Hui Ying Financial Holdings Corporation
(“the Company”) (formerly known as Sino Fortune Holding Corporation until its name was changed on September 29, 2017),
was incorporated in the State of Nevada on April 18, 2014 under the original name Tapioca Corp. Effective April 18, 2016, the Company
amended its name from Tapioca Corp. to Sino Fortune Holding Corporation. Effective on September 29, 2017, the Company amended its
name from Sino Fortune Holding Corporation to Hui Ying Financial Holdings Corporation.
On May 13, 2016, the Company entered into
a share exchange agreement (the “Share Exchange Agreement”) and on September 14, 2016, the Company entered into an
amendment to the Share Exchange Agreement (the “Amendment”) with Benefactum Alliance Holdings Company Limited (“Benefactum
Alliance”), a British Virgin Islands company, and all the shareholders of Benefactum Alliance, namely, Mr. Bodang Liu, Avis
Genesis Inc. and Manor Goldie Inc. (each a “Shareholder” and collectively the “Shareholders”), to acquire
all the issued and outstanding capital stock of Benefactum Alliance in exchange for the issuance to the Shareholders an aggregate
of 337,500,000 restricted shares of our common stock (the “Reverse Merger”). The Reverse Merger closed on September
29, 2016. As a result, Benefactum Alliance became our wholly owned subsidiary and after the Reverse Merger, the Company had a total
of 342,960,000 ( or 68,592,000 after considering the effect of 1:5 reverse stock split approved in June 2017) shares of common
stock outstanding and former shareholders of Benefactum Alliance owned 98.41% of the issued and outstanding shares.
The acquisition of Benefactum Alliance
was accounted for as a recapitalization effected by a share exchange, wherein Benefactum Alliance is considered the acquirer for
accounting and financial reporting purposes (legal acquiree) with no adjustment to the historical basis of its assets and liabilities.
Benefactum Alliance’s Shareholders become the majority shareholders and have control of the Company. The Company was a non-operating
public shell prior to the acquisition and as a result of the acquisition of Benefactum Alliance, the Company is no longer a shell
company. Pursuant to Securities and Exchange Commission (“SEC”) rules, the merger or acquisition of a private operating
company into a non-operating public shell with nominal net assets is considered a capital transaction in substance, rather than
a business combination. The historical financial statements for periods prior to September 29, 2016 are those of Benefactum Alliance
except that the equity section and earnings per share have been retroactively restated to reflect the recapitalization.
Benefactum Alliance is a holding company
incorporated under the laws of British Virgin Islands on March 15, 2016. On April 7, 2016, Benefactum Alliance incorporated Benefactum
Sino Limited (“Benefactum Sino”) in Hong Kong SAR. Benefactum Sino, in turn, incorporated Benefactum Alliance (Shenzhen)
Investment Consulting Company Limited (“Benefactum Shenzhen” or “WFOE”) in the People’s Republic
of China (“PRC” or “China”) with a registered capital of RMB 100,000 on April 21, 2016. Benefactum Shenzhen
entered into a series of contractual agreements with Benefactum Alliance Business Consultant (Beijing) Co., Ltd. (“Benefactum
Beijing”), a company incorporated in the People’s Republic of China on September 10, 2013 with a registered capital
of RMB 50,000,000. Benefactum Beijing is engaged in operating an electronic online financial platform, www.hyjf.com, as well as
mobile apps, which are designed to match investors with small and medium-sized enterprises (“SMEs”) and individual
borrowers in China and generate its revenue from services in connection with matching investors with these borrowers.
Due to PRC legal restrictions on foreign
ownership and investment in, among other areas, value-added telecommunications services, which include internet content providers,
or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China,
have to operate our internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC
through a series of contractual agreements between our WFOE and our operating entity of Benefactum Beijing. These agreements include
Trademarks, Technologies & Management and Consulting Service Agreement; The Equity Interest Pledge Agreement; Exclusive Right
and Option to Purchase Agreement; Equity Interest Holders’ Voting Rights Proxy Agreement.
All these contractual agreements, collectively,
enable us to exercise effective control over, and realize substantially all of the economic risks and benefits arising from Benefactum
Beijing, as well as give us an exclusive option to purchase all or part of the equity interests and assets of Benefactum Beijing
when and to the extent permitted by PRC law. Therefore, the Company believes that Benefactum Beijing should be considered as a
Variable Interest Entity (“VIE”) under the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 810 “Consolidation”. Accordingly, the accounts of Benefactum Beijing are consolidated
with those of WFOE.
Benefactum Beijing incorporated Qianhai
Zhonghui Business Consultant Co., Ltd (“Qianhai”) On May 9, 2017 and incorporated Puhui Equity Investment Co., Ltd
(“Puhui”) on February 24, 2017. Both Qianhai and Puhui are located in Xinjiang Huoerguosi Economic Development Zone,
where a favorable income tax holiday is offered for service-oriented entities.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.
GAAP” or the “Standard”). In the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for the fair presentation of the financial information for the interim periods reported have been made.
Interim results are not necessarily indicative of results of a full year. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and related notes included in our annual report
on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on April 13, 2017.
The unaudited condensed consolidated financial
statements include the accounts of the Company, Benefactum Alliance, including its wholly owned subsidiaries Benefactum Sino and
WFOE, and its variable interest entity Benefactum Beijing. All inter-company balances and transactions have been eliminated in
consolidation.
Preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as
well as the reported amounts of revenues and expenses during the reporting period. Significant estimates required to be made by
management include, but are not limited to, allowance for loan principal receivables, allowance for doubtful accounts, fair value
of investments, useful lives of property and equipment, intangible assets, the recoverability of long-lived assets, and deferred
income tax. Actual results could differ from those estimates.
