10-Q 1 tm215186d1_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended December 31, 2020

 

OR

 

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from ________   to________.

 

Commission File Number: 001-38426

 

SENMIAO TECHNOLOGY LIMITED

(Exact name of registrant as specified in its charter)

 

Nevada   35-2600898
(State or other jurisdiction   (IRS Employer Identification No.)
of incorporation or organization)    
     

16F, Shihao Square, Middle Jiannan Blvd.

High-Tech Zone, Chengdu

Sichuan, People’s Republic of China

  610000
(Address of principal executive offices)   (Zip Code)

 

+86 28 61554399

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   AIHS   The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x   Smaller reporting company x
      Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No x

 

As of February 12, 2021, there were 49,273,517 shares of the issuer’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

Cautionary Note Regarding Forward-Looking Statements 3
     
PART I – FINANCIAL INFORMATION 4
     
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 43
Item 3. Quantitative and Qualitative Disclosures About Market Risk 66
Item 4. Controls and Procedures 67
     
PART II – OTHER INFORMATION 68
     
Item 1. Legal Proceedings 68
Item 1A. Risk Factors 68
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 68
Item 3. Defaults Upon Senior Securities 68
Item 4. Mine Safety Disclosures 68
Item 5. Other Information 68
Item 6. Exhibits 69
     
SIGNATURES 70

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (the “Report”), including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including but not limited to, the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continues,” or “should,” or, in each case, their negative or other variations or comparable terminology. We have based these forward-looking statements largely on management's current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. However, actual results may differ materially due to various factors, including, but not limited to:

 

  · our goals and strategies, including our ability to expand our automobile transaction and related services business and our ride-hailing platform business in China;
  · our management’s ability to properly develop and achieve any future business growth and any improvements in our financial condition and results of operations;
  · the impact by public health epidemics, including the COVID-19 pandemic as manifested in China, on the industries we operate in and our business, results of operations and financial condition;
  · the growth or lack of growth in China of disposable household income and the availability and cost of credit available to finance car purchases;
  · the growth or lack of growth of China's ride-hailing, automobile financing and leasing industries;
  · taxes and other incentives or disincentives related to car purchases and ownership;
  · fluctuations in the sales and price of new and used cars and consumer acceptance of financing car purchases;
  · changes in ride-hailing, transportation networks and other fundamental changes in transportation patterns in China;
  · our expectations regarding demand for and market acceptance of our products and services;
  · our expectations regarding our customer base;
  · our plans to invest in our automobile transaction and related services business and our ride-hailing platform business;
  · our ability to maintain positive relationships with our business partners;
  · competition in the ride-hailing, automobile financing and leasing industries in China;
  · macro-economic and political conditions affecting the global economy generally and the market in China specifically; and
  · relevant Chinese government policies and regulations relating to the industries in which we operate.

 

You should read this Report and the documents that we refer to in this Report with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this Report and our other reports filed with the Securities and Exchange Commission (the “SEC”) include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

This Report also contains statistical data and estimates that we obtained from industry publications and reports generated by third-parties. Although we have not independently verified the data, we believe that the publications and reports are reliable. The market data contained in this Report involves a number of assumptions, estimates and limitations. The ride-hailing and automobile financing markets in China may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our common stock. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described herein or our other reports filed with the SEC. You should not place undue reliance on these forward-looking statements.

 

3

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.  

 

SENMIAO TECHNOLOGY LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollar, except for the number of shares)

 

   December 31,   March 31, 
   2020   2020 
ASSETS          
Current assets          
Cash, and cash equivalents  $3,537,630   $833,888 
Restricted cash   5,190    - 
Accounts receivable, net, current portion   1,165,695    660,645 
Inventories   428,503    1,000,675 
Finance lease receivables, net, current portion   672,960    459,110 
Prepayments, other receivables and other assets, net   2,906,688    2,798,780 
Due from related parties   69,099    26,461 
Current assets - discontinued operations   490,235    826,580 
Total current assets   9,276,000    6,606,139 
           
Property and equipment, net          
Property and equipment, net   1,104,104    469,201 
Property and equipment, net - discontinued operations   7,884    11,206 
Total property and equipment, net   1,111,988    480,407 
           
Other assets          
Operating lease right-of-use assets, net   398,563    473,661 
Operating lease right-of-use assets, net, related parties   358,850    236,305 
Financing lease right-of-use assets, net   5,697,293    5,440,362 
Intangible assets, net   979,000    777,621 
Goodwill   145,954    - 
Accounts receivable, net, non-current   448,658    882,078 
Finance lease receivables, net, non-current   501,250    734,145 
Total other assets   8,529,568    8,544,172 
           
Total assets  $18,917,556   $15,630,718 
           
LIABILITIES AND EQUITY          
Current liabilities          
Borrowings from financial institutions  $426,715   $226,753 
Accounts payable   238,871    4,065 
Advances from customers   153,185    90,349 
Income tax payable   25,899    16,267 
Accrued expenses and other liabilities   4,772,208    2,008,391 
Due to related parties and affiliates   168,837    152,679 
Operating lease liabilities   142,245    149,582 
Operating lease liabilities - related parties   211,622    151,655 
Financing lease liabilities   5,103,911    3,473,967 
Derivative liabilities   1,043,430    342,530 
Current liabilities - discontinued operations   2,627,510    4,516,292 
Total current liabilities   14,914,433    11,132,530 
           
Other liabilities          
Borrowings from financial institutions, non-current   47,456    64,221 
Operating lease liabilities, non-current   202,408    297,167 
Operating lease liabilities, non-current - related parties   179,021    88,349 
Financing lease liabilities, non-current   2,789,337    2,576,094 
Deferred tax liability   45,146    - 
Total other liabilities   3,263,368    3,025,831 
           
Total liabilities   18,177,801    14,158,361 
           
Commitments and contingencies          
           
Stockholders' equity          
Common stock (par value $0.0001 per share, 100,000,000 shares authorized;  44,201,052 and 29,008,818 shares issued and outstanding at December 31 and March 31, 2020, respectively)   4,420    2,901 
Additional paid-in capital   34,793,916    27,013,137 
Accumulated deficit   (30,947,104)   (23,704,863)
Accumulated other comprehensive loss   (741,183)   (507,478)
Total Senmiao Technology Limited stockholders' equity   3,110,049    2,803,697 
           
Non-controlling interests   (2,370,294)   (1,331,340)
           
Total equity   739,755    1,472,357 
           
Total liabilities and equity  $18,917,556   $15,630,718 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

4

 

 

SENMIAO TECHNOLOGY LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Expressed in U.S. dollar, except for the number of shares)

 

    For the
Three Months Ended
December 31,
    For the
Nine Months Ended
December 31,
 
    2020     2019     2020     2019  
Revenues   $ 1,638,550     $ 2,745,579     $ 4,175,862     $ 13,643,429  
Cost of revenues     (1,793,815 )     (1,901,405 )     (3,588,586 )     (10,632,901 )
Gross profit (loss)     (155,265 )     844,174       587,276       3,010,528  
                                 
Operating expenses                                
Selling, general and administrative expenses     (2,401,250 )     (1,240,213 )     (7,110,884 )     (3,258,161 )
Bad debts (expenses) recovery, net     187,907       (99,025 )     106,835       (228,249 )
Impairments of long-lived assets     (41,983 )     -       (122,206 )     -  
Total operating expenses     (2,255,326 )     (1,339,238 )     (7,126,255 )     (3,486,410 )
                                 
Loss from operations     (2,410,591 )     (495,064 )     (6,538,979 )     (475,882 )
                                 
Other income (expense)                                
Other income (expense), net     (72,586 )     (37,636 )     56,795       (53,364 )
Interest expense     (2,158 )     (17,248 )     (37,698 )     (79,593 )
Interest expense on finance leases     (150,227 )     -       (587,457 )     -  
Change in fair value of derivative liabilities     (1,030,843 )     (485,400 )     (1,443,784 )     1,509,406  
Total other income (expense), net     (1,255,814 )     (540,284 )     (2,012,144 )     1,376,449  
                                 
Income (Loss) before income taxes     (3,666,405 )     (1,035,348 )     (8,551,123 )     900,567  
                                 
Income tax benefits (expenses)     (7,487 )     72,648       (14,464 )     (32,950 )
                                 
Net income (loss)  from continuing operations     (3,673,892 )     (962,700 )     (8,565,587 )     867,617  
                                 
Net loss from discontinued operations, net of applicable income taxes     (572 )     (4,399,236 )     (78,351 )     (5,593,627 )
                                 
Net loss     (3,674,464 )     (5,361,936 )     (8,643,938 )     (4,726,010 )
                                 
Net loss (income) attributable to non-controlling interests from continuing operations     593,452       34,769       1,401,697       (89,264 )
                                 
Net loss attributable to stockholders   $ (3,081,012 )   $ (5,327,167 )   $ (7,242,241 )   $ (4,815,274 )
                                 
Net loss   $ (3,674,464 )   $ (5,361,936 )   $ (8,643,938 )   $ (4,726,010 )
                                 
Other comprehensive income (loss)                                
Foreign currency translation adjustment     (61,953     206,432       (215,452     (253,983 )
                                 
Comprehensive loss     (3,736,417 )     (5,155,504 )     (8,859,390 )     (4,979,993 )
                                 
Total comprehensive income (loss) attributable to noncontrolling interests     (252,130 )     30,015       (1,038,954 )     28,467  
                                 
Total comprehensive loss attributable to stockholders   $ (3,484,287 )   $ (5,185,519 )   $ (7,820,436 )   $ (5,008,460 )
                                 
Weighted average number of common stock                                
Basic and diluted     43,822,321       28,825,281       36,906,608       27,733,885  
                                 
Earnings (loss) per share - basic and diluted                                
Continuing operations   $ (0.07 )   $ (0.03 )   $ (0.19 )   $ 0.03  
Discontinued operations   $ (0.00 )   $ (0.15 )   $ (0.00 )   $ (0.20 )

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5

 

 

SENMIAO TECHNOLOGY LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Expressed in U.S. dollar, except for the number of shares)

  

    For the Nine Months Ended December 31, 2019  
                            Accumulated              
                Additional           other              
    Common stock     paid-in     Accumulated     comprehensive     Non-controlling        
    Shares     Par value     capital     deficit     loss     interest     Total equity  
BALANCE, March 31, 2019     25,945,255     $ 2,595     $ 23,833,112     $ (15,031,538 )   $ (428,771 )   $ 7,344     $ 8,382,742  
Net income (loss)     -       -       -       (578,360 )     -       72,928       (505,432 )
Issuance of common stock in registered direct offering, net of issuance costs     1,781,360       178       5,141,946       -       -       -       5,142,124  
Fair value of warrants allocated to derivative liabilities     -       -       (3,150,006 )     -       -       -       (3,150,006 )
Foreign currency translation adjustment     -       -       -       -       (57,947 )     (28,276 )     (86,223 )
BALANCE, June 30, 2019     27,726,615     $ 2,773     $ 25,825,052     $ (15,609,898 )   $ (486,718 )   $ 51,996     $ 9,783,205  
Net income     -       -       -       1,090,254       -       51,105       1,141,359  
Exercise of Series B warrants into common stock     964,741       96       -       -       -       -       96  
Fair value of derivative liabilities upon exercises of warrants     -       -       961,631       -       -       -       961,631  
Foreign currency translation adjustment     -       -       -       -       (276,887 )     (97,305 )     (374,192 )
BALANCE, September 30, 2019     28,691,356     $ 2,869     $ 26,786,683     $ (14,519,644 )   $ (763,605 )   $ 5,796     $ 11,512,099  
Net loss           -       -       (5,327,167 )     -       (34,769 )     (5,361,936 )
Exercise of Series B warrants into common stock     148,447       15       49,121       -       -       -       49,136  
Foreign currency translation adjustment           -       -       -       141,648       64,784       206,432  
BALANCE, December 31, 2019     28,839,803     $ 2,884     $ 26,835,804     $ (19,846,811 )   $ (621,957 )   $ 35,811     $ 6,405,731  

 

6

 

  

    For the Nine Months Ended December 31, 2020  
                            Accumulated              
                Additional           other              
    Common stock     paid-in     Accumulated     comprehensive     Non-controlling     Total equity  
    Shares     Par value     capital     deficit     loss     interest        
BALANCE, March 31, 2020     29,008,818     $ 2,901     $ 27,013,137     $ (23,704,863 )   $ (507,478 )   $ (1,331,340 )   $ 1,472,357  
Net loss     -       -       -       (1,980,485 )     -       (389,699 )     (2,370,184 )
Foreign currency translation adjustment     -       -       -       -       9,404       2,313       11,717  
BALANCE, June 30, 2020     29,008,818     $ 2,901     $ 27,013,137     $ (25,685,348 )   $ (498,074 )   $ (1,718,726 )   $ (886,110 )
Net income     -       -       -       (2,180,744             (418,546 )     (2,599,290
Exercise of Series A warrants into common stock     50,000       5       74,995       -       -       -       75,000  
Fair value of derivative liabilities upon exercises of warrants     -       -       56,662       -       -       -       56,662  
Issuance of common stock and warrants in registered direct offering, net of issuance costs     13,800,000       1,380       6,096,917       -       -       -       6,098,297  
Fair value of warrants allocated to derivative liabilities     -       -       (241,919 )     -       -       -       (241,919 )
Issuance of common stock for consulting service     500,000       50       444,950       -       -       -       445,000  
Foreign currency translation adjustment     -       -       -       -       (184,324     19,108       (165,216
BALANCE, September 30, 2020     43,358,818     $ 4,336     $ 33,444,742     $ (27,866,092 )   $ (682,398 )   $ (2,118,164 )   $ 2,782,424  
Net loss     -       -       -       (3,081,012 )     -       (593,452 )     (3,674,464 )
Exercise of Series A warrants into common stock     842,234       84       421,033       -       -       -       421,117  
Fair value of derivative liabilities upon exercises of warrants     -       -       928,141       -       -       -       928,141  
Acquisition of business entities     -       -       -       -       -       344,490       344,490  
Foreign currency translation adjustment     -       -       -       -       (58,785 )     (3,168 )     (61,953 )
BALANCE, December 31, 2020     44,201,052     $ 4,420     $ 34,793,916     $ (30,947,104 )   $ (741,183 )   $ (2,370,294 )   $ 739,755  

 

The accompanying notes are an integral part of the consolidated financial statements.

  

7

 

 

SENMIAO TECHNOLOGY LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollar, except for the number of shares)

 

    For the
Nine Months Ended
December 31,
 
    2020     2019  
Cash Flows from Operating Activities:                
Net loss   $ (8,643,938 )   $ (4,726,010 )
Net loss from discontinued operations     (78,351 )     (5,593,627 )
Net income (loss) from continuing operations     (8,565,587 )     867,617  
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Depreciation and amortization of property and equipment     175,884       82,672  
Stock compensation expense     445,000       -  
Amortization of right-of-use assets     3,119,274       89,095  
Amortization of intangible assets     59,209       197  
Provision (recovery) for doubtful accounts     (106,835 )     228,249  
Impairment loss of financing lease right-of-use assets     122,206       -  
Loss (gain) on disposal of equipment     (420 )     4,593  
Change in fair value of derivative liabilities     1,443,784       (1,509,406 )
Change in operating assets and liabilities                
Accounts receivable     227,174       (2,985,722 )
Inventories     226,852       (72,278 )
Prepayments, other receivables and other assets     137,701       (1,226,099 )
Finance lease receivables     113,911       (1,146,021 )
Accounts payable     174,160       55,464  
Advances from customers     52,453       29,693  
Income tax payable     7,847       5,860  
Accrued expenses and other liabilities     2,223,905       548,545  
Operating lease liabilities     (132,885 )     (80,297 )
Operating lease liabilities - related parties     68,326       -  
Net cash used in operating activities from continuing operations     (208,041 )     (5,107,838 )
Net cash used in operating activities from discontinued operations     (1,578,633 )     (1,896,242 )
Net Cash used in Operating Activities     (1,786,674 )     (7,004,080 )
                 
Cash Flows from Investing Activities:                
Purchases of property and equipment     (199,896 )     (414,958 )
Prepayment of intangible assets     -       (470,000 )
Cash acquired from acquisition of XXTX, net of cash paid to XXTX     7,975       -  
Net cash used in investing activities from continuing operations     (191,921 )     (884,958 )
Net cash provided by (used in) investing activities from discontinued operations     (2,258 )     1,822  
Net Cash Used in Investing Activities     (194,179 )     (883,136 )
                 
Cash Flows from Financing Activities:                
Net proceeds from issuance of common stock in registered direct offering     -       5,142,124  
Net proceeds from issuance of common stock and warrants in an underwritten public offering     6,098,297       -  
Net proceeds from issuance of common stock upon warrants exercised     496,117       111  
Borrowings from financial institutions     508,275       -  
Repayments to stockholders     -       (90,000 )
Repayments to third parties     -       (459,635 )
Borrowings from related parties and affiliates     -       555,616  
Repayments from related parties     -       27,577  
Repayments to related parties and affiliates     (213,342 )     (1,554,423 )
Repayments of current borrowings from financial institutions     (354,504 )     (129,698 )
Release of escrow receivable     -       600,000  
Principal payments of finance lease liabilities     (1,771,214 )     -  
Net cash provided by financing activities from continuing operations     4,763,629       4,091,672  
Net cash provided by (used in) financing activities from discontinued operations     (167,315 )     154,103  
Net Cash Provided by Financing Activities     4,596,314       4,245,775  
                 
Effect of exchange rate changes on cash, cash equivalents and restricted cash     83,332       (196,028 )
                 
Net increase (decrease) in cash, cash equivalents and restricted cash     2,698,793       (3,837,469 )
Cash, cash equivalents, and restricted cash, beginning of period     844,027       5,020,510  
Cash, cash equivalents, and restricted cash end of period     3,542,820       1,183,041  
                 
Less: Cash, cash equivalents, and restricted cash from discontinued operations     -       (9,520 )
                 
Cash, cash equivalents, and restricted cash from continuing operations, end of period   $ 3,542,820     $ 1,173,521  
                 
Supplemental Cash Flow Information                
Cash paid for interest expense   $ 35,419     $ 79,593  
Cash paid for income tax   $ -     $ -  
Non-cash Transaction in Investing and Financing Activities                
Recognition of right-of-use assets and lease liabilities   $ 3,145,506     $ 957,472  
Acquisition of equipment through prepayment and financing lease   $ 540,968     $ -  
Allocation of fair value of derivative liabilities for issuance of common stock proceeds   $ (241,919   $ 3,150,006  
Allocation of fair value of derivative liabilities to additional paid in capital upon warrants exercised   $ 984,803     $ 1,010,752  
Acquisition of XXTX with payables   $ 314,290     $ -  
Goodwill recognized in acquisition of XXTX   $ 145,954     $ -  

 

The following tables provides a reconciliation of cash, cash equivalent and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows:

 

    December 31,     December 31,  
    2020     2019  
Cash, cash equivalent, end of period   $ 3,537,630     $ 1,173,521  
Restricted cash, end of period     5,190       -  
Total cash, cash equivalent and restricted cash shown in the consolidated statements of cash flows, end of period   $ 3,542,820     $ 1,173,521  

 

    December 31,     December 31,  
    2020     2019  
Cash, cash equivalent, beginning of period   $ 844,027     $ 5,020,510  
Restricted cash, beginning of period     -       -  
Total cash, cash equivalent and restricted cash shown in the consolidated statements of cash flows, beginning of period   $ 844,027     $ 5,020,510  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

8

 

 

SENMIAO TECHNOLOGY LIMITED 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Senmiao Technology Limited (the “Company”) is a U.S. holding company incorporated in the State of Nevada on June 8, 2017. The Company provides automobile transaction and related services focusing on the ride-hailing industry in the People’s Republic of China (“PRC” or “China”) through its wholly owned subsidiary, Yicheng Financial Leasing Co., Ltd., a PRC limited liability company (“Yicheng”), and its majority owned subsidiary, Hunan Ruixi Financial Leasing Co., Ltd., a PRC limited liability company (“Hunan Ruixi”), its wholly owned subsidiary, Hunan Ruixi Automobile Leasing Co., Ltd., a PRC limited liability company (“Ruixi Leasing”), and its variable interest entity (“VIE”), Sichuan Jinkailong Automobile Leasing Co., Ltd., a PRC limited liability company (“Jinkailong”).

 

As described further below, since October 2020, the Company also operates an online ride-hailing platform (known as Xixingtianxia) through Hunan Xixingtianxia Technology Co., Ltd. , a PRC limited liability company (“XXTX”), which is a majority owned subsidiary of Sichuan Senmiao Zecheng Business Consulting Co., Ltd., a PRC limited liability company and wholly-owned subsidiary of the Company (“Senmiao Consulting”). The Company’s ride hailing platform enables qualified ride-hailing drivers to provide application based transportation services in Chengdu, Changsha, Neijiang and Panzhihua, China.

 

Substantially all of the Company’s operations are conducted in China.

 

The Company previously operated an online lending platform in China through its VIE, Sichuan Senmiao Ronglian Technology Co., Ltd. (“Sichuan Senmiao”), which facilitated peer-to-peer (“P2P”) loan transactions between Chinese investors and individual and small-to-medium-sized enterprise borrowers. The Company ceased its online lending services business in October 2019.

 

Hunan Ruixi holds a business license for automobile sales and financial leasing and has been engaged in automobile financial leasing services and automobile sales since March 2019 and January 2019, respectively. Hunan Ruixi also controls Jinkailong through its 35% equity interest and voting agreements with Jinkailong’s other shareholders. Jinkailong facilitates automobile sales and financing transactions for its clients, who are primarily ride-hailing drivers and provides them operating lease and relevant after-transaction services. Yicheng has been engaged in automobile sales since June 2019.

 

On July 4, 2020, Hunan Ruixi, Jinkailong and the other shareholders of Jinkailong entered into an agreement (the “JKL Investment Agreement”) with Hongyi Industrial Group Co., Ltd. (“Hongyi”). Pursuant to the JKL Investment Agreement, Jinkailong agreed to issue and Hongyi agreed to subscribe for an approximately 27.03% equity interest in Jinkailong in consideration of RMB50 million (approximately $7.0 million) (the “Investment”). The Investment will be made in two payments: (i) the first payment of RMB10 million (approximately $1.4 million) was due no later than December 31, 2020 and (ii) the remaining RMB40 million (approximately $5.6 million) is due within 30 days after the record-filing of the Investment has been made with the local PRC government and the other shareholders of Jinkailong having made their respective capital contributions in full in cash, but no later than December 31, 2020. As a result, Hunan Ruixi will be required to pay RMB3.5 million (approximately $0.5 million) to Jinkailong as a capital contribution. According to the latest arrangement with Hongyi, the first payment of RMB10 million has been postponed and the total investment of RMB50 million will be made before March 31, 2021. As a result, as of December 31, 2020, neither Hunan Ruixi nor the other shareholders of Jinkailong paid any capital contribution to Jinkailong, nor the record-filing of the Investment has been made with the local PRC government. As of the issuance date of these unaudited condensed consolidated financial statements, Hongyi has not made the payment.

 

The JKL Investment Agreement also provides Hongyi certain shareholder rights, including, but not limited to, the right to receive any undistributed dividends, a right of first refusal for any equity transfer from the other shareholders of Jinkailong, a tag-along right during the performance commitment period, anti-dilution rights, redemption rights, subscription rights and priority in liquidation or dissolution of Jinkailong. Specifically, pursuant to the redemption right provision in the JKL Investment Agreement, in the event that Jinkailong (i) fails to become public through an initial public offering for a valuation of no less than RMB350 million (approximately $49.5 million) or merge with a public company for a valuation of no less than RMB300 million (approximately $42.5 million) within the six months following the performance commitment period, (ii) fails to achieve an accumulated net profit of RMB24 million (approximately $3.4 million) for the first two years of the performance commitment period or a net profit of RMB20 million (approximately $2.9 million) for the third year of the performance commitment period, or (iii) has any material and adverse change to its core business, including but not limited to being included in the list of dishonest persons and loss of over one third of its online ride-hailing taxi operating licenses, as well as bankruptcy, liquidation or cessation of operations, Hongyi shall have the right to require certain shareholders of Jinkailong (including Hunan Ruixi) to repurchase all of its equity interest in Jinkailong. Based on a repurchase formula provided for in the JKL Investment Agreement, the maximum repurchase amount that Hunan Ruixi would be subject to is RMB28,320,000 (approximately $4.0 million). 

 

9

 

 

On September 11, 2020, Senmiao Consulting entered into an Investment Agreement relating to XXTX with all the original shareholders of XXTX, pursuant to which Senmiao Consulting will make an investment of RMB3.16 million in XXTX in cash and obtain a 51% equity interest accordingly. On October 23, 2020, the registration procedures for the change in shareholders and registered capital were completed and XXTX became a majority owned subsidiary of Senmiao Consulting. As of the issuance date of these unaudited condensed consolidated financial statements, Senmiao Consulting has made a capital contribution of RMB1.0 million (approximately $0.2 million) to XXTX and the remaining amount is expected to be paid before December 31, 2021. As of December 31, 2020, XXTX had eight wholly owned subsidiaries and only one of them has operations.

 

In December 2020, Senmiao Consulting formed a wholly owned subsidiary, Chengdu Kuneng Jiecheng Technology Co., Ltd. (“Kuneng”), with a registered capital of RMB10 million (approximately $1.6 million) in Chengdu City, Sichuan Province. In December 2020, Hunan Ruixi and a third party jointly formed a subsidiary, Chengdu Xichuang Technology Service Co., Ltd. (“Xichuang”), with a registered capital of RMB200,000 (approximately $32,000) in Chengdu City, Sichuan Province. Hunan Ruixi holds 70% of the equity interests of Xichuang. As of December 31, 2020, neither Kuneng nor Xichuang has commenced operating.

 

The following diagram illustrates the Company’s corporate structure, including its subsidiaries, and VIEs, as of the issuance date of these unaudited condensed consolidated financial statements:

 

 

VIE Agreements with Sichuan Senmiao

 

According to the VIE Agreements, Sichuan Senmiao is obligated to pay Senmiao Consulting service fees equal to its net income. Sichuan Senmiao’s entire operations are controlled by the Company. Although the Company discontinued Sichuan Senmiao’s online P2P lending services business commencing in October 2019, the VIE Agreements remain in place, and such agreements are described in detail below:

 

Equity Interest Pledge Agreement

 

Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders entered into an Equity Interest Pledge Agreement, pursuant to which the Sichuan Senmiao Shareholders pledged all of their equity interest in Sichuan Senmiao to Senmiao Consulting in order to guarantee the performance of Sichuan Senmiao’s obligations under the Exclusive Business Cooperation Agreement as described below. During the term of the pledge, Senmiao Consulting is entitled to receive any dividends declared on the pledged equity interest of Sichuan Senmiao. The Equity Interest Pledge Agreement terminates when all contractual obligations under the Exclusive Business Cooperation Agreement have been fully performed.

 

Exclusive Business Cooperation Agreement

 

Pursuant to an Exclusive Business Cooperation Agreement entered by and among the Company, Senmiao Consulting, Sichuan Senmiao and each of Sichuan Senmiao Shareholders, Senmiao Consulting will provide Sichuan Senmiao with complete technical support, business support and related consulting services for 10 years ended September 18, 2027. The Sichuan Senmiao Shareholders and Sichuan Senmiao will not engage any third party for the same or similar consultation services without Senmiao Consulting’s prior consent. Further, the Sichuan Senmiao Shareholders are entitled to receive an aggregate of 20,250,000 shares of common stock of the Company under the Exclusive Business Cooperation Agreement. Senmiao Consulting may terminate the Exclusive Business Cooperation Agreement at any time upon prior written notice to Sichuan Senmiao and the Sichuan Senmiao Shareholders.

 

10

 

 

Exclusive Option Agreement

 

Pursuant to an Exclusive Option Agreement entered by and among Senmiao Consulting, Sichuan Senmiao and the Sichuan Senmiao Shareholders, the Sichuan Senmiao Shareholders have granted Senmiao Consulting an exclusive option to purchase at any time their equity interests in Sichuan Senmiao at a purchase price equal to the capital paid by the Sichuan Senmiao Shareholders in whole or at a pro-rated price for any partial purchase. The Exclusive Option Agreement terminates after 10 years ending September 18, 2027 but can be renewed by Senmiao Consulting at its discretion.

 

Powers of Attorney

 

Each of the Sichuan Senmiao Shareholders has signed a power of attorney (the “Power of Attorney”), pursuant to which, each of the Sichuan Senmiao Shareholders has authorized Senmiao Consulting to act as his or her exclusive agent and attorney with respect to all rights of such individual as a shareholder of Sichuan Senmiao, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights that shareholders are entitled to under PRC laws and the Articles of Association of Sichuan Senmiao, including but not limited to voting, sale, transfer, pledge and disposition of the equity interests of Sichuan Senmiao; and (c) designating and appointing the legal representative, chairperson, director, supervisor, chief executive officer and other senior management members of Sichuan Senmiao. The Power of Attorney has the same term as the Exclusive Option Agreement.

 

Timely Report Agreement

 

The Company and Sichuan Senmiao entered into a Timely Report Agreement, pursuant to which, Sichuan Senmiao agrees to make its officers and directors available to the Company and promptly provide all information required by the Company so that the Company can make necessary filings to the U.S. Securities and Exchange Commission (“SEC”) and other regulatory reports in a timely fashion.

 

The Company has concluded that it should consolidate the financial statements with Sichuan Senmiao because it is Sichuan Senmiao’s primary beneficiary based on the Power of Attorney from the Sichuan Senmiao Shareholders, who assigned their rights as shareholders of Sichuan Senmiao to Senmiao Consulting, the Company’s wholly-owned subsidiary. These rights include, but are not limited to, attending shareholders’ meetings, voting on matters submitted for shareholder approval and appointing legal representatives, directors, supervisors and senior management of Sichuan Senmiao. As a result, the Company, through Senmiao Consulting, is deemed to hold all of the voting equity interests in Sichuan Senmiao. Pursuant to Exclusive Business Cooperation Agreement, Senmiao Consulting shall provide complete technical support, business support and related consulting services for 10 years. Though not explicit in the VIE Agreements, the Company may provide financial support to Sichuan Senmiao to meet its working capital requirements and capitalization purposes. The terms of the VIE Agreements and the Company’s plan to provide financial support to Sichuan Senmiao were considered in determining that the Company is the primary beneficiary of Sichuan Senmiao. Accordingly, the financial statements of Sichuan Senmiao are consolidated in the accompanying unaudited condensed consolidated financial statements.

 

Voting Agreement with Jinkailong’s Other Shareholders

 

Hunan Ruixi entered into two voting agreements signed in August 2018 and February 2020, respectively, as amended (the “Voting Agreement”), with Jinkailong and other Jinkailong’s shareholders holding an aggregate of 65% equity interests and obtained 35% equity interests in Jinkailong. Pursuant to the Voting Agreements, all other Jinkailong’s shareholders will vote in concert with Hunan Ruixi on all fundamental corporate transactions in the event of a disagreement for periods of 20 years and 18 years, respectively, ending on August 25, 2038.

 

The Company has concluded that it should consolidate the financial statements with Jinkailong because it is Jinkailong’s primary beneficiary based on the Voting Agreement. Though not explicit in the Voting Agreement by and among Jinkailong, Hunan Ruixi, and other shareholders of Hunan Ruixi, the Company may provide financial support to Jinkailong to meet its working capital requirements and capitalization purposes. The terms of the Voting Agreement and the Company’s plan to provide financial support to Jinkailong were considered in determining that the Company is the primary beneficiary of Jinkailong. Accordingly, management has determined that Jinkailong is a VIE and the financial statements of Jinkailong are consolidated in the Company’s unaudited condensed consolidated financial statements.

 

11

 

 

Total assets and total liabilities of the Company’s VIEs included in the Company’s unaudited condensed consolidated financial statements as of December 31, 2020 and March 31, 2020 are as follows:

 

    December 31,
2020
    March 31,
2020
 
    (Unaudited)        
Current assets:                
Cash and cash equivalents   $ 345,944     $ 247,671  
Restricted Cash     5,190       -  
Accounts receivable, net, current portion     667,467       66,768  
Prepayments, other receivables and other assets, net     1,615,131       1,500,784  
Other receivable- intercompany     1,334,567       2,211  
Due from related parties     69,099       26,461  
Current assets - discontinued operations (1)     668,663       1,363,972  
Total current assets     4,706,061       3,207,867  
                 
Property and equipment, net:                
Property and equipment, net     510,856       317,427  
Property and equipment, net - discontinued operations     3,540       3,895  
Total property and equipment, net     514,396       321,322  
                 
Other assets:                
Operating lease right-of-use assets, net     284,639       317,258  
Operating lease right-of-use assets, net, related parties     11,090       50,213  
Financing lease right-of-use assets, net     5,110,181       5,440,362  
Accounts receivable, net, non-current     357,308       720,916  
Total other assets     5,763,218       6,528,749  
                 
Total assets   $ 10,983,675     $ 10,057,938  
                 
Current liabilities:                
Borrowings from financial institutions   $ 426,715     $ 226,753  
Accounts payable     1,583       4,018  
Advances from customers     42,332       34,374  
Income tax payable     17,467       16,106  
Accrued expenses and other liabilities     3,109,544       1,632,617  
Other payable - intercompany     6,760,460       5,143,463  
Due to related parties and affiliates     168,837       152,679  
Operating lease liabilities     62,380       78,981  
Operating lease liabilities - related parties     6,318       37,378  
Financing lease liabilities     4,791,111       3,473,967  
Current liabilities - discontinued operations (2)     2,661,279       7,561,603  
Total current liabilities     18,048,026       18,361,939  
                 
Other liabilities:                
Borrowings from financial institutions, non-current     41,330       58,572  
Operating lease liabilities, non-current     202,408       231,825  
Operating lease liabilities, non-current - related parties     5,113       -  
Financing lease liabilities, non-current     2,515,025       2,576,094  
Total other liabilities     2,763,876       2,866,491  
                 
Total liabilities   $ 20,811,902     $ 21,228,430  

 

  (1) Includes intercompany receivables of $178,428 and $543,446 as of December 31, 2020 and March 31, 2020, respectively.

 

  (2) Includes intercompany payables of $35,912 and $402,406 as of December 31, 2020 and March 31, 2020, respectively.

 

12

 

 

Net revenue, income (loss) from operations and net loss of the VIEs that were included in the Company's unaudited condensed consolidated financial statements for the three and nine months ended December 31, 2020 and 2019 are as follows:

 

    For the
Three Months Ended
    For the
Nine Months Ended
 
    December 31,     December 31,  
    2020     2019     2020     2019  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Net revenue from continuing operations   $ 1,157,146     $ 549,330     $ 2,925,839     $ 2,302,940  
Net revenue from discontinued operations   $ 1,642     $ 4,294     $ 6,196     $ 112,618  
Income (loss) from operations from continuing operations   $ (985,172 )   $ (53,999 )   $ (3,551,034 )   $ 600,455  
Loss from operations from discontinued operations   $ (2,238 )   $ (206,234 )   $ (84,692 )   $ (1,001,493 )
Net Income (loss) from continuing operations attributable to stockholders   $ (972,620 )   $ (116,991 )   $ (2,911,651 )   $ 95,976  
Net loss from discontinued operations attributable to stockholders     (8,212 )     (4,094,558 )     (233,977 )     (4,870,090 )
Net loss attributable to stockholders   $ (980,832 )   $ (4,211,549 )   $ (3,145,628 )   $ (4,774,114 )

  

2. GOING CONCERN

 

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Debt financing from financial institutions and equity financings have been utilized to finance the working capital requirements of the Company.

 

The Company’s business is capital intensive. The Company’s management has considered whether there is substantial doubt about its ability to continue as a going concern due to (1) recurring losses from operations, including net loss of approximately $8.6 million and $0.1 million from continuing operations and discontinued operations, respectively, for the nine months ended December 31, 2020, (2) accumulated deficit of approximately $30.9 million as of December 31, 2020; (3) the working capital deficit of approximately $5.6 million as of December 31, 2020; (4) operating cash outflows of approximately $0.2 million and $1.6 million from continuing operations and discontinued operations, respectively, for the nine months ended December 31, 2020 and (5) the purchase commitment of $8.3 million to be completed in 2021. Although the Company believes that it can realize its current assets in the normal course of business, the Company’s ability to repay its current obligations will depend on the future realization of its current assets and the future operating revenues generated from its operations.

 

On February 10, 2021, the Company completed a registered direct offering of 5,072,465 shares of the Company’s common stock at $1.38 per share, pursuant to a securities purchase agreement with certain accredited investors. As a result, the Company raised approximately $5.7 million, net of placement agent fees and offering expenses, to support the Company’s working capital requirements.

  

After the completion of the registered direct offering, the Company expects its working capital to change from a deficit of approximately $5.6 million to a positive working capital of approximately $0.1 million. However, management has determined there is substantial doubt about its ability to continue as a going concern. If the Company is unable to generate significant revenue, the Company may be required to cease or curtail its operations. Management is trying to alleviate the going concern risk through the following sources:

 

  the Company will continue to seek equity financing to support its working capital;
     
  other available sources of financing (including debt) from PRC banks and other financial institutions; and
     
  financial support and credit guarantee commitments from the Company’s related parties.

 

In addition, pursuant to the JKL Investment Agreement mentioned above, Hongyi agreed to subscribe for a 27.03% equity interest in Jinkailong in consideration of approximately $7.0 million. Such investment from Hongyi will provide additional cash flow of approximately $7.0 million to support Jinkailong’s working capital requirements. According to the latest arrangement with Hongyi, the first payment of $1.4 million has been postponed and the total investment of $7.0 million will be made before March 31, 2021 and as of the issuance date of these unaudited condensed consolidated financial statements, Hongyi has not made the payment.

 

Based on the above considerations, management is of the opinion that the Company would not have sufficient funds to meet its working capital requirements and debt obligations as they become due one year from the issuance date of these financial statements. However, there is no assurance that the Company will be successful in implementing the foregoing plans or that additional financing will be available to the Company on commercially reasonable terms, or at all. There are a number of factors that could potentially arise that could undermine the Company’s plans, such as (i) the impact of the COVID-19 pandemic on the Company’s business and areas of operations in China, (ii) changes in the demand for the Company’s services, (iii) PRC government policies, (iv) economic conditions in China and worldwide, (v) competitive pricing in the automobile transaction and related service and ride-hailing industries, (vi) changes in the Company’s relationships with key business partners, (vii) that financial institutions in China may not able to provide continued financial support to the Company’s customers, and (viii) the perception of PRC-based companies in the U.S. capital markets. The Company’s inability to secure needed financing when required could require material changes to the Company’s business plans and could have a material adverse effect on the Company’s viability and results of operations.

 

13

 

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)   Basis of presentation

 

The accompanying interim unaudited condensed consolidated financial statements of the Company has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

The unaudited interim financial information as of December 31, 2020 and for the three and nine months ended December 31, 2020 and 2019 have been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended March 31, 2020, which was filed with the SEC on July 9, 2020.

 

In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited financial position as of December 31, 2020, its unaudited results of operations for the three and nine months ended December 31, 2020 and 2019, and its unaudited cash flows for the nine months ended December 31, 2020 and 2019, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

(b)   Basis of consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and include the assets, liabilities, revenues and expenses of the subsidiaries and VIEs. All inter-company accounts and transactions have been eliminated in consolidation.

 

(c)   Foreign currency translation

 

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing on the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates on the date of the balance sheet. The resulting exchange differences are recorded in the statement of operations.

 

The reporting currency of the Company and its subsidiaries and VIEs is U.S. dollars (“US$”) and the accompanying unaudited condensed consolidated financial statements have been expressed in US$. However, the Company maintains the books and records in its functional currency, Chinese Renminbi (“RMB”), being the functional currency of the economic environment in which its operations are conducted.

 

In general, for consolidation purposes, assets and liabilities of the Company and its subsidiaries whose functional currency is not the US$, are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of the Company and its subsidiaries and VIEs are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

 

14

 

 

Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:

 
    December 31,
2020
    March 31,
2020
 
Balance sheet items, except for equity accounts     6.5306       7.0824  

 

   For the
Three Months Ended
December 31,
 
   2020   2019 
Items in the statements of operations and comprehensive loss   6.6224    7.0600 

 

   For the
Nine Months Ended
December 31,
 
   2020   2019 
Items in the statements of operations and comprehensive loss, and statements of cash flows   6.8726    6.9620 

 

(d) Use of estimates

 

In presenting the unaudited condensed consolidated financial statements in accordance with U.S. GAAP, management make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgement and available information. Accordingly, actual results could differ from those estimates. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. The Company bases its estimates on past experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The inputs into our judgments and estimates consider the economic implications of COVID-19 on the Company’s critical and significant accounting estimates. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, lease classification and liabilities, finance lease receivables, inventory obsolescence, right-of-use assets, determinations of the useful lives and valuation of long-lived assets and goodwill, estimates of allowances for doubtful accounts and prepayments, estimates of impairment of intangible assets, valuation of deferred tax assets, estimated fair value used in business acquisitions, valuation of derivative liabilities, allocation of fair value of derivative liabilities, issuance of common stock and warrants exercised and other provisions and contingencies.

 

(e) Fair values of financial instruments

 

Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The three levels of valuation hierarchy are defined as follows:

 

Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
   
Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
   
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value.

 

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2020 and March 31, 2020:

 

   Carrying Value at
December 31, 2020
   Fair Value Measurement at
December 31, 2020
 
   (Unaudited)   Level 1   Level 2   Level 3 
Derivative liabilities  $1,043,430   $-   $-   $1,043,430 

 

   Carrying Value at
March 31, 2020
   Fair Value Measurement at
March 31, 2020
 
       Level 1   Level 2   Level 3 
Derivative liabilities  $342,530   $-   $-   $342,530 

 

15

 

 

The following is a reconciliation of the beginning and ending balance of the assets and liabilities measured at fair value on a recurring basis for the nine months ended December 31, 2020 and for the year ended March 31, 2020:

 

  

For the
Nine Months Ended
December 31,

2020

   For the
Year Ended
March 31,
2020
 
   (Unaudited)     
Beginning balance  $342,530   $- 
Derivative liabilities recognized at grant date on June 20, 2019   -    3,150,006 
Derivative liabilities recognized at grant date on August 4, 2020   241,919    - 
Change in fair value of derivative liabilities   1,443,784    (1,796,724)
Fair value of Series B warrants exercised   -    (1,010,752)
Fair value of Series A warrants exercised   (984,803)   - 
Ending balance  $1,043,430   $342,530 

 

On June 21, 2019, the Company closed a registered direct offering of an aggregate of 1,781,361 shares of common stock, and in connection therewith, issued to the investors (i) for no additional consideration, Series A warrants to purchase up to an aggregate of 1,336,021 shares of common stock, (ii) for nominal additional consideration, Series B warrants to purchase up to a maximum aggregate of 1,116,320 shares of common stock and (iii) placement agent warrants to purchase up to 142,509 shares of common stock.