Cash and cash equivalents include cash
on hand and highly liquid investments with maturities of three months or less when purchased. The Company’s cash equivalents,
which consist of money market funds, are measured at fair value on a recurring basis. As of September 30, 2017 and December 31,
2016, the carrying amount of cash equivalent was $7,556,519 and Nil, respectively, which approximates fair value and was determined
based upon Level 1 inputs.
Short-term investments other than highly
liquid ones are classified and accounted for as available-for-sale. Management determines the appropriate classification of its
investments at the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its
investments as either short-term or long-term based on each instrument’s underlying contractual maturity date, the nature
of the investment and its availability for use in current operations. The Company’s investments are carried at fair value,
with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive income in shareholders’
equity, with the exception of unrealized losses believed to be other-than-temporary, which are reported in earnings in the current
period. When we sell an investment, the cost is based on the specific identification method.
Short-term loans receivable represents
the outstanding balance of the entrusted loans extended by the Company to borrowers. The Company currently does not have lending
license required by relevant laws to extend loans to borrowers directly. Instead, it entrusts a third party who has proper license
to facilitate loans with funds provided by the Company. Loans receivable are recorded at unpaid principal balances, net of allowance
for loan losses that reflects the Company’s best estimate of the amounts that will not be collected.
The allowance for loan losses is determined
at a level believed to be reasonable to absorb probable losses inherent in the loan portfolio as of each balance sheet date. The
allowance is provided based on an assessment performed on a portfolio basis. All loans are assessed collectively depending on factors
such as delinquency rate, size, and other risk characteristics of the portfolio.
Loan principal are charged off when a settlement
is reached for an amount that is less than the outstanding balance or when the Company has determined the balance is uncollectable.
In accordance with ASC 310-10-35-41, the Company determines that any loans with outstanding balance that are 90 days past due are
deemed uncollectible and therefore charged-off.
The Company started the lending business
of entrusted loans in June 2017 through Qingdao Weichuang private Capital Management Co., Ltd (“Qingdao Weichuang”)
as a partner. The Company pays a fixed processing fee equal to 0.15% of the aggregate loan amount to Qingdao Weichuang for facilitating
these entrusted loans. All loans receivable consist of loans to small and medium sized enterprise (“SME”) with the
term period ranging from 3 months to 6 months. For the three and nine months ended September 30, 2017, the Company did not record
any provision for loan losses.
Prepayments consist of amounts paid in
advance to contractors and vendors for goods and services.
Property and Equipment
Property and equipment are recorded at
cost. Depreciation is computed using the straight-line method, over the estimated useful lives of these assets. Estimated useful
lives of the assets are as follows:
Office furniture
|
3 years
|
Electronic equipment
|
5 years
|
Automobile
|
5 years
|
Leasehold improvement
|
1 to 3 years
|
Maintenance and repairs are charged directly
to expenses as incurred. Major additions and betterment to property and equipment are capitalized and depreciated over the remaining
useful life of the assets.
Long-Lived Assets
Certain assets such as property, plant
and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable. Recoverability of assets that are held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value
of the asset.
Investment in equity investees
For equity investments in entities over which the Company does not have control or significant influence and for which there is
no readily determinable fair value, the cost method is used. Under the cost method, the Company carries the investment at cost
and recognizes income to the extent of dividends received from the distribution of the equity investee’s post-acquisition
profits.
Fair Value of Financial Instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”. ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
Level 1 - Observable inputs such as unadjusted
quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2 - Inputs other than quoted prices
that are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by
observable market data.
Level 3 - Inputs are unobservable inputs
which reflect management’s assumptions based on the best available information.
The Company considers the carrying amount
of cash and cash equivalents, accounts receivable, short-term loan receivable, other receivables, accounts payable, accrued liabilities,
convertible debt, other payables and taxes payable approximate their fair values because of the short period of time between the
origination of such instruments and their expected realization and their current market rate of interest. The following table sets
forth the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using
the fair value hierarchy:
As of December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investment – wealth products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,274,306
|
|
|
$
|
8,274,306
|
|
Cash equivalents – money market funds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,274,306
|
|
As of September 30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investment – wealth products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash equivalents – money market funds
|
|
|
7,556,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,556,519
|
|
Total
|
|
$
|
7,556,519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,556,519
|
|
There have been no transfers of assets
or liabilities between the fair value measurement levels. The following table is a reconciliation of the fair value measurements
that use significant unobservable inputs (Level 3):
Short-term investments
|
|
Level 3
|
|
Balance, December 31, 2016
|
|
$
|
8,274,306
|
|
Purchases
|
|
|
7,345,919
|
|
Unrealized gains
|
|
|
268,498
|
|
Repayments
|
|
|
—
|
|
- Principal
|
|
|
(15,720,267
|
)
|
- Realized gains
|
|
|
(268,498
|
)
|
Effect of exchange rate change
|
|
|
100,042
|
|
Balance, September 30, 2017
|
|
$
|
—
|
|
The Company measured short-term investments
at fair value on a recurring basis. The fair values of these investments are determined based on valuation techniques using the
best information available, and may include market comparable, quoted market rates of interest, third-party pricing information
and discounted cash flow projections, which the Company believes is less sensitive to changes in uncertainty given the short-term
nature of these investments with a maturity of six months or less. The short-term investments have been classified and accounted
for as available-for-sale with unrealized gains and losses recognized in Other Comprehensive Income under Net Unrealized Gain (Loss)
on Investments (net of tax effect). Realized gains and losses on short-term investments available for sale are reclassified from
Other Comprehensive Income when applicable and recognized in Other Income (Expense) under Realized Gain (Loss) on Investments.