 

On August 6, 2020, the Company completed a public offering of 12,000,000 shares of the Company’s common stock at $0.50 per share (the “Offering Price”), pursuant to an underwriting agreement with The Benchmark Company, LLC and Axiom Capital Management, Inc., as representatives of the several underwriters (the “Underwriters”). On August 13, 2020, the Underwriters exercised their rights to purchase an additional 1,800,000 shares of common stock at the Offering Price. In connection with the offering, the Company issued the Underwriters, on a private placement basis, warrants to purchase up to 568,000 shares of common stock (the “Underwriters’ Warrants”). The Underwriters’ Warrants are exercisable for a period of five years commencing six months from August 4, 2020 at a price per share equal to 125% of the Offering Price and are exercisable on a “cashless” basis. 

 

The strike price of the Company’s Series A and Series B warrants, the placement agent warrants and the Underwriters’ Warrants are denominated in US$ and the Company’s functional currency is RMB, therefore, those warrant shares are not considered indexed to the Company’s own stock which should be classified as derivative liability.

 

The Company’s Series A and Series B warrants, the placement agent warrants and the Underwriters’ Warrants are not traded in an active securities market; therefore, the Company estimates the fair value to those warrants using the Black-Scholes valuation model on June 20, 2019 (the grant date), August 4, 2020 (the grant date), March 31, 2020 and December 31, 2020.

 

    June 20, 2019     August 4, 2020  
                Placement        
    Series A     Series B     Agent     Underwriters’  
    Warrants     Warrants     Warrants     Warrants  
# of shares exercisable     1,336,021       1,116,320       142,509       568,000  
Valuation date     6/20/2019       6/20/2019       6/20/2019       8/4/2020  
Exercise price   $ 3.72     $ 3.72     $ 3.38     $ 0.63  
Stock price   $ 2.8     $ 2.8     $ 2.8     $ 0.51  
Expected term (years)     4.00       1.00       4.00       5.00  
Risk-free interest rate     1.77 %     1.91 %     1.77 %     0.19 %
Expected volatility     86 %     91 %     86 %     129 %

 

   March 31, 2020 
   Series A
Warrants
   Series B
Warrants
   Placement Agent
Warrants
 
# of shares exercisable   1,336,021    3,132    142,509 
Valuation date   3/31/2020    3/31/2020    3/31/2020 
Exercise price  $1.50   $0.0001   $3.38 
Stock price  $0.44   $0.44   $0.44 
Expected term (years)   3.22    0.22    3.22 
Risk-free interest rate   0.30%   0.11%   0.30%
Expected volatility   122%   127%   122%

 

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   December 31, 2020 
       Placement     
   Series A   Agent   Underwriters’ 
   Warrants   Warrants   Warrants 
# of shares exercisable   443,787    142,509    568,000 
Valuation date   12/31/2020    12/31/2020    12/31/2020 
Exercise price  $0.5   $0.5   $0.63 
Stock price  $1.07   $1.07   $1.07 
Expected term (years)   2.47    2.47    4.59 
Risk-free interest rate   0.15%   0.15%   0.31%
Expected volatility   133%   133%   133%

  

As of December 31, 2020 and March 31, 2020, financial instruments of the Company comprised primarily current assets and current liabilities including cash and cash equivalents, restricted cash, accounts receivable, inventories, finance lease receivables, prepayments, other receivables and other assets, due from related parties, borrowings from financial institutions, accounts payable, advance from customers, lease liabilities, accrued expenses and other liabilities, due to related parties and affiliates, and operating and financing lease liabilities, which approximate their fair values because of the short-term nature of these instruments, and non-current liabilities of borrowings from financial institutions, which approximate their fair values because of the stated loan interest rate to the rate charged by similar financial institutions.

 

The non-current portion of accounts receivables, finance lease receivables, and operating and financing lease liabilities were recorded at gross adjusted for the interest using the effective interest rate method. The Company believes that the effective interest rates underlying these instruments approximate their fair values because the Company used its incremental borrowing rate to recognize the present value of these instruments as of December 31, 2020 and March 31, 2020.

 

Other than as listed above, the Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value.

 

(f) Business combinations and non-controlling interests

 

The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805 "Business Combinations." The cost of an acquisition is measured as the aggregate of the acquisition date fair value of the assets transferred to the sellers and liabilities incurred by the Company and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the unaudited condensed consolidated income statements. During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the unaudited condensed consolidated income statements.

 

For the Company's non-wholly owned subsidiaries, a non-controlling interest is recognized to reflect portion of equity that is not attributable, directly or indirectly, to the Company. The cumulative results of operations attributable to non-controlling interests are also recorded as non-controlling interests in the Company's unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations and comprehensive loss. Cash flows related to transactions with non-controlling interests are presented under financing activities in the unaudited condensed consolidated statements of cash flows

 

(g) Segment reporting

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (the “CODM”), which is comprised of certain members of the Company's management team. Historically, the Company had one single operating and reportable segment, namely the provision of an online lending services. During the year ended March 31, 2019, the Company acquired Hunan Ruixi and Jinkailong. During the nine months ended December 31, 2020, the Company acquired XXTX. The Company evaluated how the CODM manages the businesses of the Company to maximize efficiency in allocating resources and assessing performance. The Company has discontinued the online P2P lending services segment and has only one segment in the periods after October 17, 2019.

 

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(h) Cash and cash equivalents

 

Cash and cash equivalents primarily consist of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use. Cash and cash equivalents also consist of funds received from automobile purchasers as payment for automobiles, related insurances and taxes to be paid on behalf of the automobile purchasers, which funds were held at the third party platforms’ fund accounts and which are unrestricted and immediately available for withdrawal and use.

 

(i) Restricted cash

 

Restricted cash consists of fund held in the bank accounts of Jinkailong was frozen by a court order due to the default of Langyue Automobile Services Co., Ltd. (“Langyue”), a prior business partner whom Jinkailong provided a guarantee to, under the Master Contract (as defined below in Note 18).  As of December 31, 2020, the freeze on all bank accounts, except two accounts in a bank in the process of being unfrozen, have been released. The restricted cash of Jinkailong was RMB33,892 (approximately $5,190) as of December 31, 2020 and has been fully released on January 7, 2021.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (230): Restricted Cash. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. Earlier adoption is permitted. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company adopted this guidance in all periods presented.

 

(j) Accounts receivable, net

 

Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest, and are due on demand. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2020 and March 31, 2020, allowance for doubtful accounts amounted to $79,355 and $379,689, respectively.

 

(k) Inventories

 

Inventories consist of automobiles which are held primarily for sale and for leasing purposes, and are stated at lower of cost or net realizable value, as determined using the weighted average cost method. Management compares the cost of inventories with the net realizable value and if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories which equals the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or net realizable value, it is not marked up subsequently based on changes in underlying facts and circumstances.

 

(l) Finance lease receivables, net

 

Finance lease receivables, which result from sales-type leases, are measured at discounted present value of (i) future minimum lease payments, (ii) any residual value not subject to a bargain purchase option as a finance lease receivables on its balance sheet and (iii) accrued interest on the balance of the finance lease receivables based on the interest rate inherent in the applicable lease over the term of the lease.  Management also periodically evaluates individual customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when necessary. Finance lease receivables is charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2020 and March 31, 2020, the Company determined no allowance for doubtful accounts was necessary for finance lease receivables.

 

18

 

 

As of December 31, 2020 and March 31, 2020, finance lease receivables consisted of the following:

 

    December 31,
2020
    March 31,
2020
 
    (Unaudited)        
Minimum lease payments receivable     1,566,517       1,606,230  
Less: Unearned interest     (392,307 )     (412,975 )
Financing lease receivables, net   $ 1,174,210     $ 1,193,255  
Finance lease receivables, net, current portion   $ 672,960     $ 459,110  
Finance lease receivables, net, non-current portion   $ 501,250     $ 734,145  

 

Future scheduled minimum lease payments for investments in sales-type leases as of December 31, 2020 are as follows:

 

    Minimum future  
    payments receivable  
Twelve months ending December 31, 2021   $ 488,137  
Twelve months ending December 31, 2022     692,388  
Twelve months ending December 31, 2023     353,208  
Twelve months ending December 31, 2024     32,784  
Total   $ 1,566,517  

 

(m) Property and equipment, net

 

Property and equipment primarily consist of computer equipment, which is stated at cost less accumulated depreciation less any provision required for impairment in value. Depreciation is computed using the straight-line method with no residual value based on the estimated useful life. The useful life of property and equipment is summarized as follows:

 

Categories   Useful life
Leasehold improvements   Shorter of the remaining lease terms or estimated useful lives
Computer equipment   2 - 5 years
Office equipment   3 - 5 years
Automobiles   3 - 5 years

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net undiscounted cash flows that the asset is expected to generate. If such asset is considered to be impaired, the impairment recognized is the amount by which the carrying amount of the asset, if any, exceeds its fair value determined using a discounted cash flow model. For the three and nine months ended December 31, 2020, the impairment for property and equipment was $10,342. For the three and nine months ended December 31, 2019, there was no impairment recorded for property and equipment.

 

Costs of repairs and maintenance are expensed as incurred and asset improvements are capitalized. The cost and related accumulated depreciation of assets disposed of or retired are removed from the accounts, and any resulting gain or loss is reflected in the unaudited condensed consolidated statements of operations and comprehensive loss.

 

(n) Intangible assets, net

 

Purchased intangible assets are recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that have determinable lives continue to be amortized over their estimated useful lives using the straight-line method as follows:

 

Categories     Useful life
Software     5-10 years
Online ride-hailing platform operating license     5 years

 

Separately identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for identifiable intangible assets is based on the amount by which the carrying amount of the assets exceeds the fair value of the assets. For the three and nine months ended December 31, 2020 and 2019, there was no impairment of intangible assets.

 

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(o) Goodwill

 

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive income (loss). Impairment losses on goodwill are not reversed.

 

The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the opinion to access qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.

 

The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.

 

If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

 

If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive income (loss). Impairment losses on goodwill are not reversed. For the nine months ended December 31, 2020 and 2019, no impairment was recorded for goodwill.

 

(p) Earnings (loss) per share

 

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to stockholders by the weighted average number of outstanding shares of common stock, adjusted for outstanding shares of common stock that are subject to repurchase.

 

For the calculation of diluted income (loss) per share, net income (loss) attributable to stockholders for basic earnings (loss) per share is adjusted by the effect of dilutive securities, including share-based awards, under the treasury stock method. Potentially dilutive securities, of which the amounts are insignificant, have been excluded from the computation of diluted net earnings (loss) per share if their inclusion is anti-dilutive.

 

(q) Derivative liabilities

 

A contract is designated as an asset or a liability and is carried at fair value on the Company’s balance sheet, with any changes in fair value recorded in the Company’s results of operations.  The Company then determines which options, warrants and embedded features require liability accounting and records the fair value as a derivative liability. The changes in the values of these instruments are shown in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss as “change in fair value of derivative liabilities”.

 

(r) Revenue recognition

 

The Company recognized its revenue under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606). ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. It also requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.

 

To achieve that core principle, the Company applies the five steps defined under ASC 606: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

20

 

 

The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.

 

As of December 31, 2020, the Company had outstanding contracts for automobile transaction and related services amounting to $534,065, of which $316,715 is expected to be completed within twelve months after December 31, 2020, and $217,350 is expected to be completed after December 31, 2021.

 

Disaggregated information of revenues by business lines are as follows:

 

   For the
Three Months Ended
December 31,
   For the
Nine Months Ended
December 31,
 
   2020   2019   2020   2019 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Automobile Transaction and Related Services (Continuing Operations)                    
-          Revenues from sales of automobiles  $104,329   $1,987,433   $527,961   $10,828,063 
-          Operating lease revenues from automobile rentals   939,645    -    2,136,078    - 
-          Service fees from automobile purchase services   18,968    352,351    179,545    1,609,361 
-          Facilitation fees from automobile transactions   30    21,031    1,646    164,294 
-          Service fees from management and guarantee services   41,523    128,893    315,124    313,548 
-          Financing revenues   74,155    44,149    178,589    105,413 
-          Other service fees   155,365    211,722    532,384    622,750 
Total Revenues from Automobile Transaction and Related Services (Continuing Operations)   1,334,015    2,745,579    3,871,327    13,643,429 
                     
Online Ride-hailing Platform Services (Continuing Operations)   304,535    -    304,535    - 
                     
Online Lending Services (Discontinued Operations)                    
-          Transaction fees   56    1,160    2,572    72,394 
-          Service fees   1,586    3,134    3,624    24,990 
-          Website development revenue   -    -    -    15,234 
Total Revenues from Online Lending Services (Discontinued Operations)   1,642    4,294    6,196    112,618 
                     
Total Revenues  $1,640,192   $2,749,873   $4,182,058   $13,756,047 

 

Automobile transaction and related services

 

Sales of automobiles – The Company generates revenue from sales of automobiles to the customers of Jinkailong and Hunan Ruixi. The control over the automobile is transferred to the purchaser along with the delivery of automobile. The amount of the revenue is based on the sale price agreed by Hunan Ruixi or Yicheng and the counterparties, including Jinkailong, who acts on behalf of its customers. The Company recognizes revenues when the automobile is delivered and control is transferred to the purchaser at a point in time.

 

Service fees from automobile purchase services – Services fees from automobile purchase services are paid by automobile purchasers for a series of the services provided to them throughout the purchase process such as credit assessment, preparation of financing application materials, assistance with closing of financing transactions, license and plate registration, payment of taxes and fees, purchase of insurance, installment of GPS devices, ride-hailing driver qualification and other administrative procedures. The amount of these fees is based on the sales price of the automobiles and relevant services provided. The Company recognizes revenue when all the services are completed and the automobile is delivered to the purchaser at a point in time.

 

21

 

 

Facilitation fees from automobile transactions – Facilitation fees from automobile purchase transactions are paid by the Company’s customers including third-party sales teams or the automobile purchasers for the facilitation of the sales and financing of automobiles. The Company attracts automobile purchasers through third-party sales teams or its own sales department. For the sales facilitated between third-party sales teams and automobile purchasers, the Company charges the fees to the third-party sales teams, which derived from the commission paid by the automobile purchasers to the third-party sales teams. Relating to sales facilitated between automobile purchasers and dealers, the Company charges the fees to the automobile purchasers. The Company recognizes revenue from facilitation fees when the titles are transferred to the purchasers at a point in time. The amount of fees is based on the type of automobile and negotiation with each sales team or automobile purchaser. The fees charged to third-party sales teams or automobile purchasers are paid before the automobile purchase transactions are consummated. These fees are non-refundable upon the delivery of automobiles.

 

Service fees from management and guarantee services – Over 95% of the Company’s customers are online ride-hailing drivers. The drivers sign affiliation agreements with the Company, pursuant to which the Company provides them with management and guarantee services during the affiliation period. Service fees for management and guarantee services are paid by such automobile purchasers on a monthly basis for the management and guarantee services provided during the affiliation period. The Company recognizes revenue over the affiliation period when performance obligations are completed.

 

Financing revenues – Interest income from the lease arising from the Company’s sales-type leases and bundled lease arrangements are recognized as financing revenues over the lease term based on the effective rate of interest in the lease.

 

Operating lease revenues from automobile rentals –The Company generates revenue from sub-leasing automobiles from some online ride-hailing drivers or leasing its own automobiles. The Company recognizes revenue wherein the automobile is transferred to the leasee and the leasee has the ability to control the asset, is accounted for under ASC Topic 842. Rental transactions are satisfied over the rental period. Rental periods are short term in nature, generally are twelve months or less.

 

Online ride-hailing platform services

 

The Company generates revenue from providing services to online ride-hailing drivers (“Drivers”) to assist them in providing transportation services to riders ("Riders") looking for taxi/ride-hailing services. The Company earns commissions for each completed ride in an amount equal to the difference between an upfront quoted fare and the amount earned by a Driver based on actual time and distance for the ride charged to the Rider. As a result, the Company bears a single performance obligation in the transaction of connecting Drivers with Riders to facilitate the completion of a successful transportation service for Riders. The Company recognizes revenue upon completion of a ride as the single performance obligation is satisfied and the Company has the right to receive payment for the services rendered upon the completion of the ride. The Company evaluates the presentation of revenue on a gross or net basis based on whether it controls the service provided to the Rider and is the principal (i.e. “gross”), or it arranges for other parties to provide the service to the Rider and is an agent (i.e. "net"). Since the Company is not primarily responsible for ride-hailing services provided to Riders, it does not have inventory risk related to the services. Thus, the Company recognizes revenue at a net basis.

 

Leases

 

On April 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). This update, as well as additional amendments and targeted improvements issued in 2018 and early 2019, supersedes existing lease accounting guidance found under ASC 840, Leases (“ASC 840”). The accounting for lessors does not fundamentally change with this update except for changes to conform and align guidance to the lessee guidance, as well as to the revenue recognition guidance in ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). Some of these conforming changes, such as those related to the definition of lease term and minimum lease payments, resulted in certain lease arrangements, that would have been previously accounted for as operating leases, to be classified and accounted for as sales-type leases with a corresponding up-front recognition of automobile sales revenue when the lessee obtained control over the automobile.

 

The two primary accounting provisions the Company uses to classify transactions as sales-type or operating leases are: (i) a review of the lease term to determine if it is for the major part of the economic life of the underlying equipment (defined as greater than 75%); and (ii) a review of the present value of the lease payments to determine if they are equal to or greater than substantially all of the fair market value of the equipment at the inception of the lease (defined as greater than 90%). Automobile included in arrangements meeting these conditions are accounted for as sales-type leases. Interest income from the lease is recognized in financing revenues over the lease term. Automobile included in arrangements that do not meet these conditions are accounted for as operating leases and revenue is recognized over the term of the lease.

 

22

 

 

The Company excludes from the measurement of its lease revenues any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer.

 

The Company considers the economic life of most of the automobiles to be three to four years, since this represents the most common lease term for its automobiles and the automobiles will be used for ride-hailing services. The Company believes three to four years is representative of the period during which an automobile is expected to be economically usable, with normal service, for the purpose for which it is intended.

 

A portion of the Company’s direct sales of automobile to end customers are made through bundled lease arrangements which typically include automobile, services (automobile purchase services, facilitation services, and management and guarantee services) and financing components where the customer pays a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included in the bundled arrangement and the financing components. Lease deliverables include the automobile and financing, while the non-lease deliverables generally consist of the services and repayment of advanced fees made on behalf of its customers. The Company considers the fixed payments for purposes of allocation to the lease elements of the contract. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the total fixed lease payments that the customer is obligated to make over the lease term. Amounts allocated to the automobile and financing elements are then subjected to the accounting estimates under ASC 842 to ensure the values reflect standalone selling prices. The remainder of any fixed payments are allocated to non-lease elements (automobile purchase services, facilitation fees, and management and guarantee services), for which these revenues are recognized in a manner consistent with the guidance for service fees from automobile purchase services, facilitation fees from automobile transactions, and service fees from management and guarantee services as discussed above.

 

The Company’s lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are developed based upon the local prevailing rates in the marketplace where its customer will be able to obtain an automobile loan under similar terms from the bank. The Company reassesses its pricing interest rates quarterly based on changes in the local prevailing rates in the marketplace. As of December 31, 2020, the Company's pricing interest rate was 6.0% per annum.

 

(s) Income taxes

 

Deferred income tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provisions or benefits for income taxes consists of tax estimated from taxable income plus or minus deferred tax expenses (benefits) if applicable.

 

Deferred tax is calculated using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable income will be utilized with prior net operating loss carried forwards using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be utilized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company did not have any significant unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of December 31, 2020 and March 31, 2020. As of December 31, 2020, the calendar years ended December 31, 2015 through 2019 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The Company presents deferred tax assets and liabilities as non-current in the balance sheet based on an analysis of each taxpaying component within a jurisdiction.

 

(t) Comprehensive income (loss)

 

Comprehensive income (loss) includes net loss and foreign currency adjustments. Comprehensive income (loss) is reported in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Accumulated other comprehensive income (loss), as presented on the unaudited condensed consolidated balance sheets are the cumulative foreign currency translation adjustments.

 

(u) Share-based awards

 

Share-based awards granted to the Company’s employees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying shares.

 

23

 

 

At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.

 

(v) Leases

 

On April 1, 2019, the Company adopted ASU 2016-02, Leases (ASC Topic 842). This update supersedes existing lease accounting guidance found under ASC 840, and requires the recognition of right-of-use (“ROU”) assets and lease obligations (“lease liabilities”) by lessees for those leases currently classified as operating leases under existing lease guidance. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Short term leases with a term of twelve months or less are not required to be recognized. Lessor accounting is generally the same under ASC 842 as compared to ASC 840 except with an additional requirement to assess collectability to support classification as a direct financing lease. Also, in order to derecognize the asset and record revenue, collection of payments due must be probable for sales-type leases and the lessees of sales-type leases will need to obtain control over the leased asset.

 

The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease a single lease component. The impact of the adoption of the ASC 842, as of April 1, 2019, the Company recognized $246,227 ROU assets and $247,325 lease liabilities, primarily related to operating leases of facilities. The adoption of this standard resulted in the recording of operating lease assets and operating lease liabilities as of April 1, 2019, with no related impact on the Company's unaudited condensed consolidated statement of changes in stockholders' equity or unaudited condensed consolidated statements of operations and comprehensive loss.

 

Beginning in the year ended March 31, 2020, the Company entered into certain agreements as a lessor under which it leased automobiles for a short-term period (usually under 12 months) to ride-hailing car service drivers. The Company also entered into certain agreements as a lessee to lease automobiles and to conduct its automobiles rental operations. If any of the following criteria are met, the Company classifies the lease as a finance lease (as a lessee) or as a direct financing or sales-type lease (both as a lessor):

 

  · The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
  · The lease grants the lessee an option to purchase the underlying asset that the Company is reasonably certain to exercise;
  · The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date falls within the last 25% of the economic life of the underlying asset;
  · The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or
  · The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

 

Leases that do not meet any of the above criteria are accounted for as operating leases.

 

The Company combines lease and non-lease components in its contracts under Topic 842, when permissible.

 

Finance and operating lease ROU assets and lease liabilities are recognized at the adoption date of April 1, 2019 or the commencement date, whichever is earlier, based on the present value of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the Company use its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.

 

Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not have reasonable certainty at lease inception that these options will be exercised. The Company generally consider the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The finance or operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term for operating lease. Meanwhile, the Company recognizes the finance leases ROU assets and interest on an amortized cost basis. The amortization of finance ROU assets is recognized on an accretion basis as amortization expense, while the lease liability is increased to reflect interest on the liability and decreased to reflect the lease payments made during the period. Interest expense on the lease liability is determined each period during the lease term as the amount that results in a constant periodic interest rate of the automobile loans on the remaining balance of the liability.

 

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The Company reviews the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of finance and operating lease liabilities in any tested asset group and include the associated lease payments in the undiscounted future pre-tax cash flows. For the three and nine months ended December 31, 2020, the Company recognized impairment loss of $31,641 and $111,864 on its finance lease ROU assets, respectively.

 

(w) Significant risks and uncertainties

 

1) Credit risk

 

a. Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of these assets to credit risk is their carrying amount as of the balance sheet dates. On December 31, 2020 and March 31, 2020, approximately $1,122,000 and $2,600, respectively, was deposited with a bank in the United States which is insured by the U.S. government up to $250,000. On December 31, 2020 and March 31, 2020, approximately $2,227,000 and $820,000, respectively, were deposited in financial institutions located in mainland China, which were insured by the government authority. Under the Deposit Insurance System in China, an enterprise’s deposits at one bank is insured for a maximum of approximately $70,000 (RMB500,000). To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

 

  The Company’s operations are carried out entirely in mainland China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the social, political, economic and legal environments in the PRC as well as by the general state of the PRC economy. In addition, the Company’s business may be influenced by changes in PRC government laws, rules and policies with respect to, among other matters, the response to the COVID-19 pandemic, anti-inflationary measures, currency conversion and remittance of currency outside of China, rates and methods of taxation and other factors.

 

b. In measuring the credit risk of accounts receivables due from the automobile purchasers (the “customers”), the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the risk exposures to the customer and its likely future development. However, as the Company only commenced the automobile transaction and related services since November 2018, there was limited historic default data and other information to make an estimate on the expected credit losses. Historically, most of the automobile purchasers would pay the Company their previously defaulted amounts within one to three months. As a result, the Company would provide full provisions on accounts receivable if the customers default on repayments for over three months. As of December 31, 2020 and March 31, 2020, the Company provided an allowance for doubtful accounts of $79,355 and $379,689, respectively. For the nine months ended December 31, 2020 and 2019, the Company wrote off accounts receivable of $252,211 and $0, respectively, which represents due from automobile purchasers.

 

 

In measuring the credit risk of accounts receivables due from the borrowers and investors who formally used the Company’s discontinued P2P lending platform (the “P2P customers”), the Company mainly reflects the “probability of default” by the P2P customer on its contractual obligations and considers the current financial position of the P2P customer and the risk exposures to the P2P customer and its likely future development. Historically, most of the borrowers would pay the transaction fee within one year upon (i) disbursement of the proceeds for loans or (ii) full payment of principal and interest of loan. Most of investors would pay the service fee within one year upon receipt of their investment returns. On October 17, 2019, the Board approved the Plan for the Company to discontinue and wind down its online lending services business. For the nine months ended December 31, 2020, no additional accounts receivable were written-off.

 

2) Foreign currency risk

 

As of December 31, 2020 and March 31, 2020, substantially all of the Company’s operating activities and major assets and liabilities, except for the cash deposit of approximately $1,590,600 and $818,000, respectively, in U.S. dollars, are denominated in RMB, which are not freely convertible into foreign currencies. All foreign exchange transactions take place through either the People’s Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires a payment application together with invoices and signed contracts. The value of RMB is subject to change in central government policies and international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. When there is a significant change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected. RMB were appreciated from 7.08 RMB into US$1.00 at March 31, 2020 to 6.53 RMB into US$1.00 at December 31, 2020.

 

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3) VIE risk

 

The Company believes that the VIE Agreements and the Voting Agreement are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements.

 

The shareholders of Sichuan Senmiao are also shareholders of the Company and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, if the shareholders of Sichuan Senmiao were to reduce their interest in the Company, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms. However, the other shareholders of Jinkailong are not shareholders of the Company and there is a risk they may act in contrary to the interests of the shareholders of the Company.

 

The Company cannot assure that when conflicts of interest arise, the shareholders of Sichuan Senmiao or the other shareholders of Jinkailong will act in the best interests of the Company or that conflicts of interests will be resolved in the Company’s favor. In addition, the Company’s ability to control Sichuan Senmiao and Jinkailong via the VIE Agreements and Voting Agreement may not be as effective as direct equity ownership.

 

Further, the VIE Agreements or the Voting Agreement may not be enforced in China if the PRC government or courts consider those contracts contravene PRC laws and regulations or otherwise not enforceable for public policy reasons. If the VIE Agreements or the Voting Agreement were found to be in violation of any existing PRC laws and regulations, the PRC government could:

 

  · revoke the Company’s business and operating licenses;
  · require the Company to discontinue or restrict operations;
  · restrict the Company’s right to collect revenues;
  · block the Company’s websites;
  · require the Company to restructure the operations in such a way as to compel the Company to establish a new enterprise, re-apply for the necessary licenses or relocate our businesses, staff and assets;
  · impose additional conditions or requirements with which the Company may not be able to comply; or
  · take other regulatory or enforcement actions against the Company that could be harmful to the Company’s business.

 

(x) Recently issued accounting standards

 

In June 2016, the FASB issued new accounting guidance ASU 2016-13 for recognition of credit losses on financial instruments, which is effective January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information and will likely result in earlier recognition of credit reserves. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses standard.  The new effective date for these preparers is for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has not yet adopted this update and it will become effective on January 1, 2023 assuming the Company will remain eligible to be smaller reporting company. The Company is currently evaluating the impact of this new standard on Company’s unaudited condensed consolidated financial statements and related disclosures.

 

CECL adoption will have broad impact on the financial statements of financial services firms, which will affect key profitability and solvency measures. Some of the more notable expected changes include:

 

- Higher allowance on financial guarantee reserve and finance lease receivable levels and related deferred tax assets. While different asset types will be impacted differently, the expectation is that reserve levels will generally increase across the board for all financial firms.
   
- Increased reserve levels may lead to a reduction in capital levels.

 

- As a result of higher reserving levels, the expectation is that CECL will reduce cyclicality in financial firms’ results, as higher reserving in “good times” will mean that less dramatic reserve increases will be loan related income (which will continue to be recognized on a periodic basis based on the effective interest method) and the related credit losses (which will be recognized up front at origination). This will make periods of loan expansion seem less profitable due to the immediate recognition of expected credit losses. Periods of stable or declining loan levels will look comparatively profitable as the income trickles in for loans, where losses had been previously recognized.

 

26

 

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of this new standard on Company’s unaudited condensed consolidated financial statements and related disclosures.

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”. The amendment in this Update is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows of the Company.

 

4. BUSINESS COMBINATION

 

On September 11, 2020, Senmiao Consulting entered into an Investment Agreement relating to XXTX with all the original shareholders of XXTX, pursuant to which Senmiao Consulting agreed to make an investment of RMB3.16 million (approximately $0.5 million) in XXTX in cash in exchange for a 51% equity interest. On October 23, 2020, the registration procedures for the change in shareholders and registered capital were completed and XXTX became a majority owned subsidiary of Senmiao Consulting. As of the issuance date of these financial statements, Senmiao Consulting has made a capital contribution of RMB1.0 million (approximately $0.2 million) to XXTX and the remaining amount is expected to be paid before December 31, 2021. The Company operates a ride-hailing platform through XXTX.

 

The Company’s acquisition of XXTX was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of XXTX based upon the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date. The Company estimated the fair values of the assets acquired and liabilities assumed at the acquisition date in accordance with the business combination standard issued by the FASB with the valuation methodologies using level 3 inputs, except for other current assets and current liabilities were valued using the cost approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.

 

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed on the acquisition date, which represents the net purchase price allocation on the date of the acquisition of XXTX based on valuation performed by an independent valuation firm engaged by the Company and translated the fair value from RMB to USD using the exchange rate on October 23, 2020 at the rate of USD 1.00 to RMB 6.69.

 

As of December 31, 2020, the Company acquired $7,975 in cash, net of cash paid to XXTX in the acquisition of XXTX. The remaining purchase consideration of $0.3 million is expected to be paid by the Company by December 31, 2021.

 

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    Fair value  
Cash and cash equivalents   $ 105,386  
Other current assets     525,005  
Plant and equipment     790  
Intangible assets     265,536  
Total assets     896,717  
Total liabilities     (230,247 )
Net assets of XXTX     666,470  
Less: fair value of non-controlling interest     (336,441 )
Fair value of net assets acquired     330,029  
Goodwill     142,544  
Total purchase consideration   $ 472,573  

 

5. DISCONTINUED OPERATIONS

 

On October 17, 2019, the Board approved the Plan under which the Company has discontinued and is winding down its online P2P lending services business. The Company determined that the continued operation of its online P2P lending services business was not viable in light of the recently tightened regulations on online peer-to-peer lending in China generally and the unofficial request from local regulator to reduce the Company’s online peer-to-peer lending transaction volume on a monthly basis. The Company also determined that the discontinuation of its online P2P lending services business would allow the Company to focus its resources on its automobile financing facilitation and transaction business. In connection with the Plan, the Company ceased facilitation of loan transactions on its online lending platform and assumed all the outstanding loans from investors on the platform. The decision and action taken by the Company of discontinuing the online lending services business represented a major shift that will have a major effect on the Company’s operations and financial results, which triggers discontinued operations accounting in accordance with ASC 205-20-45.

 

The fair value of discontinued operations, determined as of October 17, 2019, includes estimated consideration expected to be received, less costs to sell. After consideration of the determination of fair value of the discontinued operations including the assumption of all the outstanding loans from investors on the platform, $143,668 of accounts receivable, $3,760,599 of other receivables, and $143,943 of prepayments for impaired intangible assets were indicated as of the date the Company’s Board of Directors approved the winding down of the Company’s online P2P lending services business on October 17, 2019, and the Company recognized $4,048,210 provision for doubtful accounts as of September 30, 2019 in related to the Company’s online lending services business, while the Company did not recognize any additional provision for doubtful accounts for the nine months ended December 31, 2020.

 

The following table sets forth the reconciliation of the carrying amounts of major classes of assets and liabilities from discontinued operations in the unaudited condensed consolidated balance sheet as of December 31, 2020 and the audited condensed consolidated balance sheet as of March 31, 2020.

 

Carrying amounts of major classes of assets included as part of discontinued operations:

 

   December 31,   March 31, 
   2020   2020 
    (Unaudited)      
Current assets          
Cash and cash equivalents  $-   $10,139 
Prepayments, other receivables and other assets, net   490,235    816,441 
Total current assets   490,235    826,580 
           
Property and equipment, net   7,884    11,206 
           
Total assets  $498,119   $837,786 

 

Carrying amounts of major classes of liabilities included as part of discontinued operations:

 

   December 31,   March 31, 
   2020   2020 
   (Unaudited)     
Current liabilities          
Accrued expenses and other liabilities  $2,578,550   $4,204,012 
Due to stockholders   48,960    182,095 
Due to related parties and affiliates   -    76,286 
Lease liabilities   -    53,899 
Total current liabilities   2,627,510    4,516,292 
           
Total liabilities  $2,627,510   $4,516,292 

 

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The following table sets forth the reconciliation of the amounts of major classes of income and losses from discontinued operations in the unaudited condensed consolidated statements of operations and comprehensive loss for three months and nine months ended December 31, 2020 and 2019.

 

    For the
Three Months Ended
    For the
Nine Months Ended
 
    December 31,     December 31,  
    2020     2019     2020     2019  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Revenues   $ 1,642     $ 4,294     $ 6,196     $ 112,618  
                                 
Operating expenses                                
Selling, general and administrative expenses     (2,450 )     (387,895 )     (90,888 )     (1,387,059 )
Provision for doubtful accounts     -       (3,998,953 )     -       (4,036,281 )
Amortization of intangible assets     -       (3,866 )     -       (30,321 )
Impairments of intangible assets and goodwill     -       -       -       (264,958 )
Total operating expenses     (2,450 )     (4,390,714 )     (90,888 )     (5,718,619 )
                                 
Loss from discontinued operations     (808 )     (4,386,420 )     (84,692 )     (5,606,001 )
                                 
Other income (expenses), net     236       (12,816 )     6,341       12,374  
                                 
Loss before income taxes     (572 )     (4,399,236 )     (78,351 )     (5,593,627 )
                                 
Income tax expenses     -       -       -       -  
                                 
Net loss attributable to stockholders   $ (572 )   $ (4,399,236 )   $ (78,351 )   $ (5,593,627 )

 

6. ACCOUNTS RECEIVABLE, NET

 

Accounts receivable include a portion of bundled lease arrangements on fixed minimum monthly payments to be paid by the automobile purchasers arising from automobile sales and services fees, net of unearned interest income, discounted using the Company’s lease pricing interest rates.

 

As of December 31, 2020 and March 31, 2020, accounts receivable were comprised of the following:

 

    December 31,     March 31  
    2020     2020  
    (Unaudited)        
Receivables of automobile sales due from automobile purchasers   $ 1,361,635     $ 1,172,765  
Receivables of service fees due from automobile purchasers     266,528       854,730  
Receivables of online ride hailing fees from online ride-hailing drivers     121,091       -  
Less: Unearned interest     (55,546 )     (105,083 )
Less: Allowance for doubtful accounts     (79,355 )     (379,689 )
Accounts receivable, net   $ 1,614,353     $ 1,542,723  
                 
Accounts receivable, net, current portion   $ 1,165,695     $ 660,645  
Accounts receivable, net, non-current portion   $ 448,658     $ 882,078  

 

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Movement of allowance for doubtful accounts for the nine months ended December 31, 2020 and the fiscal year ended March 31, 2020 are as follows:

 

   December 31,
2020
   March 31,
2020
 
   (Unaudited)     
Beginning balance  $379,689   $- 
Addition   280,174    1,797,816 
Recovery   (343,836)   - 
Write off   (252,211)   (1,410,736)
Translation adjustment   15,539    (7,391)
Ending balance  $79,355   $379,689 

 

7. INVENTORIES

 

   December 31,
2020
   March 31,
2020
 
   (Unaudited)     
Automobiles (i)  $428,503   $1,000,675 

 

(i) As of December 31, 2020, the Company owned 25 automobiles with a total value of $367,570 for operating lease, one automobile with a value of $13,361 for financing lease, and three automobiles with a total value of $47,572 for either leasing or sale.

 

As of December 31, 2020 and March 31, 2020, management compared the cost of automobiles with their net realizable value and determined no inventory write-down was necessary for these automobiles.

 

8. PREPAYMENTS, OTHER RECEIVABLES AND OTHER ASSETS

 

As of December 31, 2020 and March 31, 2020, the prepayments, receivables and other assets were comprised of the following:

 

   December 31,
2020
   March 31,
 2020
 
   (Unaudited)     
Receivables from borrowers of online lending platform, net (i)  $490,235   $811,504 
Due from automobile purchasers, net (ii)   936,122    1,385,352 
Prepaid expenses (iii)   923,007    331,319 
Receivables from aggregation platforms (iv)   412,086    - 
Deposits (v)   411,857    489,638 
Prepayments for automobiles (vi)   48,340    365,932 
Value added tax (“VAT”) recoverable   130,096    146,964 
Employee advances   19,516    11,937 
Others   25,664    72,575 
Total prepayments, receivables and other assets   3,396,923    3,615,221 
Total prepayments, receivables and other assets - discontinued operations   (490,235)   (816,441)
Total prepayments, receivables and other assets - continuing operations  $2,906,688   $2,798,780 

 

(i) Receivables from borrowers of online lending platform, net

 

The balance of receivables from borrowers of online lending platform represented the outstanding loans the Company assumed from investors on the Company’s discontinued P2P lending platform, which will be collected from related borrowers. As of December 31, 2020 and March 31, 2020, the Company recorded allowance of $3,907,189 and $3,688,800, respectively, against doubtful receivables.

 

(ii) Due from automobile purchasers, net

 

The balance due from automobile purchasers represented the payment of automobiles and related insurances and taxes made on behalf of the automobile purchasers. The balance is expected to be collected from the automobile purchasers in installments. As of December 31, 2020 and March 31, 2020, the Company recorded allowance of $30,632 and $347,954, respectively, against doubtful receivables. During the nine months ended December 31, 2020 and 2019, the Company wrote off balance due from automobile purchasers of $270,442and $0, respectively, while recovered allowance against the balance due from automobile purchasers of $43,173 and $0, respectively.

 

30

 

 

(iii) Prepaid expense

 

The balance of prepaid expense represented automobile liability insurance premium for automobiles for operating lease and other miscellaneous expense such as office lease, office remodel expense and etc. that will expire within one year. 

 

(iv) Receivables from aggregation platforms

 

The balance of receivables from aggregation platforms represented the amount due from the collaborated aggregation platforms based on the confirmed billings, which will be disbursed to the drivers who completed their rides through the Company’s online ride-hailing platform.

 

(v) Deposits

 

The balance of deposits mainly represented the security deposit made by the Company to various financial institutions and Didi Chuxing Technology Co., Ltd., an online ride-hailing platform.

 

(vi) Prepayments for automobiles

 

The balance represented amounts advanced to dealers and a leasing company for automobiles and to other third parties for automobiles related taxes and insurances.

 

9. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

   December 31,
2020
   March 31,
2020
 
   (Unaudited)     
Leasehold improvements  $192,672   $177,659 
Electronic devices   51,858    40,720 
Office equipment, fixtures and furniture   92,139    79,271 
Vehicles   1,115,829    320,949 
Subtotal   1,452,498    618,599 
Less: accumulated depreciation and amortization   (340,510)   (138,192)
Total property and equipment, net   1,111,988    480,407 
Total property and equipment, net - discontinued operations   (7,884)   (11,206)
Total property and equipment, net - continuing operations  $1,104,104   $469,201 

 

Depreciation expense from continuing operations for the three months ended December 31, 2020 and 2019 amounted to $69,276 and $32,276, respectively. Depreciation expense from discontinued operations for the three months ended December 31, 2020 and 2019 amounted to $2,097 and $2,719, respectively.

 

Depreciation expense from continuing operations for the nine months ended December 31, 2020 and 2019 amounted to $175,884 and $82,672, respectively. Depreciation expense from discontinued operations for the nine months ended December 31, 2020 and 2019 amounted to $6,365 and $8,339, respectively.

 

10. INTANGIBLE ASSETS, NET

 

Intangible assets consisted of the following:

 

    December 31,
2020
    March 31,
2020
 
    (Unaudited)        
Software     794,698       791,216  
Online ride-hailing platform operating licenses     280,188       -  
Less: Accumulated amortization     (95,886 )     (13,595 )
Total intangible assets, net   $ 979,000     $ 777,621  

 

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Amortization expense from continuing operations totaled $17,539 and $99 for the three months ended December 31, 2020 and 2019, respectively. Amortization expense from discontinued operations totaled $0 and $3,851 for the three months ended December 31, 2020 and 2019, respectively.

 

Amortization expense from continuing operations totaled $59,209 and $197 for the nine months ended December 31, 2020 and 2019, respectively. Amortization expense from discontinued operations totaled $0 and $30,321 for the nine months ended December 31, 2020 and 2019, respectively.

 

The following table sets forth the Company’s amortization expense for the next five years ending:

 

    Amortization
expenses
 
Twelve months ending December 31, 2021   $ 143,259  
Twelve months ending December 31, 2022     143,261  
Twelve months ending December 31, 2023     139,614  
Twelve months ending December 31, 2024     134,399  
Twelve months ending December 31, 2025     99,717  
Thereafter     318,750  
Total   $ 979,000  

 

11. BORROWINGS FROM FINANCIAL INSTITUTIONS, CURRENT AND NON-CURRENT

 

The borrowings from certain financial institutions in China represented the short-term loans of $250,055 from a bank and the difference between the actual proceeds disbursed by the financial institution to Jinkailong and the total amount of principal to be responsible for and repaid by the automobile purchasers of $224,116 as of December 31, 2020. Such borrowings totaled $474,171 and $290,974 bearing interest rates ranging between 6.2% and 8.1% per annum as of December 31, 2020 and March 31, 2020, respectively, of which $47,456 and $64,221, respectively, is to be repaid over a period of 13 to 24 months.