An impairment charge is recorded in earnings in the current period when the cost of the investment exceeds its fair value and this
condition is determined to be other-than-temporary. During the three and nine months ended September 30, 2017 and 2016, the Company
did not record any other-than-temporary impairments on short-term investments required to be measured at fair value on a nonrecurring
basis. See also Note 3 – Short-term investments.
Risk Reserve Fund
In
order to better protect the investors' interests on our online platform, the Company has established a risk reserve fund which
is generally equivalent to 2% to 5% of all credit extended to borrowers. Prior to an application for credit being made on our
platform, the borrower (or if a guarantor is needed for the borrower, the guarantor) is required to provide an amount equal to
2% to 5% of the aggregate amount of the loan, which is deposited directly into the risk reserve fund and recorded as liabilities
from risk reserve fund guarantee on the balance sheet. If the borrower cannot be matched with an investor within the fundraising
period (no more than 19 days), all amounts deposited by the borrower or guarantor in the risk reserve fund, as the case may be,
will be returned. If the borrower is successfully matched with an investor, the risk reserve fund will be refunded to the borrower
if the loan is paid in full at maturity.
In
the event that a borrower defaults in repaying the loan when it is due, the Company advises the guarantor of such default. If
the guarantor cannot make the repayment within the period as stipulated (usually three days), we withdraw a sum equivalent to
the outstanding loan amount with interest and penalty at a rate of 0.06% per day from the risk reserve fund to repay investors
within three business days. When more than one loan becomes delinquent and the borrower and/or guarantor fail(s) to repay investors,
we will use the risk reserve fund to cover the loans in the order in which they become due. If the reserve fund is insufficient
to repay investors, the fund shall be allocated on a pro rata basis. The defaulting borrower and/or guarantor is/are obligated
to reimburse the risk reserve fund account up to the outstanding loan amount owed with interest and penalty at a rate of 0.06%
per day on the outstanding loan amount, which will be recorded as part of the balance of the risk reserve fund liability on the
balance sheet.
The
risk reserve fund applies only to loans facilitated through our online platform. In the role of transaction intermediary, the
Company does not assume credit risk for the loans facilitated through our online platform and our risk reserve liability is limited
to the balance of risk reserve fund that the borrowers or guarantors deposit with us. The determination of the risk reserve fund
ratio is made by referencing the overdue default loan data for the industry in which the borrower operates its business. Our risk
control department starts with the industry default loan data and credit trend then adjusts it appropriately with information
collected from current and past borrower profiles in the same industry on our platform, also taking into consideration communications
with and updates from guarantors including changes in guarantee fees they charge borrowers and other measures they would take
in providing guarantees. Based on the research results, the risk control department then sets the reserve fund ratio for the industry
and reviews and adjusts it dynamically if needed from time to time, usually every quarter to six months.
As
of September 30, 2017, each loan transaction facilitated on our platform is guaranteed by a third party guarantor who is jointly
and severally liable for the loan, except for the third party loan assignment, in which case Creditor Partners seek to sell their
rights as creditors on third party loans with borrowers who are not borrowers on our platform. Since these Creditor Partners are
usually our third party cooperative partners who refer borrowers to our platform and provide loan guarantee, the Company does
not require them to provide a third party guarantor when they seek to sell their creditor rights on our platform. They will provide
a "letter of promise," which promises that they will guarantee the loan if the Original Borrower defaults and the Company requires
them to deposit 2% to 5% of the loan amount into the risk reserve fund as usual. In the event the Original Borrower defaults and
the Creditor Partner also defaults on loan repayment, the Company will pay the investors the sum owed from the risk reserve fund.
Revenue
Recognition
Revenues
are primarily composed of fees collected from services provided with facilitating loan originations and services provided with
assisting in loan repayment process through our online platform.
Loans facilitated
through our online platform are mostly short-term loans for working capital purpose, with average life of loan around three to
four months. Pursuant to the agreements among the Company, the borrowers and the investors, all principal and interest payments
are due and paid off in lump sum at the end of the loan term, with no payments of interest or principal over the duration of the
loan. We generally sign electronically a three-party intermediary service agreement with borrowers and investors at the inception
of loan, which also specifies the repayment terms with the amounts of principal and interest due at the end of the loan term.
The borrowers are obligated to pay a loan origination service fee to us upfront at the time of loan issuance and a loan repayment
management fee at the time when the loan is repaid. All loans originated through our online platform are repaid through our online
platform. Borrowers are allowed to prepay the loan before the due date, but the borrowers are obligated to pay us the full amount
of the loan repayment management fee as if the loans are repaid at the end of the loan term in accordance with agreement.
The Company
recognizes revenues under ASC 605 when the following four revenue recognition criteria are met for each revenue type: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed
or determinable, and (iv) collectability is reasonably assured.
These criteria
as they relate to each of the following major revenue generating activities are described below.
Transactions
with online platform’s borrowers and investors
The Company
generates loan facilitation service fees and loan repayment management fees by providing the following services:
|
●
|
Connecting
investors to qualified borrowers and facilitating loan origination between the parties;
|
|
●
|
Providing
loan repayment service when loan matures, including facilitating the payment channel
and monitoring payments from borrowers and to investors;
|
Loan origination
service is rendered when a loan is successfully matched between the lenders and the borrowers; and when a loan is originated.
The origination of a loan takes place when the funds provided by the investor are transferred to the borrower. The borrower is
obligated to pay loan origination service fee upfront at loan inception and such service fee is not refundable. Revenue is recognized
when loan origination service is rendered and fee is collected from borrower upon the closing of the loan. The aforementioned
fee is an agreed upon percentage of the total principal which varies based on the duration of the loan.