 

The interest expense for the three months ended December 31, 2020 and 2019 was $2,158 and $16,498, respectively. The interest expense for the nine months ended December 31, 2020 and 2019 was $37,698 and $37,827, respectively.

 

12. ACCRUED EXPENSES AND OTHER LIABILITIES

 

    December 31,
2020
    March 31,
 2020
 
    (Unaudited)        
Payables to investors of online lending platform (i)   $ 2,083,878     $ 3,668,957  
Accrued payroll and welfare     1,092,744       890,912  
Deposits (ii)     1,694,397       543,843  
Payables to drivers from aggregation platforms (iii)     888,103       -  
Loan repayments received on behalf of financial institutions (iv)     853,344       374,535  
Other payable (v)     152,705       83,810  
Payables for expenditures on automobile transaction and related services     88,492       373,026  
Accrued expenses     54,602       104,264  
Other taxes payable     442,493       173,056  
Total accrued expenses and other liabilities     7,350,758       6,212,403  
Total accrued expenses and other liabilities - discontinued operations     (2,578,550 )     (4,204,012 )
Total accrued expenses and other liabilities - continuing operations   $ 4,772,208     $ 2,008,391  

 

(i)

The balance of payables to investors of online lending platform represented the outstanding loans from investors on the Company’s discontinued P2P lending platform, which was assumed by the Company in connection with the Plan to discontinue its online lending services business.

 

(ii) The balance of deposits represented the security deposit from operating and finance lease customers to cover lease payment and related automobile expense in case the customers’ accounts are in default. The balance is refundable at the end of the lease term, after deducting any missed lease payment and applicable fee.

 

(iii) The balance of payables to drivers from aggregation platforms represented the amount the Company collected on behalf of drivers who completed their transaction through the Company’s online ride-hailing platform base on the confirmed billings.

 

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(iv) The balance of loan repayments received on behalf of financial institutions represented the loan repayments made by the automobile purchasers to financial institutions through the Company, which has not been paid to the financial institutions.

 

(v) The balance of other payable represented amount due to suppliers and vendors for operation purposes.

 

13. EMPLOYEE BENEFIT PLAN

 

The Company has made employee benefit plan in accordance with relevant PRC regulations, including retirement insurance, unemployment insurance, medical insurance, housing fund, work injury insurance and maternity insurance.

 

The contributions made by the Company were $61,262 and $74,518 for the three months ended December 31, 2020 and 2019, respectively, for continuing operations of the Company. The contributions made by the Company were $16,886 and $61,447 for the three months ended December 31, 2020 and 2019, respectively, for the Company’s discontinued operations.

 

The contributions made by the Company were $130,427 and $169,458 for the nine months ended December 31, 2020 and 2019, respectively, for continuing operations of the Company. The contributions made by the Company were $45,457 and $158,184 for the nine months ended December 31, 2020 and 2019, respectively, for the Company’s discontinued operations.

 

As of December 31, 2020 and March 31, 2020, the Company did not make adequate employee benefit contributions in the amount of $290,552 and $170,856, respectively, for continuing operations of the Company. As of December 31, 2020 and March 31, 2020, the Company did not make adequate employee benefit contributions in the amount of $529,204 and $454,151, respectively, for discontinued operations of the Company. The Company accrued the amount in accrued payroll and welfare.

 

14. EQUITY

 

Warrants

 

IPO Warrants

 

The registration statement relating to the Company’s initial public offering also included the underwriters’ common stock purchase warrants to purchase 337,940 shares of common stock (“IPO Underwriter’s Warrants”). Each five-year warrant entitles warrant holder to purchase one share of the Company’s common stock at the price of $4.80 per share and is not exercisable for a period of 180 days from March 16, 2018. As of December 31, 2020, there were 37,940 IPO Underwriter’s Warrants outstanding.

 

Registered Direct Offering Warrants

 

The Company adopted the provisions of ASC 815 on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 815. Warrants issued in connection with the direct equity offering with exercise prices denominated in US dollars are no longer considered indexed to the Company’s stock, as their exercise price is not in the Company’s functional currency (RMB), and therefore no longer qualify for the scope exception and must be accounted for as a derivative. These warrants are classified as liabilities under the caption “Derivative liabilities” in the unaudited condensed consolidated statements of balance sheets and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation model. Changes in the liability from period to period are recorded in the unaudited condensed consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities.”

 

The Company allocated the proceeds received between the common stock and warrants first to warrants based on the fair value on the date the proceeds were received with the balance to common stock. The value of the warrants was determined using the Black-Scholes valuation model using the following assumptions: volatility 86%; risk free interest rate 1.77%; dividend yield of 0% and expected term of 4 years of the Investor Series A Warrants, 1 year of the Series B Warrants, and 4 years of the placement agent warrants. The volatility of the Company’s common stock was estimated by management based on the historical volatility of its common stock, the risk free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the expected life of the warrants. The expected dividend yield was based on the Company’s current and expected dividend policy and the expected term is equal to the contractual life of the warrants. The value of the warrants was based on the Company’s common stock closing price of $2.80 on June 20, 2019 which was the date the warrants were issued. Net proceeds were allocated as the follows:

 

Warrants  $3,150,006 
Common stock   1,992,118 
Total net proceeds  $5,142,124 

 

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Subsequent to the initial recording, the change in the fair value of the warrants, determined under the Black-Scholes valuation model, at each reporting date will result in either an increase or decrease the amount recorded as liability, based on the fluctuations with the Company’s stock price with a corresponding adjustment to other income (or expense). During the three and nine months ended December 31, 2020, the change of fair value was a loss of $786,200 and $1,148,417, respectively, recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss based on the increase in fair value of the liabilities since March 31, 2020. During the three and nine months ended December 31, 2019, the change of fair value was a loss of $485,400 and a gain of $1,509,406, respectively, was recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss based on the increase in fair value of the liabilities since granted. At December 31, 2020 and March 31, 2020, the fair value of the derivative instrument totaled $506,143 and $342,530, respectively. The fair value of derivative instrument of $1,995,556 was allocated to additional paid-in-capital upon exercise of warrants as of the exercise date. Fair value of derivative instrument was allocated as the following exercise date:

 

Exercised date  Fair value of
derivative  instrument
allocated to additional
paid-in-capital
 
August 12, 2019  $699,523 
August 13, 2019   262,108 
October 9, 2019   49,122 
July 9, 2020   56,662 
October 20, 2020   315,790 
November 24, 2020   197,926 
November 25, 2020   414,425 
Total  $1,995,556 

 

Underwriters’ Warrants

 

The Company adopted the provisions of ASC 815 on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 815. Warrants issued in connection with the direct equity offering with exercise prices denominated in US dollars are no longer considered indexed to the Company’s stock, as their exercise price is not in the Company’s functional currency (RMB), and therefore no longer qualify for the scope exception and must be accounted for as a derivative. The Underwriters’ Warrants are classified as liabilities under the caption “Derivative liabilities” in the unaudited condensed consolidated statements of balance sheets and recorded at an estimated fair value at each reporting date, computed using the Black-Scholes valuation model. Changes in the liability from period to period are recorded in the unaudited condensed consolidated statements of operations and comprehensive income (loss) under the caption “Change in fair value of derivative liabilities.”

 

The Company allocated the proceeds received between the common stock and warrants first to warrants based on the fair value on the date the proceeds were received with the balance to common stock. The value of the warrants was determined using the Black-Scholes valuation model using the following assumptions: volatility 129%; risk free interest rate 0.19%; dividend yield of 0% and expected term of 5 years of the Underwriters’ Warrants. The volatility of the Company’s common stock was estimated by management based on the historical volatility of the Company’s common stock, the risk free interest rate was based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the expected life of the warrants (0.51), the expected dividend yield was based on the Company’s current and expected dividend policy and the expected term is equal to the contractual life of the warrants. The value of the warrants was based on the closing price of the Company’s common stock of $0.51 on August 4, 2020, which was the date the warrants were issued. Net proceeds were allocated as the follows:

 

Warrants  $241,919 
Common stock   5,856,378 
Total net proceeds  $6,098,297 

 

Subsequent to the initial recording, the change in the fair value of the warrants, determined under the Black-Scholes valuation model, at each reporting date will result in either an increase or decrease the amount recorded as liability, based on the fluctuations with the Company’s stock price with a corresponding adjustment to other income (or expense). During the three and nine months ended December 31, 2020, the change of fair value was a loss of $244,643 and $295,367, respectively, recognized in the accompanying income statement based on the increase in fair value of the liabilities since issuance. At December 31, 2020, the fair value of the derivative instrument totaled $537,287.

 

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The Company has warrants outstanding as follows:

 
                Weighted     Average  
    Warrants     Warrants     Average
Exercise
    Remaining
Contractual
 
    Outstanding     Exercisable     Price     Life  
Balance, March 31, 2019     37,940       37,940     $ 4.80       3.96  
Granted     2,594,850       2,594,850     $ 3.70       4.00  
Forfeited     -       -       -       -  
Exercised     (1,113,188 )     (1,113,188 )     -       -   
Balance, March 31, 2020     1,519,602       1,519,602     $ 1.76       3.21  
Granted     568,000       568,000     $ 0.63       5.00  
Forfeited     (3,132 )     (3,132 )     -       -  
Exercised     (892,234 )     (892,234 )     -       -  
Balance, December 31, 2020 (Unaudited)     1,192,236       1,192,236     $ 1.07       5.33   

 

Restricted Stock Units

 

On October 29, 2020, the Board approved the issuance of an aggregate of 127,273 restricted stock units (“RSUs”) to directors, officers and certain employees as stock compensation for their services for the year ending March 31, 2021. Total RSUs granted to these directors, officers and employees were valued at an aggregate fair value of $140,000. These RSUs will vest in four equal quarterly installments on January 29, 2021, April 29, 2021, July 29, 2021 and October 29, 2021 or in full upon the occurrence of a change in control of the Company, provided that the director, officer or the employee remains in service through the applicable vesting date. The RSUs will be settled by the Company’s issuance of shares of common stock in certificated or uncertificated form upon the earlier of (i) vesting date, (ii) a change in control and (ii) termination of the services of the director, officer or employee due to a "separation of service" within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, or the death or disability of such director, officer or employee. As of December 31, 2020, no RSUs have been vested. As of the issuance date of issuance of these unaudited condensed consolidated financial statements, the first installment of RSUs vested but has not been settled by the Company. The Company expects to settle the vested RSUs by issuance of shares of common stock within 2021 and account for the vested RSUs as an addition to both expenses and additional paid-in capital.

 

Equity Incentive Plan

 

At the 2018 Annual Meeting of Stockholders of the Company held on November 8, 2018, the Company’s stockholders approved the Company’s 2018 Equity Incentive Plan for employees, officers, directors and consultants of the Company and its affiliates. A committee consisting of at least two independent directors appointed by the Board or in the absence of such a committee, the board of directors, will be responsible for the general administration of the Equity Incentive Plan. All awards granted under the Equity Incentive Plan will be governed by separate award agreements between the Company and the participants. As of December 31, 2020, the Company has granted an aggregate of 303,788 RSUs and issued an aggregate of 169,015 shares upon settlement of vested RSUs under the Equity Incentive Plan.

 

2019 Registered Direct Offering

 

On April 15, 2019, the SEC declared effective the Company’s Registration Statement on Form S-3, pursuant to which, along with the accompanying prospectus, the Company registered up to $80,000,000 in aggregate principal amount of its common stock, preferred stock, debt securities, warrants, rights and/or units. On June 21, 2019, the Company closed a registered direct offering of an aggregate of 1,781,360 shares of its common stock, and in connection therewith, issued to the investors (i) for no additional consideration, Series A warrants to purchase up to an aggregate of 1,336,021 shares of common stock and (iii) for nominal additional consideration, Series B warrants to purchase up to a maximum aggregate of 1,116,320 shares of common stock. The Company sold the shares of common stock at a price of $3.38 per share (the “Share Purchase Price”). The Company received gross proceeds from the offering of approximately $6.0 million, and net proceeds from the offering of approximately $5.1 million after deducting estimated offering expenses payable by the Company.

 

The Series A warrants are exercisable immediately upon issuance at an exercise price of $3.72 per share and will expire on the fourth (4th) anniversary of the original issue date. In the event that on December 20, 2019, the exercise price is greater than the Six Month Adjustment Price as defined below, on the trading day immediately following December 20, 2019 (the “Six Month Measuring Date”), the exercise price shall automatically adjust to the Six Month Adjustment Price (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events). Six Month Adjustment Price means the greater of (x) $1.50 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) and (y) 100% of the quotient of (I) the sum of the five lowest VWAPs of the common stock during the ten consecutive trading day period ending and including the Six Month Measuring Date, divided by (II) five. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction during such period. The exercise price of the Series A warrant was adjusted pursuant to this formula from $3.72 to $1.50 per share on December 20, 2019. The Company used the adjusted exercise price to value its derivative liability on its December 31, 2019 financial statements and reporting periods onwards with changes in fair value of warrant liabilities from period to period are recorded in the unaudited condensed consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities”. The exercise price of the Series A warrant was further adjusted to $0.50 per share on August 7, 2020 as a result of the Company’s issuance of shares of common stock in its underwritten public offering in August 2020, which has been recorded in the financial statements in the three months ended December 31, 2020. In addition, the exercise price of the placement agent warrants from the June 2019 registered direct offering was voluntarily adjusted by the Company from $3.72 to $0.50 per share on August 18, 2020.

 

The Series B warrants are pre-funded warrants and were issued as a true-up with respect to the shares of common stock. The maximum aggregate number of shares of common stock issuable upon exercise of the Series B warrants is 1,116,320. Initially, the Series B warrants shall not be exercisable for any shares of common stock. In the event that on the fiftieth (50th) day after the closing date (the “Adjustment Measuring Time”), the closing price of the common stock is less than the Share Purchase Price, then the number of shares of common stock issuable upon exercise of the Series B warrants shall be adjusted (upward or downward, as applicable) to the greater of (i) zero (0) and (ii) such aggregate number of shares of common stock equal to fifty percent (50%) of the difference of (A) the quotient of (x) the Share Purchase Price divided by (y) the Market Price (as defined in Purchase Agreement) as of the Adjustment Measuring Time, less (B) the aggregate number of shares of common stock issued to the investors at the closing (as adjusted for share splits, share dividends, share combinations, recapitalizations and similar events). The exercise price of the Series B warrant was adjusted from $3.72 to $0.0001 per share on August 12, 2019.  The Company used the adjusted exercise price to value its derivative liability on its September 30, 2019 financial statements and reporting period onwards with changes in fair value of warrant liabilities from period to period are recorded in the unaudited condensed consolidated statements of operations and comprehensive loss under the caption “Change in fair value of derivative liabilities. As of December 31, 2020, the Company has issued an aggregate of 1,113,188 shares of common stock to certain investors in the June 2019 offering upon exercise of the pre-funded Series B warrants for a total consideration of $111.

 

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Exercise of Warrants

 

On July 9, 2020, one of the holders of Series A warrants exercised the warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share generating gross proceeds of $75,000 to the Company.

 

On October 20, 2020, one of the holders of Series A warrants exercised the warrants to purchase 337,500 shares of the Company’s common stock at an exercise price of $0.5 per share generating gross proceeds of $168,750 to the Company.

 

On November 24, 2020, one of the holders of Series A warrants exercised the warrants to purchase 171,894 shares of the Company’s common stock at an exercise price of $0.5 per share generating gross proceeds of $85,947 to the Company.

 

On November 25, 2020, one of the holders of Series A warrants exercised the warrants to purchase 332,840 shares of the Company’s common stock at an exercise price of $0.5 per share generating gross proceeds of $166,420 to the Company.

 

Underwritten Public Offering and Exercise of the Over-Allotment Option

 

On August 4, 2020, the Company entered into an underwriting agreement with The Benchmark Company, LLC and Axiom Capital Management, Inc., as representatives of the Underwriters, relating to an underwritten public offering of 12,000,000 shares of the Company’s common stock at the Offering Price. Pursuant to the terms of the Underwriting Agreement, the Company granted the Underwriters a 45-day option to purchase up to an additional 1,800,000 shares of common stock to cover over-allotments, if any, at the Offering Price less the underwriting discounts and commissions. An underwriting discount of 7% was applied to the Offering Price, except for shares of common stock purchased by certain existing investors of the Company (the “Excluded Investors”), an underwriting discount of 6% was applied. On August 6, 2020, the Company completed the underwritten offering. The net proceeds to the Company from this offering, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the Company, were approximately $5.3 million.

 

On August 13, 2020, the Underwriters exercised their over-allotment option to purchase an additional 1,800,000 shares of common stock at $0.50 per share. This transaction was completed on August 13, 2020. Net proceeds from the exercise of the underwriters’ over-allotment option were approximately $0.8 million net of underwriting discounts and commissions and offering expenses.

 

In connection with the underwritten offering, the Company issued the Underwriters or their permitted designees, on a private placement basis, the Underwriters’ Warrants to purchase up to 568,000 shares of common stock. These warrants are valid for a period of five years and exercisable commencing six months from August 4, 2020 at a price per share equal to 125% of the Offering Price and are exercisable on a “cashless” basis.

 

Common stock issued for consulting services

 

On July 23, 2020, the Company entered into a consulting agreement with FirsTrust China Ltd. (the “Consultant”), pursuant to which the Company engaged the Consultant to provide certain management, operation and business development advisory services for a period of twelve months. As compensation for the services, the Company agreed to issue the Consultant an aggregate of 500,000 shares of its common stock, par value $0.0001. These shares were valued at $445,000, based on the closing price of the Company’s common stock on July 23, 2020 of $0.89 per share. Pursuant to the agreement, these shares issued to the Consultant are not subject to vesting or forfeiture, and the Company has no recourse and no substantial disincentives against the Consultant if the services disrupt before the termination or expiration of the service period. As a result, these shares issued to the Consultant should be expensed on the date of issuance. For the three and nine months ended December 31, 2020, these shares was recorded as stock compensation of $0 and $445,000, respectively.

 

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15. INCOME TAXES

 

The United States of America

 

The Company is incorporated in the State of Nevada in the U.S., and is subject to U.S. federal corporate income taxes with tax rate of 21%. The State of Nevada does not impose any state corporate income tax.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The Tax Act also stablished the Global Intangible Low-Taxed Income (GILTI), a new inclusion rule affecting non-routine income earned by foreign subsidiaries. For the nine months ended December 31, 2020 and 2019, the Company’s foreign subsidiaries in China were operating at loss on a consolidated basis which resulted in no GILTI tax.

 

The Company’s net operating loss from U.S for the nine months ended December 31, 2020 amounted to approximately $0.8 million. As of December 31, 2020, the Company’s net operating loss carryforward for U.S. income taxes was approximately $4.0 million. The net operating loss carryforward will not expire and is available to reduce future years’ taxable income, but limited to 80% of income until utilized. Management believes that the utilization of the benefit from this loss appears uncertain due to the Company’s operating history. Accordingly, the Company has recorded a 100% valuation allowance on the deferred tax asset to reduce the deferred tax assets to zero on the unaudited condensed consolidated balance sheets. As of December 31 and March 31, 2020, valuation allowances for deferred tax assets were approximately $0.84 million and $0.53 million, respectively. Management reviews the valuation allowance periodically and makes changes accordingly.

 

PRC

 

Senmiao Consulting, Sichuan Senmiao, Hunan Ruixi, Ruixi Leasing, Jinkailong, Yicheng, XXTX and its subsidiaries are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the relevant PRC income tax laws. The EIT rate for companies operating in the PRC is 25%.

 

Income taxes in the PRC are consist of:

 

    For the
Three Months ended
December 31,
    For the
Nine Months ended
December 31,
 
    2020     2019     2020     2019  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Current income tax expenses (benefit)   $ 7,487     $ (72,648   $ 14,464     $ 155,722  
Deferred income tax expenses (benefit)   $ -     $       $ -     $ (122,772
Total income tax expenses (benefit)   $ 7,487     $ (72,648   $ 14,464     $ 32,950  

 

As of December 31, 2020 and March 31, 2020, the Company’s PRC entities from continuing operations had net operating loss carryforwards of approximately $6.7 million and $1.7 million, respectively, which will expire starting from 2023 and ending in 2024. In addition, allowance for doubtful accounts must be approved by the Chinese tax authority prior to being deducted as an expense item on the tax return. The bad debt allowances are incurred in Company’s PRC subsidiaries and VIEs which were operating at losses, the Company believes it is more likely than not that its PRC operations will be unable to fully utilize its deferred tax assets related to the net operating loss carryforwards in the PRC. As a result, the Company provided 100% allowance on all deferred tax assets on net operating loss carryforwards in the PRC of $1,666,131 and $414,996 related to its operations in the PRC at December 31, 2020 and March 31, 2020, respectively and provided 100% allowance on all deferred tax assets on allowance for doubtful account of $7,826 and $178,381 related to its operations in the PRC at December 31, 2020 and March 31, 2020, respectively.

 

The tax effects of temporary differences from continuing operations that give rise to the Company’s deferred tax assets and liabilities are as follows: 

 
    December 31,
2020
    March 31,
2020
 
    (Unaudited)        
Net operating loss carryforwards in the PRC   $ 1,666,131     $ 414,996  
Net operating loss carryforwards in the U.S.     841,268       527,365  
Allowance for doubtful account     7,826       178,381  
Less: valuation allowance     (2,515,225 )     (1,120,742 )
 Deferred tax assets, net   $ -     $ -  
Deferred tax liabilities:                
Capitalized intangible assets cost     45,146       -  
Deferred tax liabilities, net     45,146          

 

37

 

 

As of December 31, 2020 and March 31, 2020, the Company’s PRC entities associated with the discontinued P2P lending operations had net operating loss carryforwards of approximately $10.5 million and $8.8 million, respectively, which will expire in 2023 to 2024. The Company reviews deferred tax assets for a valuation allowance based upon whether it is more likely than not that the deferred tax asset will be fully realized. At December 31, 2020 and March 31, 2020, full valuation allowance is provided against the deferred tax assets based upon management’s assessment as to their realization.

 

The tax effects of temporary differences from discontinued operations that give rise to the Company’s deferred tax assets are as follows:

 

   December 31,
2020
   March 31,
2020
 
   (Unaudited)     
Net operating loss carryforwards in the PRC  $2,636,245   $2,206,673 
Less: valuation allowance   (2,636,245)   (2,206,673)
   $-   $- 

 

16. RELATED PARTY TRANSACTIONS AND BALANCES

 

1. Related Party Balances

 

1) Due from related parties

 

As of December 31, and March 31, 2020, balances due from related parties were $53,786 and $12,341, respectively, and represented operation costs of four related parties paid by the Company on their behalf, amounts received by the Company on behalf of a related party for refund of insurance claims, and amounts collected by a related party on behalf of the Company from the automobile purchasers, including certain installment payments and facilitation fees. In addition, another $15,313 and $14,120 represents advances to the non-controlling shareholders of Hunan Ruixi for operational purposes as of December 31, 2020 and March 31, 2020, respectively. The balances due from related parties were all non-interest bearing and due on demand.

 

2) Due to stockholders

 

Due to stockholders comprised of amounts payable to two stockholders named below and are unsecured, interest free and due on demand.

 

   December 31,
2020
   March 31,
2020
 
   (Unaudited)     
Jun Wang  $48,960   $73,384 
Xiang Hu   -    108,711 
Total due to stockholders  $48,960   $182,095 
Total due to stockholders – discontinued operations   (48,960)   (182,095)
Total due to stockholders – continuing operations  $-   $- 

 

3) Due to related parties and affiliates

 

   December 31,
2020
   March 31,
2020
 
   (Unaudited)     
Loan payable to related parties (i)  $140,122   $202,487 
Others (ii)   28,715    26,478 
Total due to related parties and affiliates   168,837    228,965 
Total due to related parties and affiliates – discontinued operations   -    (76,286)
Total due to related parties and affiliates – continuing operations  $168,837   $152,679 

 

(i) As of December 31, 2020 and March 31, 2020, the balances represented borrowings from three related parties, which are unsecured, interest free and due in the fiscal year of 2021.

 

(ii) As of December 31, 2020 and March 31, 2020, the balances represented $28,715 and 26,478, respectively of payables to three other related parties for operational purposes.  These balances are interest free and due on demand.

 

Interest expense for the three months ended December 31, 2020 and 2019 were $0 and $750, respectively. Interest expense for the nine months ended December 31, 2020 and 2019 were $0 and $28,772, respectively.

 

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2. Related Party Transactions

 

In December 2017, the Company entered into loan agreements with two stockholders, who agreed to grant lines of credit of approximating $955,000 and $159,000, respectively, to the Company for five years. The lines of credit are non-interest bearing, effective from January 2017. As of December 31, 2020, the outstanding balances due to these two stockholders in the discontinued operations were $48,960 and $0, respectively. As of March 31, 2020, the outstanding balances in the discontinued operations to these two stockholders were $73,384 and $108,711, respectively.

 

The Company entered into two office lease agreements which were set to expire on January 1, 2020. On April 1, 2020, the two office leases were amended with a leasing term from April 1, 2020 to March 31, 2023. As of December 31, 2020 and March 31, 2020, operating lease right-of-use assets of these leases in the continuing operations amounted to $244,175 and $105,432, respectively. As of December 31, 2020 and March 31, 2020, current leases liabilities of these leases in the continuing operations amounted to $141,239 and $78,482, respectively. Non-current lease liabilities of these leases in the continuing operation amounted to $112,570 and $0 as of December 31, 2020 and March 31, 2020, respectively. As of December 31, 2020 and March 31, 2020, current leases liabilities of these leases in the discontinued operations amounted to $0 and $53,899, respectively. For the three months ended December 31, 2020 and 2019, the Company incurred $29,206 and $27,415, respectively, in rental expenses to this related party. For the nine months ended December 31, 2020 and 2019, the Company incurred $87,617 and $82,246, respectively, in rental expenses to this related party.

 

In November 2018, Hunan Ruixi entered into an office lease agreement with Hunan Dingchentai Investment Co., Ltd. ("Dingchentai"), a company where one of our independent directors serves as legal representative and general manager. The term of the lease agreement was from November 1, 2018 to October 31, 2023 and the rent was approximately $44,250 per year, payable on a quarterly basis. The original lease agreement with Dingchentai was terminated on July 1, 2019. The Company entered into another lease with Dingchentai on substantially similar terms on September 27, 2019. As of December 31, 2020 and March 31, 2020, operating lease right-of-use assets of this lease in the continuing operations amounted $114,675 and $130,873, respectively. As of December 31, 2020, current leases liabilities and non-current leases liabilities of this lease in the continuing operations amounted $70,383 and $66,451, respectively. As of March 31, 2020, current leases liabilities and non-current leases liabilities of this lease in the continuing operations amounted $73,173 and $88,349, respectively. For the three months ended December 31, 2020 and 2019, the Company incurred expense of $11,080 and $20,725 in rent to Dingchentai, respectively. For the nine months ended December 31, 2020 and 2019, the Company incurred $33,239 and $31,180, respectively, in rental expenses to this related party.

 

In June 2019 and January 2020, the Company entered into two automobile maintenance services contracts with Sichuan Qihuaxin Automobile Services Co., Ltd and Sichuan Yousen Automobile Maintenance Service Co., Ltd, which companies are controlled by one of the non-controlling shareholders of Sichuan Jinkailong. During the three months ended December 31, 2020, the Company paid automobile maintenance fees of $0 and $196,858 to those companies as mentioned above, respectively. During the nine months ended December 31, 2020, the Company paid automobile maintenance fees of $29,469 and $360,927 to those companies as mentioned above, respectively. 

 

17. LEASE

 

Lessor

 

The Company's operating leases for automobile rentals have rental periods that are typically short term, generally is twelve months or less. Revenue recognition section of Note 3 (r), the Company discloses that revenue earned from automobile rentals, wherein an identified asset is transferred to the customer and the customer has the ability to control that asset, is accounted for under Topic 842 upon adoption for the year ended March 31, 2020. The Company did not have any automobile rentals operations prior to April 1, 2019, which the Company would have accounted for such revenue under Topic 606 for the year ended March 31, 2019.

 

Lessee

 

As of December 31, 2020 and March 31, 2020, the Company has engaged in offices and showroom leases which were classified as operating leases. In addition, the Company had automobiles leases which were classified as finance lease.

 

The Company occupies various offices under operating lease agreements with a term shorter than twelve months which it elected not to recognize lease assets and lease liabilities under ASC 842. Instead, the Company recognized the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

39

 

 

The Company recognized lease expense on a straight-line basis over the lease term for operating lease. Meanwhile, the Company recognized the finance leases ROU assets and interest on an amortized cost basis. The amortization of finance ROU assets is recognized on an accretion basis as amortization expense, while the lease liability is increased to reflect interest on the liability and decreased to reflect the lease payments made during the period. Interest expense on the lease liability is determined each period during the lease term as the amount that results in a constant periodic interest rate of the automobile loans on the remaining balance of the liability.

 

The ROU and lease liabilities are determined based on the present value of the future minimum rental payments of the lease as of the adoption date, using an effective interest rate of 6.0%, which is determined using an incremental borrowing rate with similar term in the PRC. As of December 31, 2020, the average remaining operating and finance lease term of its existing leases is 1.8 and 1.7 years, respectively.

 

Operating and finance lease expenses consist of the following:

 
        For the
Three Months Ended
    For the
Nine Months Ended
 
    Classification   December 31,
2020
    December 31,
2019
    December 31,
2020
    December 31,
2019
 
        (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Operating lease cost                                    
Lease expenses   Selling, general and administrative   $ 93,646     $ 77,767     $ 299,526     $ 286,943  
Finance lease cost                                    
Amortization of leased asset   Cost of revenue     758,091       -       1,524,439       -  
Amortization of leased asset   Selling, general and administrative     382,727       -       1,455,527       -  
Interest on lease liabilities   Interest expenses on finance leases     150,227       -       587,457       -  
Total lease expenses       $ 1,384,691     $ 77,767     $ 3,866,949     $ 286,943  

 

Operating lease expenses from continuing operations totaled $93,646 and $50,690 for the three months ended December 31, 2020 and 2019, respectively. Operating lease expenses from discontinued operations totaled $0 and $27,077 for the three months ended December 31, 2020 and 2019, respectively. Operating lease expenses from continuing operations totaled $299,526 and $202,751 for the nine months ended December 31, 2020 and 2019, respectively. Operating lease expenses from discontinued operations totaled $0 and $84,192 for the nine months ended December 31, 2020 and 2019, respectively. Interest expenses on finance leases from continuing operations totaled $150,227 and $0 for the three months ended December 31, 2020 and 2019, respectively. Interest expenses on finance leases from continuing operations totaled $587,457 and $0 for the nine months ended December 31, 2020 and 2019, respectively.

 

The following table sets forth the Company’s minimum lease payments in future periods:

 

    Operating
lease
payments
    Finance lease
payments
    Total  
Twelve months ending December 31, 2021   $ 330,090     $ 6,446,597     $ 6,776,687  
Twelve months ending December 31, 2022     251,513       1,972,364       2,223,877  
Twelve months ending December 31, 2023     171,476       42,071       213,547  
Twelve months ending December 31, 2024     48,322       -       48,322  
Total lease payments     801,401       8,461,032       9,262,433  
Less:  discount     (66,105 )     (567,784 )     (633,889 )
Present value of lease liabilities     735,296       7,893,248       8,628,544  
Less: Present value of lease liabilities – discontinued operations     -       -       -  
Present value of lease liabilities – continuing operations   $ 735,296     $ 7,893,248     $ 8,628,544  

 

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18. COMMITMENTS AND CONTINGENCIES

 

Purchase Commitments

 

On January 19, 2021, the Company entered into a contract with an automobile dealer for the purchase of a total of 500 automobiles for an aggregate purchase price of approximately $8,330,000. The purchase is expected to be completed by the end of 2021.

 

Contingencies

 

In measuring the credit risk of guarantee services to automobile purchasers, the Company primarily reflects the “probability of default” by the automobile purchasers on its contractual obligations and considers the current financial position of the automobile purchasers and its likely future development.

 

The Company manages the credit risk of automobile purchasers by performing preliminary credit checks of each automobile purchaser and ongoing monitoring every month. By using the current credit loss model, management is of the opinion that the Company is bearing the credit risk to repay the principal and interests to the financial institutions if automobile purchasers default on their payments for more than three months. Management also periodically re-evaluates probability of default of automobile purchasers to make adjustments in the allowance when necessary as the Company is the guarantor of the loans.

 

Contingent liabilities for automobile purchasers

 

Historically, most of the automobile purchasers would pay the Company their previous defaulted amounts within one to three months. In December 2019, a novel strain of coronavirus, or COVID-19, surfaced and it has spread rapidly to many parts of China and other parts of the world, including the United States. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China and elsewhere. Because substantially all of the Company’s operations are conducted in China, the COVID-19 outbreak has materially and adversely affected, and may continue to affect, the Company’s business operations, financial condition and operating results for 2020 and 2021, including but not limited to decrease in revenues, slower collection of accounts receivables and additional allowance for doubtful accounts. Some of the Company’s customers exited the ride-hailing business and tendered their automobiles to the Company for sublease or sale to generate income or proceeds to cover payments owed to financial institutions and the Company. For the three and nine months ended December 31, 2020, the Company recognized an estimated provision loss of approximately $17,000 and $119,000, respectively for the guarantee services because the drivers who exited the ride-hailing business were not able to make the monthly payments.

 

As of December 31, 2020, the maximum contingent liabilities the Company would be exposed to was approximately $14,898,000 (including approximately $202,000 related to the discontinued P2P business), assuming all the automobile purchasers were in default. Automobiles are used as collateral to secure the payment obligations of the automobile purchasers under the financing agreements. The Company estimated the fair market value of the collateral to be approximately $10,561,000 as of December 31, 2020, based on the market price and the useful life of such collateral, which represents approximately 70.9% of the maximum contingent liabilities. As of December 31, 2020, approximately $3,358,000, including interests of $201,000, due to financial institutions, of all the automobile purchases we serviced were past due mainly due to the COVID-19 epidemic in China.

 

Contingent liability of Jinkailong

 

On May 25, 2018, Chengdu Industrial Impawn Co., Ltd (“Impawn”) signed a pledge and pawn contract (the “Master Contact”) with Langyue, pursuant to which, Impawn shall provide loans to Langyue up to RMB20 million (approximately $2.9 million). In connection with the Master Contract, Jinkailong entered into a guaranty with Impawn and agreed to provide guarantee on all the payments (including principal, interests, compensations and other expenses) of Langyue jointly and severally with seven other guarantors, one of which is a shareholder of Jinkailong. Langyue used RMB7,019,652 (approximately $1,003,000) of the loans from Impawn and re-loaned it to automobile purchasers referred by Jinkailong from June 2018 to September 2018, which were also guaranteed by Jinkailong.

 

Langyue did not pay Impawn the monthly installment of June 2020 timely. In July 2020, Impawn sent the Collection Letter and Notice to Langyue to demand payment of the interest and penalty of RMB100,300 (approximately $14,330). On September 18, 2020, Impawn initiated a legal action with the People's Court of Sichuan Pilot Free Trade Zone (the “Court”) for an order to collect and enforce the repayment of the total outstanding principal, interest and penalty for an aggregate of RMB9,992,728 (approximately $1,428,000) and other expenses by freezing all bank accounts of Langyue and all related guarantors. On October 14, 2020, the cash in the bank accounts of Jinkailong, totaling RMB175,335 (approximately $25,050) was frozen by the Court and became restricted cash accordingly.

 

41

 

 

On December 24, 2020, Jinkailong, a shareholder of Jinkailong and Impawn signed a settlement agreement (“Settlement Agreement”). Impawn agreed to release the pledge of Jinkailong’s 75 automobiles, provided that Jinkailong and such shareholder repay an aggregate of RMB4,026,594 (approximately $617,000) in monthly installments over 35 months. In addition, upon the initial payment of RMB600,000 (approximately $92,000) by Jinkailong and such shareholder, Impawn will request the court to release the frozen bank accounts of Jinkailong. The Settlement Agreement further provides that it does not release the guarantee obligations of Jinkailong and in the event Langyue’s loan is not fully repaid at the end of the 35 months, Impawn reserves the right to pursue further actions against Jinkailong and such shareholder for the outstanding balance of the loan. As of December 31, 2020, the original maximum contingent liabilities related to the loans from Langyue to automobile purchasers which Jinkailong would be exposed to was approximately RMB2,787,000 (approximately $427,000), which has been included in the amount of contingent liabilities of automobile purchasers as mentioned above. So Jinkailong recorded the additional $93,000 for the gap between the total amount to be paid pursuant to the Settle Agreement and the remaining principal of loans from Impawn as guarantee expenses in the unaudited condensed consolidated financial statements. Jinkailong will collect monthly installment payments from online ride-hailing drivers who lease those 75 automobiles to repay for the remaining balance of Impawns and recognize guarantee expenses if any. However, as Jinkailong has undertaken the joint and several liability guarantee for all of Langyue’s loans from Impawn, Jinkailong may be required to pay all the outstanding balance of approximately $1,428,000 to Impawn in the future.

 

As of December 31, 2020, the freeze on all except two bank accounts was released. The restricted cash of Jinkailong was RMB33,892 (approximately $5,190) as of December 31, 2020 which was subsequently released on January 7, 2021.

 

From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Except the contingent liabilities for Langyue, other amounts accrued, as well as the total amount of reasonable possible losses with the respect to such matters, individually and in the aggregate, are not deemed to be material to the interim unaudited condensed consolidated financial statements.

 

19. SUBSEQUENT EVENTS

 

2021 Registered Direct Offering

 

On February 10, 2021, the Company completed a registered direct offering of 5,072,465 shares of the Company’s common stock at $1.38 per share, pursuant to a securities purchase agreement with certain accredited investors. As a result, the Company raised approximately $5.7 million, net of placement agent fees and offering expenses, to support the Company’s working capital requirements. In connection with the offering, the Company issued the placement agent warrants to purchase up to 380,435 shares of its common stock. These warrants are exercisable for a period of five years commencing 180 days from February 8, 2020 at a price of $1.38 per share and are exercisable on a “cashless” basis.

 

42

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our results of operations and financial condition should be read together with our unaudited consolidated financial statements and the notes thereto, which are included elsewhere in this report and our Annual Report on Form 10-K for the year ended March 31, 2020 (the “Annual Report”) filed with the SEC. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Overview

 

We are a provider of automobile transaction and related services, connecting auto dealers, financial institutions, and consumers, who are mostly existing and prospective ride-hailing drivers affiliated with different operators of online ride-hailing platforms in the People’s Republic of China (“PRC” or “China”). We provide automobile transaction and related services through our majority owned subsidiary, Hunan Ruixi Financial Leasing Co., Ltd. (“Hunan Ruixi”), a PRC limited liability company, and its variable interest entity (“VIE”), Sichuan Jinkailong Automobile Leasing Co., Ltd. (“Jinkailong”). Since October 2020, we also operate an online ride-hailing platform through Hunan Xixingtianxia Technology Co., Ltd. (“XXTX”), a majority owned subsidiary of Sichuan Senmiao Zecheng Business Consulting Co., Ltd., our wholly-owned subsidiary (“Senmiao Consulting”). Our platform enables qualified ride-hailing drivers to provide application based transportation services in Chengdu and Changsha, China. Substantially all of our operations are conducted in China.

 

Our Automobile Transactions and Related Services

 

Our automobile transaction and related services are mainly comprised of (i) facilitation of automobile transaction and financing where we connect the prospective ride-hailing drivers to financial institutions to buy, or get financing on the purchase of, cars to be used to provide ride-hailing services; (ii) automobile sales where we procure new cars from dealerships and sell them to our customers in the automobile financing facilitation business; (iii) automobile operating lease where we provide car rental services to individual customers to meet their personal needs with lease term no more than twelve months; and (iv) automobile financing where we provide our customers with auto finance solutions through financing leases. We started our facilitation services in November 2018, the sale of automobiles in January 2019, and financial and operating leasing in March 2019, respectively.

 

Since November 22, 2018, the acquisition date of Hunan Ruixi, as of December 31, 2020, we have facilitated financing for an aggregate of 1,687 automobiles with a total value of approximately $24.38 million, sold an aggregate of 1,414 automobiles with a total value of approximately $13.9 million and delivered approximately 1,249 automobiles under operating leases and 130 automobiles under financing leases to customers, the vast majority of whom are ride-hailing drivers.

 

The table below provides a breakdown of the number of vehicles sold or delivered under different leasing arrangements or managed/guaranteed by us and corresponding revenue generated for the three and nine months ended December 31, 2020 and 2019:

 

    Three Months Ended
December 31
    Nine Months Ended
December 31
 
    2020     2019     2020     2019  
    Number of
Vehicles
    Revenue
(Approximate)
    Number of
Vehicles
    Revenue
(Approximate)
    Number of
Vehicles
    Revenue
(Approximate)
    Number of
Vehicles
    Revenue
(Approximate)
 
Sales     7     $ 104,000       207     $ 1,987,000       26     $ 528,000       1,105     $ 10,828,000  
Facilitation     7     $ 19,000       264     $ 373,000       61     $ 181,000       1,242     $ 1,774,000  
Financing Leases     130     $ 74,000       92     $ 44,000       130     $ 179,000       92     $ 105,000  
Operating Leases     1,195     $ 940,000       -       -       1,220     $ 2,136,000       -       -  
Other Services     >2,200     $ 197,000       >2,000     $ 341,000       >2,500       848,000       >2,000     $ 936,000  

 

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Our operating leases, auto sales, auto financing and transaction facilitation, automobile management services and auto financial leasing accounted for approximately 55.2%, 13.6%, 4.7%, 8.1% and 4.6% of our total revenue from our automobile transactions and related services, respectively, for the nine months ended December 31, 2020 as compared to approximately 0.0%, 79.4%, 13.0%, 2.3% and 0.8% for the nine months ended December 31, 2019, respectively.

 

Our Ride-Hailing Platform

 

As part of our goal to provide an all-encompassing solution for ride-hailing drivers as well as to increase our competitive strengths in an increasing competitive ride-hailing industry and to take advantage of what we believe is significant market potential, in October 2020, we began operating our own online ride-hailing platform as a means of connecting drivers and riders in Chengdu. The platform (called Xixingtianxia) was owned and operated by XXTX, of which Senmiao Consulting acquired a 51% equity interest pursuant to an investment agreement entered into with all the original shareholders of XXTX on September 11, 2020 (the “XXTX Investment Agreement”). Pursuant to the XXTX Investment Agreement, Senmiao Consulting agreed to make an investment of RMB3.16 million (approximately $0.5 million) in XXTX in cash in exchange for a 51% equity interest in XXTX. The registration procedures for the change in shareholders and registered capital of XXTX were completed on October 23, 2020. As the date of this Report, Senmiao Consulting has made capital contribution of RMB1.0 million (approximately $0.2 million) to XXTX and the remaining amount is expected to be paid before December 31, 2021.