Towards
the end of each loan term, the Company also provide repayment service to ensure loan repayment process is handled smoothly through
our online platform and to assist in release of liens or collaterals if applicable. The Company charges a separate fee for loan
repayment management service, which is determined based on an agreed upon percentage on the borrowing times the duration of the
loan and is not refundable. Borrowers are obligated to pay loan repayment management fee upon repayment of the loan. Loan repayment
management fee is recognized upon the borrower paying the principal, interest and our management fee for the loan repayment service
through our online platform.
Entrusted
loan lending transactions
Financing
income (interest) on loans receivable, is accrued and recognized as income when earned. Accrual of interest is discontinued when
reasonable doubt exists as to the full, timely collection of interest or principal (e.g. when the loans have been past due by
90 days). Subsequent recognition of income for loans in non-accrual status occurs only to the extent payment is received, subject
to the management’s assessment of the collectability of the remaining interest and principal.
Incentives
to investors on the online platform
To attract
investors to our online platform, the Company provides cash incentives from time to time to qualified investor within a limited
period. During the relevant incentive program period, the Company set certain thresholds for the investor to qualify for the cash
incentive. When qualified investment is made, the cash incentive is provided to the investor. The cash incentives provided are
accounted for as reduction of revenue from investors in accordance with ASC subtopic 605-50. Given the fact that the Company has
not generated any revenue from investors since inception, when recording these incentives as a reduction in revenue from investors
results in negative revenue for the investors on a cumulative basis, the cumulative shortfall is re-characterized as an expense
in accordance with ASC 605-50-45-9, given the inherent uncertainties with the incentive program which may not result in sufficient
probable future revenue to the Company to recover such shortfall. For the three and nine months ended September 30, 2017, we recorded
cash incentives of $552,832 and $1,539,160, respectively, all of which were re-characterized and recognized as sales and marketing
expenses. We did not provide cash incentives during the three and nine months ended September 30, 2016.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
The provisions
of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated
financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation
also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The
Company does not believe that there was any uncertain tax position at September 30, 2017 and December 31, 2016.
Foreign
Currency Translation
Benefactum
Beijing maintains its accounting records in Renminbi (“RMB”), which is the primary currency of the economic environment
in which its operations are conducted. The Company’s principal country of operations is the PRC. The financial position
and results of its operations are determined using RMB, the local currency, as its functional currency. The results of operations
and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates
of exchange in effect at that date. The equity denominated in the functional currency is translated at historical rate of exchange.
Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation
adjustments arising from the use of different exchange rates from period to period are included as a component of shareholders’
equity as “Accumulated Other Comprehensive Income (Loss)”.
Translation
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Gains and losses from foreign currency transactions are included
in the results of operations. No material transaction gains or losses were recognized for the six months ended June 30, 2017 and
2016.
The value
of RMB against U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s
political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition
in terms of financial reporting in U.S. dollars.
The following
table outlines the currency exchange rates that were used in creating the condensed consolidated financial statements in this
report:
|
|
As of September
30, 2017
|
|
As of December
31, 2016
|
Balance sheet items, except for equity
accounts
|
|
US$1 = RMB 6.6549
|
|
US$1 = RMB 6.9448
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
Items in the statements
of income and cash flows
|
|
US$1 = RMB 6.8065
|
|
US$1 = RMB 6.5802
|
Comprehensive
Income (Loss)
Comprehensive
income (loss) consists of two components, net income (loss) and other comprehensive income (loss). The foreign currency translation
gain or loss resulting from translation of the financial statements expressed in RMB to USD and unrealized gain or loss from available-for-sale
investment are reported in other comprehensive income (loss) in the condensed consolidated statements of income and other comprehensive
income (loss) and the condensed consolidated statements of shareholders’ equity.
Earnings
per Share (“EPS”)
Basic EPS
is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of potential common shares (i.e., options and warrants) as if
they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation
of diluted EPS.
Risks and Uncertainties
Default
risk
Investments
in loans on our online marketplace involve inherent risks as the return of the principal on a loan investment made through our
platform is not guaranteed. Although we are not liable for default loss, we aim to limit investor losses due to borrower defaults
to within an industry acceptable range through various preventive measures we have taken or will take. Our ability to attract
borrowers and investors to, and build trust in, our marketplace is significantly dependent on our ability to effectively evaluate
a borrower’s credit profile and maintain low default rates. To conduct this evaluation, we have employed a series of review
and assessment procedures.
Default
risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages default risk
through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize
default risk, we established a risk reserve funds policy with our borrowers and related guarantors. In accordance with the risk
reserve policy, investors are recoverable from the certain portion of unpaid principal and interest repayment of the defaulted
loan up to the balance of the risk reserve funds provided by borrowers or his related guarantors. The risk reserve fund being
set aside by borrowers or his guarantor equals to 2% to 5% of the loan principal amount for loans facilitated on our platform.
There is no limit on the period of time in which an investor can receive payments for unpaid interest and principal from the risk
reserve policy, but the Company’s obligation under the risk reserve liability to make payments is limited to the balance
of the risk reserve liability at any point in time.
The Company
identifies default risk collectively based on industry, geography and customer type. This information is monitored regularly by
management.
In measuring
the default risk of extending loans to corporate borrowers, the Company mainly reflects the “probability of default”
by the borrower on its contractual obligations and considers the current financial position of the borrowers and the exposures
to the borrowers and its likely future development. The Company uses standard approval procedures to manage default risk for their
loans.
Political
and economic risk
The Company’s
operations are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may
be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. These include risks associated with, among others, the political, economic
and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the
political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with respect
to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
Foreign
currency exchange risk
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political
and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict how market forces
or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains
significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater
fluctuation of the RMB against the U.S. dollar. We are a holding company and we rely on dividends paid by our operating subsidiaries
in China for our cash needs. Any significant revaluation of the RMB may materially and adversely affect our liquidity and cash
flows. To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S.
dollar would have an adverse effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into U.S.
dollars for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S.
dollar amount we would receive.
Reclassification
Certain
reclassifications have been made to the 2016 unaudited condensed consolidated financial statements to confirm to the 2017 unaudited
condensed consolidation financial statement presentation. These reclassifications had no effect on net income or cash flows as
previously reported.
Reverse
Stock Split
On June
20, 2017, the Board of Directors approved a reverse stock split of the Company’s issued and outstanding shares of common
stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-5 (the “Reverse Stock Split”).
The Reverse Stock Split was effected by the Company filling a Certificate of Change (the “Certificate”) with the Secretary
of State of the State of Nevada on June 20, 2017 (the “Effective Date”). As a result of the filing of the Certificate,
the number of shares and of the Company’s authorized Common Stock was reduced from 2,990,000,000 shares to 598,000,000 shares
and the issued and outstanding number of shares of the Company’s Common Stock was correspondingly decreased, with no change
in par value per share. The Company received FINRA’s approval of the Reverse Stock Split on August 7, 2017. The Company
has retroactively restated all shares and per share data for all the periods presented.
Recent
Accounting Pronouncements
In September
2017, the FASB has issued ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic
606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July
20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No.
2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02.
Both of the entities may still adopt using the public company adoption guidance in the related ASUs, as amended. The effective
date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
Note 3 – Short-term investments
On November 7 and
December 16, 2016, in order to increase return of the Company’s excess cash held in banks, the Company entered into two
short-term entrusted financial management contracts (the “Contracts”) with Shandong Wenye Investment Co., Ltd. (“Wenye”).
The contracts provide that the Company entrusted $7,377,434 (or RMB 50 million) and $1,032,841 (or RMB 7 million) in principal,
respectively, to Wenye to make investments in principal guaranteed short-term wealth products for the Company. Balance of the
short-term investments was $8,274,306 as of December 31, 2016 including the unrealized gain of these investments. The term of
both contracts was for six months and upon maturity of these investments in May and June of 2017, respectively, Wenye repaid the
entrusted principals with accumulated investment return of $219,230 (or RMB 1,492,192).
In May 2017, the
Company entered into an agreement with Jiangxi Bank to purchase a principal-guaranteed wealth management product. Principal of
the wealth management product is $7,377,434 (or RMB 50 million) and term of the product was for 68 days from May 3 to July 10,
2017 with annualized rate of return of 3.60%. Upon maturity, Jiangxi Bank repaid the investment principal with accumulated investment
return of $49,268 (or RMB 335,342) on July 11, 2017.
Note 4 –
Accounts receivable
Accounts receivable
include service fees generated through our loan original service and loan repayment service. As of September 30, 2017 and December
31, 2016, the Company has service fee receivable balance of $572,440 and $281,038, respectively, from ChinaPnR.
ChinaPnR is a licensed
third party online payment service, who assists us in the disbursement and repayment of loans facilitated through our online platform
as well as deducts and remits service fees to us. ChinaPnR usually remits our service fee to our bank account on the next day.
The receivable balance from ChinaPnR is due to the timing difference at end of the periods. All service fee receivable are considered
fully collectible and no allowance is deemed necessary.
Note 5 –
Short-term loans receivable
In June 2017, the
Company started to lend entrusted loans through Qingdao Weichuang, a licensed loan provider under the PRC regulations, to SME
and individual borrowers in China. As of September 30, 2017, the Company granted entrusted loans in the aggregate principal amount
of $35,312,326 (or RMB 235 million) to SME borrowers. The loans are short-term loans with typical loan terms between three and
six months, and interest payable on a monthly basis. Interest rates charged are based on negotiation with borrowers, taking into
consideration of factors such as duration of the loan, the industry in which the borrower conducts its business, its credit history,
financial condition, operating results and cash flows etc.
In connection with
execution of the entrusted loan contracts, each borrower is required to engage a third party guarantor, pursuant to which the
guarantor has agreed to guarantee the obligation under the entrusted loan contract. The Company pays a processing fee equal to
0.15% of the aggregate loan amount to Qingdao Weichuang for facilitating these entrusted loans. The sister of Mr. Bodang Liu,
our chief executive officer and chairman, owns 48.41% of the outstanding equity interests in Qingdao Weichuang. For the three
and nine months ended September 30, 2017, the processing fee expense paid to Qingdao Weichuang amounted to $38,566 and $48,857,
respectively.