 

XXTX operates Xixingtianxia and holds a national online reservation taxi operating license. The platform is presently servicing ride-hailing drivers in Chengdu, Changsha, Neijiang and Panzhihua, China, providing them a platform to view and take customer orders for rides. We currently collaborate with two well-known aggregation platforms in China, Gaode Map, a map application owned and operated by AutoNavi Software, Co., Ltd. and Meituan, an e-commerce platform for services. Under our collaboration, when a rider using the platform searches for taxi/ride-hailing services on the aggregation platform, the platform provides such rider a number of online ride-hailing platforms for selection, including ours and if our platform is specifically selected by the rider, the order will then be distributed to registered drivers on our platform for viewing and acceptance. The rider may also simultaneously select multiple ride-hailing platforms in which case, the aggregation platform will distribute the requests to different online ride-hailing platforms which they cooperate with, based on the number of available drivers using the platform in a certain area and these drivers’ historical performance, among other things. We generate revenue from providing services to online ride-hailing drivers to assist them in providing transportation services to the riders looking for taxi/ride-hailing services. We earn commissions for each completed order as the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. We settle our commissions with the aggregation platforms on a weekly basis.

 

The acquisition of XXTX has brought us a new stream of revenue and furthers our goal of providing an all-encompassing solution for ride-hailing drivers. We launched Xixingtianxia in specific markets within Chengdu in late October 2020, focused on current driver customers. Since October 23, 2020, the acquisition date, to December 31, 2020, we have expanded marketing of our ride-hailing platform to a larger pool of potential drivers and riders in Chengdu and Changsha through cooperation with certain local car rental companies and through offering attractive incentives and awards to drivers.

 

During the period from the acquisition date to December 31, 2020, approximately 1.2 million rides with gross fare of approximately $3.3 million were completed through Xixingtianxia and an average of over 3,500 ride-hailing drivers completed rides and earned income through Xixingtianxia (the “Active Drivers”) each month. Among the Active Drivers, approximately 32% also leased automobiles from us, which is in line with our strategy to cross sell our core ride-hailing focused automobile finance and leasing business with the newer online ride-hailing platform business. We plan to expand our driver base for the platform and automobile rental business while strengthening the royalty of the drivers who both lease our cars and use our platform while expanding. During the period since the acquisition date to December 31, 2020, we achieved revenue of approximately $0.3 million from our online ride-hailing platform services, after taking into account approximately $0.4 million incentives paid by us to Active Drivers, which were recorded as a reduction to our revenue.

 

We intend to focus on drivers who currently finance or lease vehicles through us but our platform is available to others. We plan to launch Xixingtianxia in more cities across China during 2021.

 

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Key Factors and Risks Affecting Results of Operations

 

Ability to Increase Our Automobile Lessee and Active Driver Base

 

Our revenue growth has been largely driven by the expansion of our automobile lessee base and the corresponding revenue generated from operating and financial leasing. After the acquisition of XXTX, our revenue growth also depends on the number of completed online ride-hailing orders on our platform, which largely depends on the number of Active Drivers who complete ride-hailing transactions on our platform. We acquire customers for our automobile transaction and related services, as well as for our online ride-hailing platform services, through the network of third-party sales teams, referral from online ride-hailing platforms and our own efforts including online advertising and billboard advertising. We also send out fliers and participate in trade shows to advertise our services. We plan to increase the number of our Active Drivers for the platform by expanding our platform to more cities during 2021 as well as marketing our platform to our existing and prospective automobile lessees. We expect the expansion of our Active Driver base to promote the growth of our automobile rental business because we offer automobile rental solutions/incentives specifically targeted at drivers using our platform. An effective cross-selling strategies between our automobile finance and leasing business and the newer online ride-hailing platform business is important to our expansion and revenue growth. We also plan to strengthen our marketing efforts through the collaboration with certain automobile dealers and through our own team by employing more experienced staffs and improving the quality and variety of our services. We also plan to continue to set up new service centers in the cities of Chengdu and Changsha during 2021. As of December 31, 2020, we had 54 employees in our own sales department and cooperated with a total of 13 third-party sales teams with about 190 professionals in the aggregate.

 

Management of Automobile Rentals

 

Due to the fierce competition of online ride-hailing industry in Chengdu and the adverse impact from COVID-19 pandemic across mainland China, a significant number of online ride-hailing drivers exited the ride-hailing business and tendered their automobiles to us for sublease or sales in order to generate income/proceeds to cover their payments owed to the financial institutions and us. We have seen an increasing demand for short-term car rentals since the end of 2019, which remained stable during the three months ended December 31, 2020. The daily management and timely maintenance of leased automobiles will have a significant effect on the growth of our income from leasing automobiles in the next twelve months. The effective management of our automobiles through our proprietary system and experienced auto-management team could provide qualified automobiles to potential lessees, either for personal use or providing online ride-hailing services. As of December 31, 2020, we had three parking lots and 14 employees in Chengdu and one parking lot and five employees in Changsha for parking and management of automobiles for operating lease. During the three and nine months ended December 31, 2020, our overall utilization of the automobiles for operating lease was approximately 75.5% and 72.9%, respectively.

 

Our Service Offerings and Pricing

 

The growth of our revenue depends on our ability to improve existing solutions and services provided, continue identifying evolving business needs, refine our collaboration model with financial institutions and provide value-added services to our customers. The attraction of new automobile purchasers depends in part on our collaboration with financial institutions to offer more attractive automobile financing solutions with competitive interest rates to our automobile purchasers. We have also adopted a stable pricing formula, considering the historical and future expenditure, remaining available leasing months and market price to determine our rental price for varied rental solutions. Furthermore, our product designs affect the type of automobile purchasers or leases we attract, which in turn affects our financial performance. Our revenue growth also depends on our abilities to effectively price our services and the ability to obtain relatively lower expenditure paid to dealers, insurance companies and other service providers, which enables us to attract more customers and improve our profit margin.

 

Ability to Retain Existing Financial Institutions and Engage New Financial Institutions

 

The growth of our business is dependent on our ability to retain existing financial institutions and engage new financial institutions. During the three and nine months ended December 31, 2020, we saw a significant decrease in the number of automobile financing facilitation transactions because of the shift of our business focus to automobile rental. Despite such decrease, we are exploring new collaboration methods with financial institutions in connection with our automobile rental business and for our purchase of electric vehicles (“EVs”) in the next twelve months. Our collaborations with financial institutions may be affected by factors beyond our control, such as perception of automobile financing as an attractive asset, stability of financial institutions, general economic conditions and regulatory environment. To increase the number of our cooperative financial institutions and the availability of financing for our existing and new businesses will enhance the overall stability and sufficiency of funding for automobile transactions.

 

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Ability to Collect Payments on a Timely Basis

 

We advance the purchase price of automobiles and all service expenses when we provide related services to the purchasers. We collect the receivables due from automobile purchasers from their monthly installment payments and repay financial institutions on behalf of the purchasers every month. As of December 31, 2020, we had accounts receivable of $1.5 million and advanced payments of approximately $0.9 million due from the automobile purchasers, which will be collected through installment payments on a monthly basis during the relevant affiliation periods. The efficiency of collection of the monthly installment payments has a material impact on our daily operation. Our risk and asset management department has set up a series of procedures to monitor the collection.

 

The accounts receivable and advance payments may increase our liquidity risk. We have used the majority of the proceeds from our equity offerings and plan to seek equity and/or debt financings to pay for the expenditure related to the automobile purchase. To pay for the expenditure in advance will enhance the stability of our daily operation and lower the liquidity risk, and attract more customers.

 

Ability to Manage Defaults and Potential Guarantee Liability Effectively

 

We are exposed to credit risk as we are required by certain financial institutions to provide guarantee on the lease/loan payments (including principal and interests) of the automobile purchasers referred by us. If a default occurs, we are required to make the monthly payments on behalf of the defaulted purchasers to the financial institution.

 

We manage the credit risk arising from the default of automobile purchasers by performing credit checks on each automobile purchaser based on the credit reports from People’s Bank of China and third party credit rating companies, and personal information including residence, ethnicity group, driving history and involvement in legal proceeding. Our risk department continuously monitors the payment by each purchaser and sends them payment reminders. We also keep close communication with our purchasers in particular the ride-hailing drivers so that we can evaluate their financial conditions and provide them with assistance including the transfer of automobile to a new driver if they are no longer interested in providing ride-hailing services or are unable to earn enough income to make monthly lease/loan payments.

 

In addition, automobiles are used as collateral to secure purchasers’ payment obligations under the financing arrangement. In the event of a default, we can track the automobile through an installed GPS system and repossess and handover the automobile over to the financial institution so that we can be released from our guarantee liability. However, if a financial institution initiates a legal proceeding to collect payments due from a defaulted automobile purchaser, we may be required to repay the defaulted amount as a guarantor. If we are unable to undertake the responsibility as a guarantor, our assets, such as cash and cash equivalents, may be frozen by the court if the financial institution successfully requests for an order to freeze our assets or bank accounts, which may adversely affect our operations.

 

As of December 31, 2020, approximately $3,358,000, including interests of approximately $201,000, due to financial institutions, of all the automobile purchases we serviced were past due. Approximately 1,250 online ride-hailing drivers we serviced tendered their automobiles to us for sublease or sale and approximately 37 automobile purchasers that remained in the online ride-hailing business were late in their monthly installment payments as of December 31, 2020. In general, most of the defaulted automobile purchasers who want to remain in online ride-hailing business would pay the default amounts within one to three months. Our risk management department typically starts to interact with overdue purchasers if they have missed one monthly installment payment. However, if the balances are overdue for more than two months or the purchasers decide to exit the online ride-hailing business and sublease or sell their automobiles, we would fully record an allowance against receivables from those purchasers. As of December 31, 2020, we recognized an accumulated allowance against receivables of approximately $3,477,000 from these purchasers. For the nine months ended December 31, 2020, we also recognized an estimated provision loss of approximately $235,000 for the guarantee services as the drivers exited the online ride-hailing business and would no longer make the monthly repayments to us. By subleasing automobiles from these drivers, we believe we can cope with the defaults and control associated risks.

 

Further, the automobiles subject to our financing leases are not collateralized by us. As of December 31, 2020, the total value of non-collateralized automobiles was approximately $1,397,000. We believe our risk exposure of financing leasing is immaterial as we have experienced limited default cases and we are able to re-lease those automobiles to drivers under financing leases.

 

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Actual and Potential Impact of Ongoing Coronavirus (COVID-19) in China on Our Business

 

Beginning in late 2019, an outbreak of a novel strain of coronavirus and related respiratory illness (which we refer to as COVID-19) was first identified in China and has since spread rapidly globally. The COVID-19 pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in China and globally. In March 2020, the WHO declared COVID-19 a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because all of our business operations and our workforce are concentrated in China (where the virus first originated), our business, results of operations and financial condition have been adversely affected.

 

Due to the lockdown policy and travel restrictions, the demand for ride-hailing services has been materially and adversely impacted in our areas of operation in China, which reduced the demand of our Automobile Transaction and Related Services. As a result, our revenue and income for the three months ended March 31, 2020 and the subsequent three months ended June 30, 2020 was negatively impacted to a significant extent. As the ride-hailing markets in Chengdu and Changsha gradually recovered from the impact of COVID-19 since April 2020, our revenue for the three months ended September 30, 2020 and three months ended December 31, 2020 had an increase of approximately 21% and 43%, respectively, as compared with three months ended June 30, 2020.

 

Our ability to collect the monthly installment payments from ride-hailing drivers during February and March 2020 was adversely impacted. Approximately 1,500 drivers delayed their monthly installments of February and March 2020, which resulted in a decrease in our monthly installment collection by $732,000 during February and March 2020. Since April 2020, the COVID-19 epidemic in China has been effectively controlled and the online ride-hailing markets in Chengdu and Changsha have been recovering. As of December 31, 2020, approximately 1,250 drivers exited the online ride-hailing business and tendered their automobiles to us for sublease or sale while approximately 37 drivers postponed their monthly installment payments. As a result, we recorded accumulated bad debt expenses of approximately $3,477,000. However, during the six months ended September 30, 2020, there was an increase in our collection of monthly installments from automobile purchasers and operating lease as compared with the three months ended March 31, 2020, and the negative impact has been gradually alleviated. During the three months ended December 31, 2020, the average collection kept stable as compared with that in the three months ended September 30, 2020. We will continue to closely monitor our collections.

 

Our daily cash flow has also been adversely impacted as a result of the unsatisfied collection from the online ride-hailing drivers and our potential guarantee expenditure pursuant to the financing agreements we guaranteed. Our cash flow will continue to be adversely impacted if the online ride-hailing market in China recovers slower than anticipated. We anticipate having a larger cash outflow in our daily operations in the next twelve months (even greater than during the nine months ended December 31, 2020) as we expand our online ride-hailing platform services in more cities in China and incur more marketing and promotion expenses. Our cash flow situation may worsen if the COVID-19 pandemic reoccurs in China.

 

In an effort to assist with our automobile purchasers, we negotiated with the financial institutions we cooperate with to extend the due dates for monthly payments that may be affected by the epidemic. Certain financial institutions agreed to grant a grace period of up to four months from February to May 2020 for qualified drivers.

 

We commenced the operation of our online ride-hailing platform since late October 2020 and have witnessed the decrease in online ride-hailing orders in mid- December 2020, when Chengdu reported 14 confirmed COVID-19 cases and fewer people took ride-hailing trips as a result. The average daily rides completed through our Xixingtianxia platform decreased by approximately 15% compared to that before the reporting of the new COVID-19 cases in Chengdu and recovered a week later as the new confirmed cases in Chengdu were fully under control. Similarly, in early January 2021, Beijing reported three confirmed COVID-19 cases and one asymptomatic case involving drivers for Didi Chuxing Technology Co., Ltd. (“Didi”), a major transportation network company, which also resulted in the decrease in orders in the Didi platform in Beijing. Consequently, the income of our online ride-hailing drivers who ran their business through the Didi platform also decreased during this period.

 

Recent local resurgences of COVID-19 cases in some areas has brought uncertainties to future economic recovery of China, but we believe that the impact may be limited as China has established plans to rapidly contain the spread of COVID-19 cases and minimize related economic losses. However, if the epidemic in China deteriorates during the year ending March 31, 2021, new confirmed COVID-19 cases in the regions where we operate our online ride-hailing platform may have significant negative impact on the demand for rides through online ride-hailing platforms, including our platform and our revenue from the online ride-hailing platform services may decrease.

 

In addition, our automobile purchasers and lessees may be unable to generate sufficient income to make their monthly installment payments, which may create a significant risk of continuing default from our automobile purchasers or lessees. As a result, we may have to repay the defaulted amount as a guarantor or lose the monthly rental revenue. If we experience a widespread default by our automobile purchasers\lessees, our cash flow and results of operations will be materially and adversely affected. As a consequence, we could face shortfalls in liquidity without extra financing resources for the foreseeable future and lose the ability to grow our business or may even be required to scale down or restructure our operations.

 

Any of these factors related to COVID-19 and other similar or currently unforeseen factors beyond our control could have an adverse effect on our overall business environment, cause uncertainties in the regions in China where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.

 

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Ability to Manage and Grow New Ride-Hailing Business

 

Due to the fierce competition of online ride-hailing industry in Chengdu and Changsha, our ability to increase our revenue over time may be limited if we focus only on our current automobile transaction and related services business model. As part of our strategy to provide an all-encompassing solution for ride-hailing drivers, we have expanded our services to drivers through the operation of Xixingtianxia, our own online ride-hailing platform, which has brought us a new stream of revenue. We generate revenue from commissions earned from each completed order, which represent the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. As the aggregation platforms distribute the demand orders to different online ride-hailing platforms, the flow of drivers in our area of operations is enhanced, leading to a higher probability that more ride orders will be distributed to our platform, which in turn will increase the revenue of the drivers who use our platform (and our revenue). This also allows us to attract more drivers to engage their online ride-hailing business on our platform. Through a series of promotion and effective daily management and training services, we expect our own online ride-hailing platform will offer us a stable revenue source which can also help grow our automobile financing and leasing business.

 

Pursuant to the cooperation agreement signed with Didi, we may be penalized by Didi, or our partnership with Didi may be terminated as we now operate a business competitive with Didi. However, the service fees from we earn from Didi currently represent less than 0.1% of our total revenue. Therefore, we believe the termination of cooperation with Didi will not have a material influence on our business or results of operations.

 

Ability to Compete Effectively

 

Our business and results of operations depend on our ability to compete effectively. Overall, our competitive position may be affected by, among other things, our service quality and our ability to price our solutions and services competitively. We will set up and continuously optimize our own business system to improve our service quality and user experience. Our competitors may have more resources than we do, including financial, technological, marketing and others and may be able to devote greater resources to the development and promotion of their services. We will need to continue to introduce new or enhance existing solutions and services to continue to attract automobile dealers, financial institutions, car buyers, leasees, ride-hailing drivers and other industry participants. Whether and how quickly we can do so will have a significant impact on the growth of our business.

 

Market Opportunity and Government Regulations in China

 

The demand for our services depends on overall market conditions of the ride-hailing industry in China. The continuous growth of the urban population places increasing pressure on the urban transportation and the improvement of living standards has increased the market demand for quality travel in China. Traditional taxi service is limited, and the merging online platforms have created good opportunities for the development of the online ride-hailing service market. Based on the monitoring of China E-Commerce Research Center, the number of online ride-hailing service users had reached 333 million by the end of 2018, increased by 16% from 2017. According to Bain & Company, the transaction value of China's online ride-hailing market in 2017 was larger than the total of the rest of the world. It estimated that by 2021, the total transaction value of China's online ride-hailing market will reach $60 billion. The ride-hailing industry is facing increasing competition in China and is attracting more capital investment. According to Xinhua News Agency, as of October 12, 2020, approximately 1.04 million online booking taxi transportation certificates and approximately 2.5 million online booking taxi driver's licenses were issued nationwide in China, and the average daily volume of online ride-hailing orders exceeded 21 million. In 2019, in addition to the traditional online ride-hailing platforms, automobile manufacturers, offline operation service companies, financial and map service providers, among others, have built cooperation relationships with each other to make the online ride-hailing industry a more aggregated industry. In March 2019, T3, a new travel service company, was established in Nanjing and subsequently in other cities, including Wuhan and Chongqing and has accumulated over 1 million registered users since March 2019. T3 is jointly invested by three large automobile manufacturers, FAW, Dongfeng and Chang’an, and leading internet, retail and finance companies such as Suning, Tencent and Alibaba and intends to compete with Didi and capitalize on the great potential of the ride-hailing market. As of December 2019, Alibaba, together with its affiliate, has invested in or acquired more than 30 enterprises in the fields related to ride-hailing, including Hello Travel, Yongan Travel, Didi, Gaode Software, Xiaopeng Automobile and others covering the ride-hailing industry.

 

The online ride-hailing industry may also be affected by, among other factors, the general economic conditions in China. The interest rates and unemployment rates may affect the demand of ride-hailing services and automobile purchasers’ willingness to seek credit from financial institutions. Adverse economic conditions could also reduce the number of qualified automobile purchasers and online ride-hailing drivers seeking credit from the financial institutions, as well as their ability to make payments. Should any of those negative situations occur, the volume and value of the automobile transactions we service will decline, and our revenue and financial condition will be negatively impacted.

 

In order to manage the rapidly growing ride-hailing service market and control relevant risks, on July 28, 2016, seven ministries and commissions in China, including the Ministry of Transport, jointly promulgated the “Interim Measures for the Administration of Online Taxi Booking Business Operations and Services” (“Interim Measures”), which legalizes online ride-hailing services such as Didi and requires the ride-hailing services to meet the requirements set out by the measures and obtain taxi-booking service licenses.

 

On November 5, 2016, the Municipal Communications Commission of Chengdu City and a number of municipal departments jointly issued the “Implementation Rules for the Administration of Online Booking Taxi Management Services for Chengdu.” On August 10, 2017, the Transportation Commission of Chengdu further issued the detailed guidance “Working Process for the Online Booking Taxi Drivers Qualification Examination and Issuance” and the “Online Booking Taxi Transportation Certificate Issuance Process.” According to these regulations and guidelines, three licenses /certificates are required for operating the online ride-hailing business in Chengdu: (1) the ride-hailing service platform such as Didi should obtain the online booking taxi operating license; (2) the automobiles used for online ride-hailing should obtain the online booking taxi transportation certificate (“automobile certificate”); (3) the drivers should obtain the online booking taxi driver's license (“driver’s license”).

 

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On July 23, 2018, the General Office of Changsha Municipal People's Government issued the “Detailed Rules for the Administration of Online Booking Taxi Management Services for Changsha.” On June 12, 2019, the Municipal Communications Commission of Changsha City further issued “Transfer and Registration Procedures of Changsha Online Booking of Taxi.” According to the regulations and guidelines, to operate a ride-hailing business in Changsha requires similar licenses in Chengdu, except that automobiles used for online ride-hailing services are required to meet certain standards, including that the sales price (including taxes) is over RMB120,000 (approximately $17,000). In practice, Hunan Ruixi is also required to employ a safety administrator for every 50 automobiles used for online ride-hailing services and submit daily operation information of these automobiles such as traffic violation to the Transport Management Office of the Municipal Communications Commission of Changsha City every month.

 

Didi, the online ride-hailing platform with whom we cooperate for our automobile transaction and related services, obtained the online reservation taxi operating license in Chengdu and Changsha in March 2017 and July 2018, respectively. However, approximately 63% of our ride-hailing drivers had not obtained the driver’s license as of December 31, 2020 while all of the cars used for online ride-hailing services which we provided management services to have the automobile certificate. Without requisite automobile certificate or driver’s license, these drivers may be suspended from providing ride-hailing services, confiscated their illegal income and subject to fines of up to 10 times of their illegal income. Starting in August 2019, Didi began limiting customer orders allocated to drivers in Chengdu if they do not have requisite driver’s license or the automobiles used for ride-hailing services lacks the automobile certificate. Further, in December 2019, Didi began to enforce such limitation on drivers in Chengdu who have a driver’s license but operate automobiles without the automobile certificate.

 

In addition to the national online reservation taxi operating license, XXTX and its subsidiaries also obtained the online reservation taxi operating license in Chengdu, Changsha, Neijiang and Panzhihua in Sichuan, in June, October and December 2020, February 2021, respectively, to operate the online ride-hailing platform services. However, according to the Interim Measures, no enterprise or individual is allowed to provide information for conducting online ride-hailing services to unqualified vehicles and drivers. In December 2020, Chengdu Transportation Bureau has taken a series of investigations into actions violating the Interim Measures and imposed fines for such violations. Among the 226 cases, two cases involved drivers of our Xixingtianxia online ride-hailing platform who failed to obtain the ride-hailing driver’s licenses. As a result, we were fined RMB10,000. Pursuant to the Interim Measures, XXTX and its subsidiaries may be fined between RMB5,000 to RMB30,000 (approximately $714 to $4,300) for violations of the Interim Measures, including providing online ride-hailing platform services to unqualified drivers or vehicles. If we are deemed in serious violation of the Interim Measures, our online ride-hailing platform services may be suspended and the relevant licenses may be revoked by certain government authorities.

 

We are in the process of assisting the drivers to obtain the required certificate and license both for our automobile transaction and related services and our online ride-hailing platform services. However, there is no guarantee that all of the drivers affiliated with us would be able to obtain all the certificates and licenses. Further, there is no assurance that each of the drivers who use our platform or the cars used by such drivers in providing ride-hailing services possess the requisite license or certificate. Our business and results of operations will be materially and adversely affected if our affiliated drivers are suspended from providing ride-hailing services or imposed substantial fines or if we are found to be in serious violation of the Interim Measures due to the drivers’ failure to obtain requite licenses and/or automobile certificates in connection with providing services through our platform.

 

Our Discontinued Online P2P Lending Services

 

We previously also operated an online lending platform through our VIE, Sichuan Senmiao, in China, which facilitated loan transactions between Chinese investors and individual and SME borrowers. Our revenues from online lending services were primarily generated from fees charged for our services in matching investors with borrowers. We charged borrowers transaction fees for the work we perform through our platform and charged our investors service fees on their actual investment returns. We ceased our online lending services in October 2019 to focus on our automobile transaction and related services.

 

In connection with the plan adopted by our Board of Directors to discontinue and wind down our online P2P lending services business on October 17, 2019 (the “Plan”), we ceased facilitation of loan transactions on our online lending platform and assumed all the outstanding loans from investors on the platform. The aggregate balance of the loans we assumed was approximately $5.6 million. As of December 31, 2020, we have used cash generated from our automobile transactions and related services and payments collected from borrowers in the aggregate of approximately $4.1 million to repay platform investors and we expect to repay all of them by December 31, 2021, an extended due date agreed by the investors. However, if we could not generate enough cash flow to pay investors on time in accordance with the Plan, we may incur additional commitment liabilities in our financial statements during the following periods before we fully fulfill our Plan. Since December 31, 2019, we have treated the online lending business as discontinued operations and recognized receivables from borrowers and payables to investors of approximately $4.0 million in our financial statements accordingly. Based on recent repayments collected from borrowers, we also recognized bad debt expenses of approximately $3.7 million for those receivables and $0.3 million for accounts receivable and prepayment for intangible assets related to our online lending services. However, the amount and timing of the actual allowance for bad debt may change based on evidence of collectability of the subject loans during the execution of the Plan. As part of the Plan, we transferred certain employees who used to work on our online lending business, primarily the information technology staff, to provide a new website design and development service for customers.

 

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Results of Operations of Continuing Operations for the Three Months Ended December 31, 2020 Compared to the Three Months Ended December 31, 2019

 

  

For the
Three Months Ended

December 31,

     
   2020   2019   Change 
   (unaudited)   (unaudited)     
Revenues  $1,638,550   $2,745,579   $(1,107,029)
Cost of revenues   (1,793,815)   (1,901,405)   107,590 
Gross profit (loss)   (155,265)   844,174    (999,439)
Operating expenses               
Selling, general and administrative expenses   (2,401,250)   (1,240,213)   (1,161,037)
Bad debts (expenses) recovery, net   187,907    (99,025)   286,932 
Impairments of long-lived assets   (41,983)   -    (41,983)
Total operating expenses   (2,255,326)   (1,339,238)   (916,088)
Loss from operations   (2,410,591)   (495,064)   (1,915,527)
Other expenses, net   (72,586)   (37,636)   (34,950)
Interest expense   (2,158)   (17,248)   15,090 
Interest expense on finance leases   (150,227)   -    (150,227)
Change in fair value of derivative liabilities   (1,030,843)   (485,400)   (545,443)
Loss before income taxes   (3,666,405)   (1,035,348)   (2,631,057)
Income tax benefits (expenses)   (7,487)   72,648    (80,135)
Net loss  $(3,673,892)  $(962,700)  $(2,711,192)

 

Revenues

 

We started generating revenue from automobile transaction and related services from our acquisition of Hunan Ruixi on November 22, 2018. Revenue for the three months ended December 31, 2020 generated from our automobile transaction and related services, and online ride-hailing platform services, which decreased by $1,107,029, or approximately 40%, as compared with three months ended December 31, 2019, mainly due to the decreased number of newly facilitated automobiles.

 

As a result of the fierce competition of online ride-hailing industry in Chengdu and Changsha and the adverse impact from COVID-19 pandemic across the mainland China, we experienced a decrease in the number of newly facilitated automobiles. This resulted in a decrease in our revenue from automobile transaction and related services since January 2020 as compared with the prior year. Moreover, we experienced a significant number of online ride-hailing drivers who exited the ride-hailing business and tendered their automobiles to us in the three months ended March 31, 2020 as a result of less demand due to the public travel restrictions. The online ride-hailing market has recovered in the nine months ended December 31, 2020 since COVID-19 is generally under control in China and travel restrictions have been lifted by the Chinese government.

 

As the ride-hailing markets in Chengdu and Changsha gradually recovered from the impact of COVID-19 beginning in April 2020, we also experienced a decrease in the number of automobiles tendered to us by the ride-hailing drivers exiting the business during the three months ended December 31, 2020 as compared with prior quarters. The monthly installments we collected from our customers in the three months ended December 31, 2020 kept stable as compared with the three months ended September 30, 2020.

 

In an effort to mitigate the negative impact on our daily cash flow resulting from the drivers exiting the ride-hailing business during the epidemic period and develop a new income resource, we shifted our business focus to automobile rentals from facilitation of automobile transaction and financing.

 

Moreover, as described above, we had a source of new revenue from our online ride-hailing platform, which brought us $0.3 million during the period from October 23, 2020 (the date we acquired the platform) to December 31, 2020. As we plan to focus more on our automobile rental and online ride-hailing platform services business, we expect our revenue from automobile rental income to continue to account for a majority of our revenues and revenue from our online ride-hailing platform services to increase over the next twelve months. We plan to take advantage of the expansion of our online ride-hailing platform to increase the utilization of our automobiles for operating leases, which would bring the increasing demand for short-term automobile rentals.

 

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The following table sets forth the breakdown of revenues by revenue source for the three months ended December 31, 2020 and 2019:

 

    For the
Three Months Ended
December 31,
 
    2020     2019  
    (unaudited)     (unaudited)  
Revenue from automobile transactions and related services   $ 1,334,015     $ 2,745,579  
- Revenues from sales of automobiles     104,329       1,987,433  
- Operating lease revenues from automobile rentals     939,645       -  
- Service fees from automobile purchase services     18,968       352,351  
- Facilitation fees from automobile transactions     30       21,031  
- Service fees from automobile management and guarantee services     41,523       128,893  
- Financing revenues     74,155       44,149  
- Other service fees     155,365       211,722  
                 
Revenue from online ride-hailing platform services     304,535       -  
                 
Total Revenue   $ 1,638,550     $ 2,745,579  

 

Revenue from automobile transactions and related services

 

Revenue from our automobile transaction and related services includes sales revenue of automobiles, operating lease revenues from automobile rentals, service fees from automobile purchase services, service fees from automobile management and guarantee services, financing revenues (representing interest income from financial leasing) and other services fees, which accounted for approximately 7.8%, 70.4%, 1.4%, 3.1%, 5.6% and 11.7%, respectively, of the total revenue from automobile transaction and related services during the three months ended December 31, 2020. Meanwhile, sales revenue of automobiles, service fees from automobile purchase services, facilitation fees from automobile purchase, service fees from automobile management and guarantee services, financing revenues and other services fees, including commissions from insurance companies, which accounted for approximately 72.4%, 12.8%, 0.8%, 4.7%, 1.6% and 7.7%, respectively, of the total revenue from automobile transaction and related services during the three months ended December 31, 2019.

 

Sales of automobiles

 

We generated revenues from sales of automobiles to the customers of Hunan Ruixi during the three months ended December 31, 2020 and to the customers of Jinkailong, Hunan Ruixi and Mashangchuxing Automobile Leasing Co., Ltd. (“Mashang Chuxing”) during the three months ended December 31, 2019. Sales of automobiles during the three months ended December 31, 2020 decreased by $1,883,104 as compared with the same period in 2019, mainly due to the decrease in the number of new automobile purchases, which was a result of the increased competition in the online ride-hailing markets in Chengdu and Changsha, and the adverse impact of COVID-19 across mainland China and the shift of our business focus to automobile leasing. We sold an aggregate of 7 automobiles and 206 automobiles during the three months ended December 31, 2020 and 2019, respectively.

 

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Operating lease revenues from automobile rentals

 

We generate revenues from leasing our own automobiles or sub-leasing automobiles tendered by online ride-hailing drivers with their authorization for a lease term of no more than twelve months. Due to the fierce competition and COVID-19 pandemic, as of December 31, 2020, approximately 1,250 online ride-hailing drivers exited the online ride-hailing business because of decreased income. We leased over 1,170 automobiles with an average monthly rental income of $473 per automobile, resulting in a rental income of $939,645, for the three months ended December 31, 2020.

 

Service fees from automobile purchase services

 

We generate revenues from providing a series of automobile purchase services throughout the automobile purchase transaction process. The amount of these fees is based on the sales price of the automobiles and relevant services provided. Service fees from automobile purchase services decreased by $333,383 as compared with the same period in 2019, mainly due to the decrease in the number of facilitated new automobile purchases. We had revenue from 16 new automobile transactions, including purchase, financial leasing and operating leases, with service fees ranging from $160 to $2,306 per automobile during the three months ended December 31, 2020 while we serviced 264 new automobile purchases with service fees ranging from $376 to $2,093 per automobile during the three months ended December 31, 2019.

 

Facilitation fees from automobile transactions

 

We also generate revenues from fees charged to third-party sales teams or the automobile purchasers for the facilitation of sales of automobiles. The amount of facilitation fee is based on the type of automobile and negotiation with each sales team or automobile purchaser. The fees charged to third-party sales teams or automobile purchasers are paid when the transactions are consummated. These fees are non-refundable upon the delivery of automobiles. These fees are non-refundable upon the delivery of automobiles. Facilitation fees from automobile transaction were minimal, showing a decrease of $21,001 as compared with the same period in 2019, mainly due to the decrease in the number of facilitated new automobiles purchases and the waiving of facilitation fees for most of the facilitated automobile transactions since January 2020.

 

We facilitated 264 new automobile purchases during the three months ended December 31, 2019, with an average facilitation fee of $80 per automobile while we facilitated 7 new automobile purchases during the three months ended December 31, 2020, when we waived the facilitation fee for new automobile purchasers. We expect facilitation fees from automobile transactions to account for a smaller portion of our total revenue in the next twelve months.

 

Service fees from automobile management and guarantee services

 

The majority of our customers are online ride-hailing drivers, who enter into affiliation service agreements with us pursuant to which we provide them post-transaction management services and guarantee services. The decrease of $87,370 in service fees from automobile management due to the increase in the number of tendered automobiles which were subsequently rented to ride-hailing drivers whom we charge rent rather than charging management and guarantee services fee. We had management and guarantee services for over 1,400 and 2,100 automobiles during the three months ended December 31, 2020 and 2019, respectively.

 

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Financing revenues

 

We started our financial leasing business in March 2019 and began to generate interest income from providing financial leasing services to ride-hailing drivers in April 2019. We also charge the customers of our automobile financing facilitation services interest on their monthly payments which cover purchase price of automobile and our services fees and facilitation fees for terms of 36 or 48 months. We recognized a total interest income of $74,155 and $44,149 during the three months ended December 31, 2020 and 2019, respectively. The increase of $30,006 was mainly attributed to the increase in the number of automobiles we financed.

 

Other service fees

 

We generate other revenues such as commissions from insurance companies and other miscellaneous service fees charged to the automobile purchasers, which accounted for 57.2%, and 42.8% of revenues from other service fees during the three months ended December 31, 2020, respectively. The commissions from insurance companies and other miscellaneous service fees charged to the automobile buyers accounted for 50.0% and 50.0% of revenues from other service fees during the three months ended December 31, 2019, respectively. Other service fees decreased by $56,357 due to decrease of approximately $16,018 in the insurance commissions and decrease of approximately $40,339 in other miscellaneous service fees during the three months ended December 31, 2020 as compared to the same period in 2019.

 

Revenue from online ride-hailing platform services

 

We generate revenue from providing services to online ride-hailing drivers to assist them in providing transportation services to the riders looking for taxi/ride-hailing services and earn commissions for each completed order equal to the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. During the period from October 23 to December 31, 2020, approximately 1.2 million rides were completed through our Xixingtianxia platform and we earned online ride-hailing platform service fees of $304,535, netting off approximately $0.4 million incentives paid to Active Drivers.

 

Cost of Revenues

 

Cost of revenues represents the costs of automobiles sold of $191,024, amortization, daily maintenance and insurance expense of automobiles leased to online ride-hailing drivers of $1,205,826, technical service charges and insurance of online ride-hailing platform services of $396,965. Cost of revenues decreased by $107,590, or approximately 6%, during the three months ended December 31, 2020 as compared with the same period in 2019, mainly due to the decrease in costs of automobile sold of $1,710,381 as the number of automobiles sold decreased from 206 to 7, partially offset by the increase of $1,205,826 in costs of automobiles under operating leases and $396,965 in direct expense and technical service fees of online ride-hailing platform services, as a result of the commencement and expansion of those two businesses.

 

Gross Profit (Loss)

 

Gross profit decreased by $999,439, or approximately 118%, during the three months ended December 31, 2020 as compared with the same period in 2019 mainly due to the decreased number of facilitated new automobile purchases. Gross profit generated from sales of automobiles decreased by $172,723 and other revenues with no cost of revenues decreased by $468,105 due to the significant decrease in the number of automobiles sold and facilitated new automobile purchases during the three months ended December 31, 2020 as compared with the same period in 2019. Meanwhile, we had gross loss of $266,181 from operating lease revenues during the three months ended December 31, 2020. The majority of those leased automobiles were tendered to us with overdue monthly installment payments to financial institutions. Therefore, the total amount of the amortization and daily maintenance expense of these automobiles were higher than the monthly rent generated and resulted in losses. We have focused on our operating leases as a means of mitigating the impact of the return of automobiles by a substantial number of Didi drivers who exited the ride-hailing business as a result of COVID-19 and the intense competition in the online ride-hailing market in Chengdu and Changsha since 2020. Moreover, we had gross loss of $92,430 from our online ride-hailing platform services as we just started this new business in October 2020 and paid cash incentives to attractive drivers to our platform.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative expenses primarily consist of salary and employee benefits, office rental expense, travel expenses, and other costs. Selling, general and administrative expenses increased from $1,240,213 for the three months ended December 31, 2019 to $2,401,250 for the three months ended December 31, 2020, representing an increase of $1,161,037, or approximately 94%. The increase was attributable to more employees hired for the daily operations of our automobile transaction and related services business and the management of a significant number of automobiles which were tendered to us for sublease or sale due to the negative impact of COVID-19. The new business of online ride-hailing platform also brought approximately $262,000 in daily operating expenses. The increase mainly consists of an increase of $413,072 in amortization of automobiles which were tendered to us but have not been sub-leased or sold, an increase of $391,106 in salary and employee benefits as our employee increased from 158 to 201, an increase of $152,235 in professional service fees such as financial, legal and market consulting, an increase of $145,623 in rental and other office charges, and an increase of $59,001 in advertising and promotion and other miscellaneous expenses.

 

Bad Debt Expense

 

As a result of the fierce competition in the online ride-hailing markets in Chengdu and Changsha, and the negative impact of COVID-19, the number of online ride-hailing drivers we serviced who tendered their automobiles to us for sublease or sale increased by approximately 90 and the numbers of drivers who missed their monthly installment payments decreased by approximately 50 during the three months December 31, 2020. However, there was an increase in the amount of our collection of monthly installments during the three months ended December 31, 2020 as compared with the prior quarters ended March 31, 2020 and June 30, 2020. We re-evaluated the possibility of collection of unsettled balances from those drivers and recovered bad debt expenses of $187,907 for those receivables during the three months ended December 31, 2020.

 

Impairments of Long-lived Assets

 

For the three months ended December 31, 2020, we evaluated the future cash flow of our right-of-use assets and our own vehicles used for operating leases during their remaining useful life and recognized an additional impairment loss of $41,983 for those assets that could not generate sufficient cash.

 

Other Expense

 

For the three months ended December 31, 2020, we had other expense of $72,586, primarily a result of the penalty of $38,280 paid for driver’s traffic violations and accrued additional guarantee expenses of $93,119 payable to Impawn pursuant to the Settle Agreement as more fully described in Note 18 to the financial statements included herein, which was offset by other miscellaneous income. We had miscellaneous expense of $37,636 in the same period in 2019.

 

Interest Expense and Interest Expense on Finance Leases

 

Interest expense for the three months ended December 31, 2020 was $2,158, resulting from the borrowings of Jinkailong from a financial institution for its working capital requirements. The decrease of $15,090, or approximately 87%, was due to the decrease in outstanding principal of the loans obtained before 2019 and lower interest rate for the remaining principal.

 

Interest expense on finance leases for the three months ended December 31, 2020 was $150,227, representing the interest expense accrued under financing leases for the leased automobiles tendered to us for sublease or sale by the online ride-hailing drivers who exited the ride-hailing business.

 

Change in Fair Value of Derivative Liabilities

 

Warrants issued in our registered direct offering and underwritten public offering were classified as liabilities under the caption “Derivative Liabilities” in the consolidated balance sheet and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation model. The change in fair value of derivative liabilities for the three months ended December 31, 2020 derived from change of the fair value between December 31, 2020 and September 30, 2020 for the warrants issued in our registered direct offering in June 2019 and our underwritten public offering in August 2020, resulted in a loss of $1,030,843 in total.

 

Income Tax Expense

 

Generally, our subsidiaries and consolidated VIEs in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. Income tax expense of $7,487 for the three months ended December 31, 2020 mainly represented the provision of enterprise income tax resulting from the taxable income of approximately $29,900 from Hunan Ruixi and Yicheng. Income tax benefits of $72,648 for the three months ended December 31, 2019 mainly represented the reversal of enterprise tax accrued in prior quarters of Jinkailong as it incurred loss during the three months ended December 31, 2019.

 

Other subsidiaries and consolidated VIEs in China incurred cumulative losses and no tax expense were recorded.

 

Net Loss

 

As a result of the foregoing, net loss for the three months ended December 31, 2020 was $3,673,892, representing an increase of $2,711,192 from $962,700 for the three months ended December 31, 2019.

 

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Results of Operations of Continuing Operations for the Nine Months Ended December 31, 2020 Compared to the Nine Months Ended December 31, 2019

 

   

For the
Nine Months Ended

December 31,

       
    2020     2019     Change  
    (unaudited)     (unaudited)        
Revenues   $ 4,175,862     $ 13,643,429     $ (9,467,567 )
Cost of revenues     (3,588,586 )     (10,632,901 )     7,044,315  
Gross profit     587,276       3,010,528       (2,423,252 )
Operating expenses                        
Selling, general and administrative expenses     (7,110,884 )     (3,258,161 )     (3,852,723 )
Bad debt (expense) recovery, net     106,835       (228,249 )     335,084  
Impairments of long-lived assets     (122,206 )     -       (122,206 )
Total operating expenses     (7,126,255 )     (3,486,410 )     (3,639,845 )
Loss from operations     (6,538,979 )     (475,882 )     (6,063,097 )
Other income (expenses), net     56,795       (53,364 )     110,159  
Interest expense     (37,698 )     (79,593 )     41,895  
Interest expense on finance leases     (587,457 )     -       (587,457 )
Change in fair value of derivative liabilities     (1,443,784