Note 6 – Prepayments
The following is
a summary of prepayments as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid service fees (i)
|
|
$
|
503,198
|
|
|
$
|
2,071,013
|
|
Prepayment for rent
|
|
|
57,163
|
|
|
|
—
|
|
Prepayment for advertising
|
|
|
26,876
|
|
|
|
—
|
|
Down payment for fixed asset
|
|
|
—
|
|
|
|
7,200
|
|
Others
|
|
|
—
|
|
|
|
713
|
|
Prepayments
|
|
$
|
587,237
|
|
|
$
|
2,078,926
|
|
|
(i)
|
We pay
a service fee to third-party service providers based on the amount of loans the service
providers refer to us. In April 2016, the Company entered into a cooperation agreement
with Shanghai Nami Financial Consulting Co., Ltd (“Nami”), amended in October
2016, pursuant to which Nami will refer potential investors to us, and in turn we will
pay Nami a service fee based on the number of new registered investors and the amount
of loans extended by the investors it refers to us. To secure and grow the cooperation
relationship, the Company agreed to make prepayment to Nami. As of September 30, 2017,
the balance of prepaid service fee was $503,198, with $459,598 paid to Nami and $43,598
to other service providers, which are refundable if the service providers fail to refer
potential investors to us. For the three and nine months ended September 30, 2017, the
referral fee paid to Nami amounted to $4,836,228 and $10,917,505, respectively. For the
three and nine months ended September 30, 2016, the referral fee paid to Nami amounted
to $2,781,186 and $4,906,807, respectively.
|
Note 7 –
Other receivables
The following is
a summary of other receivables as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Security deposit
|
|
$
|
83,373
|
|
|
$
|
106,489
|
|
Business-related advances
|
|
|
821,462
|
|
|
|
686,360
|
|
VAT receivable
|
|
|
175,015
|
|
|
|
—
|
|
Other receivables
|
|
$
|
1,079,850
|
|
|
$
|
792,849
|
|
Security deposit
represents various deposits made to vendors for lease, renovation and other services. Advances and loans are amounts advanced
or lent without interest to employees and vendors for out-of-pocket expenses and business transactions.
Note 8 –
Investment in equity investees
On September 1,
2017, the Company acquired 4.4538% of equity interests in Shenzhen TouZhiJia Financial Information Service Co., Ltd. (“Shenzhen
TouZhiJia Financial”) from three individuals with a total cash consideration of $2,870,067 (RMB 19.1 million). The equity
interest the Company acquired was held through three limited partnerships wherein each partnership’s sole purpose is to
hold the equity interest of Shenzhen TouZhiJia Financial.
For the purpose
of investment, the Company acquired 35.1%, 61.7% and 65.54% equity interests of these three limited partnerships, respectively,
which represent 1.4259%, 0.7175% and 2.3104% of the ownership interest in Shenzhen TouZhiJia Financial, respectively. Due to the
fact that the only asset in these limited partnerships are their equity investments in Shenzhen TouZhiJia Financial, the Company
believes that the acquisition of the equity interest of these limited partnership constitute as an acquisition of an asset rather
than an acquisition of a business. The Company doesn’t have significant influence nor control over Shenzhen TouZhiJia Financial.
The equity interest in Shenzhen TouZhiJia Financial does not have readily determinable fair value. As a result, the Company accounted
for this investment under cost method. As of September 30, 2017, no impairment loss was recognized.
Shenzhen TouZhiJia
Financial’s main businesses include vertical Peer-to-Peer (“P2P”) search engine, private wealth management and
secondary loan exchange services. Shenzhen TouZhiJia Financial, as a service provider, refers potential investors to the Company
through online channel (Note 12). The Company believes this investment could offer new opportunities for operational synergies
in the financial information service industry.
Note 9 –
Taxes payable
The following is
a summary of taxes payable as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Value-added tax
|
|
$
|
300,632
|
|
|
$
|
194,178
|
|
Corporate income tax
|
|
|
3,615,689
|
|
|
|
996,274
|
|
Withholding tax
|
|
|
14,875
|
|
|
|
27,505
|
|
Business & related taxes
|
|
|
70,874
|
|
|
|
67,203
|
|
Taxes payable
|
|
$
|
4,002,070
|
|
|
$
|
1,285,160
|
|
Note 10 –
Liabilities from risk reserve fund guarantee
To minimize default
risk, we offer a private loan risk reserve fund which is 2-5% of the credit extended to the third-party guarantors or borrowers
who do not have a guarantor, though a risk reserve fund is not a regulatory requirement. Prior to an application for credit being
made on our platform, borrower (or if a guarantor is needed for the borrower, the guarantor) is required to provide an amount
equal to 2-5% of the amount being loaned, which shall be deposited directly into the risk reserve account. Under our risk reserve
fund arrangement, the risk reserve fund will be refunded to the borrowers (or guarantors) if the loan is paid in full at maturity.
The private loan risk reserve is deposited directly into a bank account owned by the company at a third party depository institution
and can be refunded directly from such bank account. The Company is not restricted to use any of these loan risk reserve fund
if needed.
If a loan is delinquent
for a certain period of time, usually within 3 business days, we will withdraw a sum, equal to the overdue principal and interest,
from the risk reserve fund to repay the investor (up to the total amount of reserve funds maintained with us by the guarantor
of the default loan or the borrower who does not have a guarantor). No such payments were made from the risk reserve fund during
the three and nine months September 30, 2017 and 2016.
The following is
a roll-forward of the private loan risk reserve fund for the nine months ended September 30, 2017 and 2016:
Private loan risk reserve
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
7,297,123
|
|
|
$
|
5,410,913
|
|
Increase for
new loans
|
|
|
26,856,281
|
|
|
|
19,734,407
|
|
Refund for
loan payoffs
|
|
|
(21,492,187
|
)
|
|
|
(17,931,427
|
)
|
Withdrawals
for delinquent loans
|
|
|
—
|
|
|
|
—
|
|
Repayments
for delinquent loans
|
|
|
—
|
|
|
|
—
|
|
Effect
of exchange rate change
|
|
|
440,073
|
|
|
|
(169,128
|
)
|
Balance at end of period
|
|
$
|
13,101,290
|
|
|
$
|
7,044,765
|
|
Note 11 –
Convertible notes payable
On June 30, 2017,
the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”),
pursuant to which we issued and sold senior convertible promissory notes in the aggregate principal amount of $13,189,164 (RMB
90,357,317) (the “Notes”), convertible into shares of the Company’s common stock (the “Common Stock”)
following June 30, 2018 at a conversion price of $2.00 per share (the “Conversion Price”) in a private placement (the
“Private Placement”). The Notes mature on June 30, 2020 and accrue interest at a rate of 6%, 7% and 8% per annum for
each of the first, second and third year, respectively, with such interest payable annually. In event of a conversion of the Notes,
the Investors have agreed to a one year lock-up period with respect to the shares of Common Stock issuable upon conversion of
the Notes commencing on the applicable conversion date of the Notes.
Following the first
anniversary of the issuance date of Notes, if the closing price of the Common Stock is equal to or greater than 130% of the Conversion
Price for 20 business days within a 30 consecutive business day period, the principal and accrued interest under the Notes may
be repaid at the option of the Company without penalty or premium. Following the second anniversary of the issuance date of the
Notes, if the closing price of the Common Stock is less than 70% of the Conversion Price for 20 business days within a 30 consecutive
business day period, and (i) the Company has an effective current registration statement and (ii) the average trading volume of
the Common Stock for such prior 30 consecutive business days is at least 10,000 shares, then the Investors may redeem and declare
due any or all of the Notes. If this right of redemption is exercised, the interest rate shall be reduced to 3% per annum. The
Notes contain various events of default provisions, which, if breached, may result in the acceleration of all obligations under
the Notes.
The Notes are secured
by a pledge of shares of the Common Stock pursuant to a stock pledge agreement (the “Stock Pledge Agreement”) between
Avis Genesis Inc., a majority shareholder of the Company, and the Investors on the basis of one share of Common Stock per $1 loaned
under the Note. Other than the shares pledged pursuant to the Stock Pledge Agreement, there is no recourse against the Company
upon a default of the Notes.
Since the fair value
of the common stock into which the above-mentioned note is converted at the date of the Purchase Agreement is same as the conversion
price and the average stated interest rate is in line with the market rate, the Company concludes that there is no beneficial
conversion feature associated with the Notes. For the three and nine months ended September 30, 2017, the financing expense amounted
to $199,464 and $348,252, respectively.
Note 12 –
Related party transaction
On
September 1, 2017, the Company acquired 4.4538% of equity interests in Shenzhen TouZhiJia Financial, which refers potential investors
to the Company through online channel (Note 8). The Company incurred $136,110 referral service expense to Shenzhen TouzhiJia Financial
for the period from September 1 to September 30, 2017. As of September 30, 2017, the referral service fee payable to Shenzhen
TouZhiJia Financial was $601,638.
Note 13 – Income taxes
The Company accounts
for income taxes in accordance with ASC 740: Income Taxes, which requires that the Company recognizes deferred tax liabilities
and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities,
using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the
opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized.
United States
The Company is subject
to the U.S. Tax law at tax rate of 34%. No provision for the U.S. federal income taxes has been made as the Company had no U.S.
taxable income for the periods presented, and its earnings are permanently invested in PRC.
BVI
Benefactum Alliance
is a holding company incorporated under the laws of British Virgin Islands (“BVI”) and under the current laws of BVI,
it is not subject to income tax.
Hong Kong
Benefactum Alliance
incorporated Benefactum Sino in Hong Kong SAR, which is subject to Hong Kong profit tax. The applicable statutory tax rate is
16.5%. No provision for Hong Kong income taxes has been made as Benefactum Sino had no taxable income for the periods presented.
China
Benefactum
Shenzhen and Benefactum Beijing were incorporated in PRC and are subject to income taxes on income arising in or derived from
the PRC in which they are domiciled. The applicable statutory tax is 25%. Qianhai and Puhui are located in Xinjiang Huoerguosi
Economic Development Zone and enjoy five-year income tax exemption starting from their first profitable year in 2017, followed
by a reduced income tax rate of 12.5% for the subsequent five years.
The provision for
income taxes consists of the following for the three and nine months ended September 30, 2017 and 2016:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
Current:
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
1,405,154
|
|
|
|
503,232
|
|
|
|
2,921,258
|
|
|
|
624,721
|
|
Current
provision
|
|
|
1,405,154
|
|
|
|
503,232
|
|
|
|
2,921,258
|
|
|
|
624,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Deferred
provision
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
provision for income taxes
|
|
$
|
1,405,154
|
|
|
$
|
503,232
|
|
|
$
|
2,921,258
|
|
|
$
|
624,721
|
|
Reconciliations
of the differences between the PRC statutory income tax rate and the Company’s income tax provision for the three and nine
months ended September 30, 2017 and 2016 are as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income before provision
for income taxes
|
|
$
|
6,164,510
|
|
|
$
|
1,961,785
|
|
|
$
|
12,566,653
|
|
|
$
|
3,134,264
|
|
PRC statutory
rate of 25%
|
|
$
|
1,541,128
|
|
|
$
|
490,446
|
|
|
$
|
3,141,664
|
|
|
$
|
783,566
|
|
Tax holiday effect and others
|
|
|
(135,974
|
)
|
|
|
—
|
|
|
|
(220,405
|
)
|
|
|
—
|
|
Non-deductible expense and others
per PRC tax code
|
|
|
—
|
|
|
|
12,786
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
carry forward
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(158,845
|
)
|
Income
tax provision
|
|
$
|
1,405,154
|
|
|
$
|
503,232
|
|
|
$
|
2,921,258
|
|
|
$
|
624,721
|
|
For the three months
ended September 30, 2017, the tax holiday effect on basic and diluted net income per share were $0.0019 per share and $0.0017
per share, respectively. For the three months ended September 30, 2016, the tax holiday effect on basic and diluted net income
per share were both $0.003 per share.
Note 14 –
Stockholders’ equity
In June 2017, the
Board of Directors approved a reverse stock split of the Company’s issued and outstanding shares of common stock at a ratio
of 1-for-5. The Company effected the reverse stock split through filing a Certificate of Change with the Secretary of State of
the State of Nevada on June 20, 2017. The issued and outstanding number of shares has been retroactively restated to reflect this
reverse stock split.
Note 15 –
Earnings per share
The following table
sets forth the computation of basic and diluted net income per share for the three and nine months ended September 30, 2017 and
206:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income - basic
|
|
$
|
4,759,356
|
|
|
$
|
1,458,553
|
|
|
$
|
9,645,395
|
|
|
$
|
2,509,543
|
|
Reversal of financing expense on convertible
note payable
|
|
|
199,464
|
|
|
|
—
|
|
|
|
348,252
|
|
|
|
—
|
|
Net income - diluted
|
|
|
4,958,820
|
|
|
$
|
1,458,553
|
|
|
$
|
9,993,647
|
|
|
$
|
2,509,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares - basic
|
|
|
72,364,178
|
|
|
|
67,500,000
|
|
|
|
72,364,178
|
|
|
$
|
67,500,000
|
|
Conversion of convertible note payable
|
|
|
6,594,582
|
|
|
|
—
|
|
|
|
2,230,421
|
|
|
|
—
|
|
Weighted average number of shares - diluted
|
|
|
78,958,760
|
|
|
|
67,500,000
|
|
|
|
74,594,599
|
|
|
|
67,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
Net income per share - diluted
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
Note
16 –Concentrations and Risks
ChinaPnR
We
have contracted with a licensed third party online payment service, ChinaPnR, to assist in the disbursement and repayment of loans.
Both investor and borrower would open accounts with ChinaPnR and authorize ChinaPnR to manage their accounts. The investor will
fund the loan amount in his/her account under ChinaPnR, which would then disburse this loan amount to the borrower net of our
loan origination service fees which it will remit to us.
When
the borrower repays the loan to ChinaPnR, he/she will deposit the loan repayment management fee along with the principal loan
amount and interest. ChinaPnR will then disburse the principal loan amount and interest back to investor and loan repayment management
service fee to us.
Currently,
investors are not charged for the service provided by ChinaPnR. However, individual borrowers are charged a processing fee by
ChinaPnR in the amount of 0.11% to 0.25% (which varies depending on the bank they use) of the loan amount when it is deposited
in their ChinaPnR account. For SME borrowers, they pay RMB 10 per deposit. When borrowers withdraw money from their ChinaPnR account,
they would have to pay a processing fee of 0.05% of the withdrawing amount plus RMB1 or just RMB1, depending on how soon they
wish for the withdrawal to be effected. When the loan is repaid to ChinaPnR, it will disburse the loan and interest back to investor.
Jiangxi
Bank
In
February 2017, the CBRC released the Guidance to regulate funds depositories for online lending intermediaries. The Guidance defines
depositories as commercial banks that provide online lending fund depository services. In compliance with the regulatory requirement,
we engaged Jiangxi Bank, a qualified banking financial institution, in March 2017 as our funding depository service provider.
Relevant Chinese regulations require us to enter into fund depository agreement with only one commercial bank to provide fund
depository services. Upon successful system transition from ChinaPnR to Jiangxi Bank in July 2017, Jiangxi Bank started to assist
in the disbursement and repayment of loans. Both investors and the borrowers open accounts with Jiangxi Bank and authorize Jiangxi
Bank to manage their accounts. The investor funds the loan amount in his/her account with Jiangxi Bank, which disburses loan amount
to the borrower net of our service fees, which is remitted to us. When the borrower repays the loan to Jiangxi Bank, they deposit
the loan repayment management fee along with the principal loan amount and interest. Jiangxi Bank then disburses the principal
loan amount and interest back to the investor and remits the repayment management fee to us.
Currently,
investors are not charged for deposits made to their accounts in Jiangxi Bank. Borrowers are charged a processing fee by Jiangxi
Bank in the amount of 0.10% (with a minimum of RMB 2) of the loan amount when the funds are deposited into the borrower’s
Jiangxi Bank account. When borrowers and investors withdraw money from their Jiangxi Bank accounts, they pay a processing fee
of RMB 1 per transaction.
Foreign
currency risk
The
Company maintains certain bank accounts in the PRC which are not insured by Federal Deposit Insurance Corporation (“FDIC”)
insurance or other insurance. Cash and cash equivalents balance held in PRC bank accounts was $12,942,309 and $8,561,695 as of
September 30, 2017 and December 31, 2016, respectively, of which no deposits were covered by insurance. For the three and nine
months ended September 30, 2017 and 2016, all of the Company’s assets and operations were located in the PRC and all of
the Company’s revenues were derived from the PRC.
Concentrations
risk
No
customer accounted for more than 10% of revenues for the three and nine months ended September 30, 2017 and 2016.
91%
and 83% of the loans facilitated through our platform for the three and nine months ended September 30, 2017 were referred through
three and two investor referral groups, respectively. 88% and 58% of the loans facilitated through our platform for the three
and nine months ended September 30, 2016, respectively, were referred through one investor referral group. Any loss of referrals
from these referral groups may have a material impact on the Company’s operation results.
Note
17 – Subsequent event
For
purpose of preparing these unaudited condensed consolidated financial statements, the Company considered events through November
14, 2017, which is the date the consolidated financial statements were available for issuance. Except for those disclosed above,
there were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements.