As filed with the Securities and
Exchange Commission on March 26, 2018
Registration No. 333-219451
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
(Amendment No. 4)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HUI YING FINANCIAL HOLDINGS CORPORATION
(Exact name of registrant as specified
in its charter)
Nevada
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5400
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35-2507568
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(State or other jurisdiction of
incorporation or organization)
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(Primary standard industrial
classification code number)
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(I.R.S. employer
identification number)
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Room 2403, Shanghai Mart Tower
2299 West Yan’an Road, Changning District
Shanghai, China
+86 21-23570077
(Address, including zip code, and telephone
number, including area code, of registrant’s principal executive offices)
Nevada Agency And Transfer Company
50 West Liberty Street, Suite 880
Reno, NV 89501
(775) 322-0626
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Mitchell S. Nussbaum, Esq.
James Zhang, Esq.
Tahra Wright, Esq.
David J. Levine, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
(212) 407-4000
Fax: (212) 407-4990
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Ralph
V. De Martino, Esq.
Cavas S. Pavri, Esq.
F. Alec Orudjev, Esq.
Schiff Hardin LLP
901 K Street, Suite 700
Washington, DC 20001
(202) 778-6400
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Approximate date of
commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities
being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box.
x
If this Form is filed
to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
¨
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
¨
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Accelerated filer
¨
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Non-accelerated filer
¨
(Do not check if smaller reporting company)
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Smaller reporting company
x
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Emerging growth company
x
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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 7(a)(2)(B) of the Securities Act.
x
CALCULATION OF REGISTRATION FEE
Title of Each Class of Security Being
Registered
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Proposed
Maximum
Aggregate
Offering Price
(1)
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Amount of
Registration
Fee
(2)
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Common Stock, $0.001 par value
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$
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40,000,000
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$
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4,636.00
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Underwriter Warrants (3)
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$
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-
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$
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-
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Common Stock Underlying Underwriter Warrants (4)
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$
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2,000,000
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$
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231.80
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Total
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$
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42,000,000
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$
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4,867.80
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(1) Estimated
solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Calculated
pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price, including the offering price of
warrants to be issued to the underwriters and common stock underlying such warrants. Previously paid.
(3) No
fee is required pursuant to Rule 457(g) under the Securities Act. Resales of the underwriter warrants on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act are registered hereby.
(4) Resales
of shares of common stock issuable upon exercise of the underwriter warrants on a delayed or continuous basis pursuant to Rule
415 under the Securities Act are also registered hereby.
The registrant hereby
amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion,
Preliminary Prospectus dated, March 26, 2018
HUI YING FINANCIAL HOLDINGS CORPORATION
[●] shares of common stock
Hui Ying Financial
Holdings Corporation is offering
[●]
shares of common stock, par value $0.001 per share. We are a reporting company
under Section 15(d) of the Securities Exchange Act of 1934, as amended. Our common stock is currently quoted on the OTCQB Marketplace
(the “OTCQB”) under the symbol “SFHD.” There is a limited public trading market for our common stock.
We are applying to list our common stock on the Nasdaq Capital Market under the symbol “HYJF.” To qualify for listing
on the Nasdaq Capital Market, we must have a bid price of at least $4.00. The public offering price will be determined by us and
The Benchmark Company, LLC, as representative of the underwriters taking into consideration several factors as described in “Underwriting
– Determination of Offering Price” on page 111 of this prospectus, and will not be based upon the price of our common
stock on the OTCQB.
Investing in our securities
involves a high degree of risk. You should carefully consider the risk factors beginning on page 9 of this prospectus before purchasing
shares of our common stock.
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Price to
Public
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Total
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Public Offering Price Per Share
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$
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$
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Underwriting Discounts and Commissions (1)(2)
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$
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$
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Proceeds to Hui Ying Financial (before expenses)
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(1) Represents
underwriting discount and commissions equal to 6.0% per share (or $[●] per share), which is the underwriting discount and
commission we have agreed to pay on all investors in this Offering introduced by the underwriters. Notwithstanding the foregoing,
we have agreed to pay underwriting discount and commissions equal to 4.0% per share (or $[●] per share) on the initial $20.0
million in offering proceeds from the sale of shares of common stock in this Offering to investors introduced by us to the underwriters
and 2.0% per share (or $[●] per share) on all additional amounts above $20.0 million in offering proceeds from the sale
of shares of common stock in this Offering to investors introduced by us to the underwriters.
(2) Does
not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering, payable to Benchmark, the
representative of the underwriters, or the reimbursement of certain expenses of the underwriters. See “Underwriting”
beginning on page 109 of this prospectus for additional information regarding total underwriter compensation.
In addition to
the underwriting discounts and commissions listed above and the non-accountable expense allowance described in the footnote, we
have agreed to issue Benchmark warrants, exercisable commencing 180 days immediately following the date of effectiveness of the
registration statement of which this prospectus forms a part, and exercisable for a period of five years from the date of effectiveness
of the registration statement of which this prospectus forms a part, to purchase shares of common stock equal to 3.5% of the total
number of shares sold in this offering at a per share price equal to the public offering price (the “Underwriters’
Warrants”). The registration statement of which this prospectus is a part also covers the Underwriters’ Warrants and
the shares of common stock issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters,
please see “Underwriting” beginning on page 109.
Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock
to purchasers on , 2018.
Benchmark
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Cuttone & Co., LLC
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The date of this prospectus is ,
2018
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
You should rely only on
the information contained in this prospectus or any supplement or amendment hereto. We and the underwriters have
not authorized any person to provide you with different information. We and the underwriters are not offering to sell,
or seeking an offer to buy, our common stock in any jurisdiction where such offer or sale is not permitted. You should
assume that the information contained in this prospectus and any supplement or amendment hereto is accurate only as of the date
of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock or warrants. Our
business, financial condition, results of operations and prospects may have changed since that date.
On June 20, 2017,
we effected a 1 for 5 reverse split on our shares of Common Stock and the proportional reduction of our total authorized shares
of common stock from 2,990,000,000 shares to 598,000,000 shares.
Unless the context otherwise
indicates, all references in this prospectus to:
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“we,”
“us,” “our company,” “our,” “the Company”
and “Hui Ying Financial” refer to Hui Ying Financial Holdings Corporation.
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“China”,
“Chinese” or the “PRC” refers to the People’s Republic
of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;
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all
references to “RMB” or “Chinese Yuan” is to the legal currency
of the People’s Republic of China;
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all
references to “U.S. dollars,” “dollars,” “USD” or
“$” are to the legal currency of the United States;
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“peer-to-peer
lending service providers” refers to marketplaces connecting borrowers and investors;
and
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“Benefactum
Beijing, ”“variable interest entity” or “VIE” is to our
variable interest entity, Benefactum Alliance Business Consultant (Beijing) Co., Ltd
, that is 100% owned by PRC citizens, that holds the business operation licenses or approvals,
and generally operates our various websites and mobile applications for our internet
businesses or other businesses in which foreign investment is restricted or prohibited,
and is consolidated into our consolidated financial statements in accordance with U.S.
GAAP as if it were our wholly-owned subsidiary.
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Unless otherwise
noted, all translations from Chinese Yuan to U.S. dollars using the exchange rate refers to the exchange rate quoted on http://www.oanda.com
on December 31, 2017, which was RMB 6.5074 to USD$1.00. We make no representation that the Chinese Yuan amounts referred to in
this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.
SUMMARY
This summary highlights
certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read
the entire prospectus carefully, including the information under “Risk Factors” and our financial statements and the
related notes included elsewhere in this prospectus before investing in our common stock.
Overview
We are a holding
company that, through our wholly-owned subsidiaries, Benefactum Alliance Holdings Company Limited, a British Virgin Islands company
(“Benefactum Alliance”), Benefactum Sino Limited, a Hong Kong company (“Benefactum Sino”) and Benefactum
Alliance (Shenzhen) Investment Consulting Company Limited, a People’s Republic of China company (“Benefactum Shenzhen”
or “WFOE”) and our contractually controlled and managed company, Benefactum Alliance Business Consultant (Beijing)
Co., Ltd., a People’s Republic of China company (“Benefactum Beijing”), operate an electronic online financial
platform, www.hyjf.com, which is designed to match investors with small and medium-sized enterprises (“SMEs”) and
individual borrowers in China. We believe our services provide an effective solution for under-served SMEs and individual borrowers
who need access to financing. From the launch of our marketplace in December 2013 through December 31, 2017, we have facilitated
over $2.87 billion in loans. As of December 31, 2017, we had 367,893 registered investors and 24 cooperative partners
who frequently serve as guarantors of loans on our platform.
We generate revenue
by matching lenders, who we refer to as our investors, with individual and SME borrowers. We typically charge borrowers a loan
origination service fee between 1.5% and 3% of the loan amount, depending on the duration of the loan, for each effected loan
facilitated by us. Additionally, we charge a separate fee from borrowers for each loan repayment facilitated by us, which is based
on an agreed upon percentage around 0.3% on the borrowing times the duration of the loan.
In June 2017, we
engaged a qualified non-banking financial institution to provide entrusted loans to SMEs. Through this process we, as the trustor,
provide funds to a trustee, who enters into a three-party loan agreement with us and the borrower. The loans are typically short-term
and are guaranteed by a third-party financing guarantor. This is one step forward towards our long-term strategy of building a
financial ecosystem aimed at providing full service to our SME customers. We intend to expand our business in both online and
offline sectors to meet the demands of various customers.
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 wholly foreign-owned enterprises, majority-owned entities and variable interest entities. As
a result of the restrictions on foreign investment in this industry, we plan to continue operating our online financial platform
in China through Benefactum Beijing, which is wholly-owned by two Chinese shareholders, but is contractually controlled and managed
through our wholly-owned WFOE.
The contractual
arrangements between WFOE and Benefactum Beijing collectively enable us to exercise effective control over, and realize substantially
all of the economic risks and benefits arising from, Benefactum Beijing. See “Corporate History and Structure — Contractual
Arrangements with Benefactum Beijing.” As a result, we include the financial results of Benefactum Beijing in our consolidated
financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, as if it
were our wholly-owned subsidiary. The contractual arrangements may not be as effective in providing operational control as direct
ownership. See “Risk Factors — Risks Related to Our Corporate Structure.”
Our Strategy
Our mission is
to provide SMEs and individual borrowers with easy and effective access to affordable financing and provide investors with a safe
and acceptable investment return. To achieve this goal, we have implemented the following strategies, each of which we intend to
continue to expand.
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Expand
the base of borrowers on our platform by entering into cooperation agreements with guarantor
institutions, pawn shops, micro credit companies and asset management companies
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We have expanded our base
of SMEs and individual borrowers by entering into cooperation agreements with various partners, including, without limitation,
guarantor institutions, pawn shops, micro-credit companies and asset management companies, who can provide us with recommendations
for new borrowers. Currently, our cooperative partners are located in Shandong, Inner Mongolia and other areas in China. Since
the inception of our online platform, approximately 88.5% of the loans facilitated through our platform are for SME borrowers.
We will continue to expand the number, type and areas of cooperative partners, and seek cooperation with internet companies, e-commerce
companies, telecommunication companies and third-party payment platforms which are located throughout China.
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Develop
new consumer financing products and penetrate niche markets
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We are promoting new personal
consumer financing products to individual borrowers, such as automobile financing and consumer financing. In addition, we will
continue to design and develop diversified financing products to satisfy market demand.
Our platform
also allows investors to diversify their wealth management strategies by providing easy access to various lending opportunities
that can be designed with flexible terms.
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Expand
our base of investors to include mutual fund and other institutional investors
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Currently, all of our
investors are individuals. We are introducing mutual fund and other institutional investors to increase our overall number
and type of investors. In addition, we have implemented plans to attract more individual and institutional investors by
cooperating with institutions so that the cost to the borrowers would be reduced if there are more funds available for
loans.
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Further
enhance our risk management capabilities
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As loan volume in our marketplace
grows and consumer financing products expand, we have implemented protocols to enhance our risk management capabilities. As for
individual borrowers, we have improved the risk management model for individual credit control so that risk management testing
will be more effective and reasonable. For SME borrowers, besides the due diligence process that our cooperative partners undertake,
we have enhanced the onsite due diligence process and appointed a risk management team.
In addition, we have enhanced
our cooperation with other third-party credit investigators to obtain more accurate information about the credit history of the
borrowers so we can make reasonable and accurate assessments of borrower applications to reduce and avoid bad debts.
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Continue
to invest in our technology platform
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We have made significant
investments in our proprietary technologies in the areas of data collection and processing algorithms to increase the precision,
speed and scale at which we match the demand and supply of loans. Enhanced data analytics improves our conversion of online leads
into successful borrowers and investors. With the further application of big data, we can acquire members of our target borrower
and investor groups in a more focused and cost-efficient way. Furthermore, we will continue to leverage technology to further
automate our processes and improve the safety and efficiency of matching the loans with investors. At the same time, we will also
benefit from the operating leverage associated with our scalable platform as our loan volume increases. We believe these investments
will facilitate the long-term growth of our marketplace.
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Increase
our merger and acquisition activities to enhance our competitive advantage in the financing
technology ecosystem and to improve the efficiency of our products and services
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We will expand strategic
relationships with internet financing companies, internet companies, technology companies and financing companies, by mergers
and acquisitions to enhance our competitive advantage in the financing technology ecosystem and to improve the efficiency of our
products and services.
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Various
Product and Service Offerings
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As a long-term strategy,
we are building a financial ecosystem for SME customers that are under-served in China's current financial system. We seek to
expand our intermediary and direct lending services, both online and offline, to meet the demands of various customers. As part
of this initiative, we announced the launch of entrusted loan services on June 30, 2017, which leverages our improving financial
condition and years of experience in providing financing solutions to our customers in China. We believe the new service
allows us not only to generate new revenues, but also to expand our scope beyond the existing service of being an intermediary
between investors and borrowers through the online platform. We will continue to devise customized product and service offerings
to meet customer demands and expand the scale and scope of our operations.
Competitive Strengths
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Significant
brand awareness and positive reputation in the China market
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We are one of the leading
online lending intermediary platforms in PRC. According to information from Wang Dai Zhi Jia (www.wdzj.com), a third-party information
platform that specializes in providing information in China’s internet finance industry, as of February 2018, there are
1,890 active online lending intermediary platforms in the PRC, and based on loan volume in the month of February 2018, we facilitated
RMB 658 million (approximately $101.1 million) in loans and were ranked the 38
th
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Strong
and well-developed risk management structure
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We are highly
selective with our cooperative partners and have developed a risk management model and threshold system for such selection. We
rely on the method of “experience + data” for the assessment of a loan application. For SME borrowers, besides the
due diligence investigation by cooperative partners, we have a system that includes onsite investigation and due diligence on
SMEs by a selected risk management team. For individual borrowers, we have a personal credit model for assessment. In addition,
we cooperate with third-party credit investigators to evaluate the credit history of borrowers.
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Stable
Channel for Assets
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The borrowers on our platform
are mainly recommended by our cooperative partners. We have built long-term relationships with our cooperative partners; therefore,
they have been loyal to our platform.
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Robust
Technology Platform
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Our technology
platform powers our online marketplace, enabling us to connect investors and individual borrowers in a fast and effective way
and to efficiently deliver services to them. Our platform covers the entire loan transaction process, including application, verification,
offline anti-fraud investigation, credit assessment, approval, listing, funding, after-funding servicing and collections, and
provides a flexible, cost-efficient and time-saving mechanism for matching borrowers and investors when compared to traditional
banking institutions. Our technology platform also facilitates our user-friendly mobile applications, which allow our users to
invest and borrow anytime, anywhere. In addition, we have adopted robust security measures and policies to protect our customer
information and proprietary data, and have deployed multiple layers of redundancy to ensure the reliability of our platform.
Recent Developments
In March 2017,
we engaged Jiangxi Bank to provide fund depository services for our marketplace, pursuant to which Jiangxi Bank will set up separate
accounts for borrowers and investors, and assume fund depository functions including settlement, accounting and safeguarding of
online lending funds. Third-party payment agents operate as the payment channels and only transfer funds to and from fund depository
accounts. Relevant Chinese regulations require us to enter into a fund depository agreement with only one commercial bank to provide
fund depository services. For more details, see “Regulations on Peer-to-Peer Lending Service Provider.”
On September 1,
2017, Puhui Equity Investment Co., Ltd. (“Puhui”), a wholly owned subsidiary of Benefactum Beijing 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 $2,935,121 (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. 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. The Company believes this investment could offer new opportunities
for operational synergies in the financial information service industry.
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 effective on June 20, 2017 (the “Effective Date”). On August 7, 2017, the Reverse Stock Split
was reflected on the OTCQB. As a result of the Reverse Stock Split, every five issued and outstanding shares of the Company's
Common Stock have been automatically combined into one issued and outstanding share. This reduced the total number of issued and
outstanding shares of Common Stock from 361,820,246 to 72,364,178 and the Company's authorized shares of Common Stock also have
been reduced from 2,990,000,000 to 598,000,000. No fractional shares were issued. All fractional shares created by the Reverse
Stock Split were rounded up to the nearest whole share.
On June 30, 2017,
we entered into a securities purchase agreement with various investors, pursuant to which we issued and sold senior convertible
promissory notes in the aggregate principal amount of $13,189,163.87 (RMB 90,357,316.73) (the “Notes”), convertible
into shares of the Company’s Common Stock following June 30, 2018 at a conversion price of $2.00 per share (the “Conversion
Price”) in a 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. The Notes are secured by a pledge of shares of Common
Stock pursuant to a stock pledge agreement (the “Stock Pledge Agreement”) between Avis Genesis Inc., a majority shareholder
of the Company, and the Note investors on the basis of one share of Common Stock per $1 loaned under the Note, for an aggregate
of 13,189,450 shares. Other than the shares pledged pursuant to the Stock Pledge Agreement, there is no recourse against the Company
upon a default of the Notes.
From June 30, 2017
to July 20, 2017, Benefactum Beijing, provided RMB180,000,000 (approximately $26.56 million) in capital to Qingdao Weichuang Private
Capital Management Co., Ltd. (“Qingdao Weichuang”), as trustee, to lend funds directly to 18 SME borrowers as evidenced
by entrusted loan agreements. This is our first series of transactions in which we, through Qingdao Weichuang, are lending funds
directly to SME borrowers. The loans are short-term loans between three and six months with interest rates between 10% and 11%.
In connection with the entrusted loan contracts, Benefactum Beijing also entered into entrusted loan guarantee contracts with
guarantors, pursuant to which the guarantors have agreed to guarantee the obligations under the entrusted loan contracts. Benefactum
Beijing pays a processing fee equal to 0.15% of the aggregate loan amounts to Qingdao Weichuang for issuing the 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.
On
September 27 and September 29, 2017, we filed Articles of Merger and a Certificate of Correction, respectively, with the Secretary
of State of Nevada to effect a change in our corporate name from “Sino Fortune Holding Corporation” to “Hui
Ying Financial Holdings Corporation”. The name change was the result of a merger of our wholly-owned subsidiary, “Hui
Ying Financial Holdings Corporation”, with and into us to effect the name change.
Risk Related to Our Business
Our ability to implement
our business strategy is subject to numerous risks and uncertainties that you should be aware of before making an investment decision.
We face many risks inherent in our business and our industry generally. You should carefully consider all of the information set
forth in this prospectus and, in particular, the information under the heading “Risk Factors,” prior to making an
investment in our common stock. These risks include, among others, the following:
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We
have a limited operating history in a new and evolving market, which makes it difficult
to evaluate our future prospects.
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Fraudulent
activity on our platform could negatively impact our operating results, brand and reputation
and cause the use of our loan products and services to decrease.
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We
may not be able to collect the payment when a borrower becomes delinquent in the payment
of his/her outstanding obligation.
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We
have limited experience operating our risk reserve fund. If it is under- or over-funded,
or if we fail to accurately forecast the expected risk reserve payouts or otherwise implement
the risk reserve fund successfully, our financial results and competitive position may
be harmed.
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The
laws and regulations governing the online lending information intermediary service industry
in China are developing and evolving and are subject to change. If we fail to obtain
and maintain requisite approvals, licenses or permits or fail to satisfy related governmental
requirements, our business, financial condition and results of operations would be materially
and adversely affected.
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The
proper functioning of our technology platform is essential to our internet finance business.
Any failure to maintain the satisfactory performance of our website and systems could
materially and adversely affect our business and reputation.
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Changes
in the interest rates and spread could have a negative impact on revenues from our new
entrusted loan services.
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If
the PRC government deems that the contractual arrangements in relation to our variable
interest entity (Benefactum Beijing) do not comply with PRC governmental restrictions
on foreign investment, or if these regulations or the interpretation of existing regulations
changes in the future, we could be subject to penalties or be forced to relinquish our
interests in those operations.
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Our
contractual arrangements with Benefactum Beijing is not as effective in providing control
over Benefactum Beijing as direct ownership.
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We
may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets
held by our variable interest entity, which would severely disrupt our business, render
us unable to conduct some or all of our business operations and constrain our growth.
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We
may be required to obtain a value-added telecommunication business certificate and be
subject to foreign investment restrictions.
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Our Corporate Information
We were incorporated on
April 18, 2014 in the State of Nevada. We conduct our business primarily in Beijing, Shanghai and Shandong Province, People’s
Republic of China. Our principal executive offices are located at Rooms 2401, 2402, 2403, 2404 and 2412 on 2299 Yan’an West
Road, Shanghai, China. Our telephone number is +86 021-2357-0077. We maintain a website at www.hyjf.com. The information contained
on our website is not, and should not be interpreted to be, a part of this prospectus.
THE
OFFERING
Common stock being offered
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[●] shares
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Shares of common stock outstanding before this offering
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72,364,178 shares
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Shares of common stock outstanding after this offering
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[●] shares
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Over-allotment option
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We have granted a 45-day option to the underwriters, exercisable
one or more times in whole or in part, to purchase up to an additional [●] shares of
common stock.
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Use of Proceeds
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We intend to use the net proceeds from this offering for
general corporate purposes, which may include investment in product development, sales and marketing activities, technology
upgrades, capital expenditures, improvement of corporate facilities, attracting qualified employees and other general and
administrative matters, working capital and other general corporate purposes. We may also use a portion of these proceeds
for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, however, we
have no present understandings, commitments or agreements to enter into any acquisitions or make any investments.
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Proposed NASDAQ trading symbol
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“HYJF”
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Lock-up agreements
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See “Underwriting” for more information
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Risk Factors
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The securities offered by this prospectus are speculative
and involve a high degree of risk and investors purchasing securities should not purchase the securities unless they can afford
the loss of their entire investment. See “Risk Factors” beginning on page 9.
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The number of
shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31,
2017. Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment
option.
Unless otherwise indicated,
all information in this prospectus gives effect to a 1-for-5 reverse stock split of our common stock effected on June 20, 2017.
SUMMARY FINANCIAL
AND OTHER DATA
The following tables
set forth our summary historical financial data for the periods presented. The following summary financial data for the years
ended December 31, 2017 and 2016 are derived from our audited financial statements appearing elsewhere in this prospectus.
This summary financial
data should be read together with the historical financial statements and related notes to those statements, as well as “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.
The pro forma as adjusted
balance sheet data reflects the balance sheet data as of December 31, 2017, as adjusted to reflect our receipt of the estimated
net proceeds from our sale of
[●]
shares in this offering at an assumed offering price of $
[●]
per share
(after deducting the underwriting discounts and commissions and estimated offering expenses payable by us).
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As of December 31,
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As of December 31,
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2017
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2016
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2017
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Pro Forma,
as
adjusted
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(Audited)
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(Audited)
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(Unaudited)
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Selected Consolidated Balance Sheet Data:
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Cash and cash equivalents
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$
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12,684,370
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$
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8,561,695
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$
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Short-term loans receivable
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40,492,363
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-
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Prepayments, Deposits and Other Receivables
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1,330,555
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2,834,718
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Total Assets
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59,055,384
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20,248,910
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Total Current Liabilities
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17,467,409
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9,138,607
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Total Liabilities
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30,656,573
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9,138,607
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Total Stockholders’ equity
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28,398,811
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11,110,303
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2017
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2016
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(Audited)
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(Audited)
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Selected Consolidated Statements of Operations Data:
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Revenues
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$
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46,497,812
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$
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24,679,249
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Cost and Expense
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Selling, General and Administrative Expenses
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28,237,779
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19,355,753
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Business and related taxes
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179,347
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175,854
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Depreciation Expenses
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128,492
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678,991
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Income from Operations
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17,952,194
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4,468,651
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Income before Income Tax
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17,837,775
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4,497,302
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Net Income
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$
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15,274,091
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$
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3,439,205
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Net income per common share
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Basic*
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$
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0.21
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$
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0.05
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Diluted*
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$
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0.21
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$
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0.05
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* Retroactively restated for the
effect of 1-for-5 reverse stock split on June 20, 2017.
RISK FACTORS
You should carefully
consider the risks described below and elsewhere in this prospectus, which could materially and adversely affect our business,
results of operations or financial condition. Our business faces significant risks and the risks described below may not be the
only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may materially affect
our business, results of operations, or financial condition. If any of these risks occur, the trading price of our common stock
could decline
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and you may lose all or part of
your investment.
Risks Related to Our Business and Industry
We have a limited operating history in a new and evolving
market, which makes it difficult to evaluate our future prospects.
We launched our online
financial platform on December 23, 2013 and have a limited operating history. In addition, the market for China’s financial
services is new and may not develop as expected, which could substantially harm our earning potential. Further, due to the fact
that the industry in which we operate is relatively new, potential borrowers may not be familiar with the services we provide
and may have difficulty distinguishing our services from those of our competitors. Convincing potential new borrowers of the value
of our services is critical to expand our operations.
In addition, we are in
a new and evolving market, and the regulatory framework for this may remain uncertain for the foreseeable future. As our business
develops in response to new regulatory requirements, or in response to competition, we may introduce new services or make adjustments
to our existing services or business model. Any significant change to our business model may not achieve expected results and
may have a material and adverse impact on our financial conditions and results of operations. In response to general economic
conditions, we may impose more stringent borrower qualifications to ensure the quality of loans on our platform, which may negatively
affect the growth of our business. It is therefore difficult to effectively assess our future prospects. You should consider our
business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving
market. These risks and challenges include our ability to, among other things:
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navigate
an evolving regulatory environment;
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expand
the base of our cooperative companies;
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expand
the base of borrowers and investors served on our market place;
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enhance
our risk management capabilities;
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improve
our operational efficiency;
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attract,
retain and motivate talented employees;
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maintain
the security of our platform and the confidentiality of the information provided and
utilized across our platform; and
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defend
ourselves against regulatory, litigation, privacy or other claims.
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If we fail to educate
potential borrowers and investors about the value of our services, if the market for our services does not develop as we expect,
or if we fail to address the needs of our target market, or other risks and challenges, our business and results of operations
will be harmed.
Our historical financial results may not be indicative
of our future performance.
Our business has
achieved rapid growth since our inception. Our net revenue increased from approximately $24.68 million for the year ended December
31, 2016 to approximately $46.50 million for the year ended December 31, 2017, representing an increase of 88%. We recorded net
income of approximately $3.44 million for the year ended December 31, 2016 to approximately $15.27 million for the year ended
December 31, 2017. Our historically high growth rate and the limited history of business make it difficult to evaluate our prospects.
We may not be able to sustain our historically rapid growth or may not be able to grow our business.
Our reputation and brand recognition
are crucial to our business. Any harm to our reputation or failure to enhance our brand recognition may materially and adversely
affect our business, financial condition and results of operations.
Our reputation and
brand recognition, which depend on earning and maintaining trust and confidence of individuals or enterprises that are current
or potential clients, are critical to our business. Our reputation and brand are vulnerable to many threats that can be difficult
or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits initiated by
clients or other third parties, employee misconduct, perceptions of conflicts of interest and rumors, among other things, could
substantially damage our reputation, even if they are baseless or are satisfactorily addressed. In addition, any perception that
the quality of our internet finance services may not be the same as or better than that of other internet finance service providers
can also damage our reputation. Moreover, any misconduct or allegations of misconduct by our third-party cooperative partners
could result in negative publicity that could affect our reputation and erode the confidence of our clients. Furthermore, any
negative media publicity about the financial service industry in general or service quality problems of other companies in the
industry, including our competitors, may also negatively impact our reputation and brand. If we are unable to maintain a good
reputation or further enhance our brand recognition, our ability to attract and retain clients and key employees could be harmed
and, as a result, our business and revenues would be materially and adversely affected.
If we fail to promote and maintain
our brand in an effective and cost-efficient way, our business and results of operations may be harmed.
We believe that developing
and maintaining awareness of our brand effectively are critical to attracting new and retaining existing borrowers and investors
to our platform. Successful promotion of our brand and our services depend largely on the effectiveness of our marketing efforts
and the success of the channels we use to promote our services. Our efforts to build our brand have caused us to incur significant
expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts
may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not
offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses,
our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
Successful strategic relationships
with the third-party cooperative partners are important for our future success.
Our operations
are heavily dependent on the relationship with our third-party cooperative partners. We anticipate that we will continue to leverage
our strategic relationships with the existing third-party cooperative partners to grow our business while we will also pursue
new relationships with other financial institutions. Identifying, negotiating and documenting relationships with these partners
require significant time and resources. Our competitors may be more effective in providing incentives to our partners. Certain
types of partners may devote more resources to support their own competing businesses. In addition, we may have disagreements
or disputes with such partners, which could adversely affect our brand, reputation and services. If we cannot successfully maintain
effective strategic relationships with these third-party cooperative partners, our business will be harmed.
Fraudulent activity on our platform
could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease.
We are subject to the
risk of fraudulent activity both on our platform and associated with borrowers, investors and third parties handling borrower
and investor information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent
fraud. Significant increases in fraudulent activity involving our platform could negatively impact our brand and reputation, reduce
the volume of loan transactions facilitated through our platform and lead us to take additional steps to reduce fraud risk, which
could increase our costs. High profile fraudulent activity could even lead to regulatory intervention and may divert our management’s
attention and cause us to incur additional expenses and costs. Although we have not experienced any material business or reputational
harm as a result of fraudulent activities in the past, we cannot rule out the possibility that any of the foregoing may occur
causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and
financial conditions could be materially and adversely affected.
If we are unable to maintain low
default rates for loans facilitated by our platform, our business and results of operations may be materially and adversely affected.
Investments in loans on
our marketplace involve inherent risks as the return of the principal on a loan investment made through our platform is not guaranteed,
although 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. If our review and assessment procedures
contain errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale, our loan pricing and
approval process in our platform could be negatively affected, resulting in misclassified or mispriced loans or incorrect approvals
or denials of loans. If we are unable to effectively and accurately assess the credit profiles of borrowers, segment borrowers
into appropriate grade in the pricing grid, or price loans on our platform appropriately, we may either be unable to offer attractive
fee rates to borrowers and returns to investors, or unable to maintain low default rates of loans facilitated by our platform.
In addition, if the borrower’s financial condition deteriorates after a loan application is approved, we may not be able
to take measures to prevent default on the part of the borrower and thereby maintain low default rates for loans facilitated by
our platform. Although we offer investor protection in the form of a risk reserve fund, if widespread defaults were to occur,
investors may still incur losses and lose confidence in our marketplace and our business and results of operations may be materially
and adversely affected.
If default rates were
to increase, we may have to require borrower (or if a guarantor is needed for the borrower, the guarantor) to provide additional
cash in the risk reserve fund, which could have a material adverse effect on our ability to retain existing borrowing customers
or attract prospective borrowers to our platform.
We have limited experience operating
our risk reserve fund. If it is under- or over-funded, or if we fail to accurately forecast the expected risk reserve payouts
or otherwise implement the risk reserve fund successfully, our operations and competitive position may be harmed.
We have
limited experience operating our risk reserve fund, which was launched in December 2013. 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. 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 borrowers if the loan is paid in full at
maturity. In the event that a borrower defaults in repaying the loan when it is due, we advise 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 risk
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.
Since we commenced our
internet finance business only in December 2013, we have limited information regarding the default rates on loans facilitated
through our platform. In addition, given our limited operating history and recent introduction of new products, we have limited
information on historical charge-off rates, and we may not be able to accurately forecast charge-offs for our target borrower
group. Given these challenges, it is possible that we will under- or over-fund the risk reserve fund. If we under-fund the risk
reserve fund, and we do not or are unable to require the borrower (or the guarantor) to replenish the risk reserve fund to a sufficient
level in time, investors may not be fully protected from loss. This may result in negative sentiment among investors, potentially
hindering our ability to retain existing investors as well as to attract new investors, and investors may bring claims against
us, whether or not they have legal rights to seek damages from us, which could lead to additional expenses and distract management’s
attention from our business operation. Conversely, if we over-fund the risk reserve fund, this will hinder our ability to retain
existing borrowing customers and attract new borrowers to our platform. Should any of the foregoing occur, our competitive position
as well as our results of operations could be materially and adversely affected.
Credit and other information that
we receive from third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness,
which may compromise the accuracy of our credit assessment.
For the purpose of credit
assessment, we obtain borrower credit information from third parties, such as financial institutions and e-commerce providers,
and assess applicants’ credit and assign credit scores to borrowers based on such credit information. Although we will conduct
due diligence work and assess applicants’ credit, a credit score assigned to a borrower may not reflect that particular
borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer
reporting data, and our due diligence work may not be sufficient to thoroughly assess an applicant’s background information
due to our limited resources. Additionally, there is a risk that, following our obtaining a borrower’s credit information,
the borrower may have:
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become
delinquent in the payment of an outstanding obligation;
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defaulted
on a pre-existing debt obligation;
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taken
on additional debt; or
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sustained
other adverse financial events.
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Such inaccurate or incomplete
borrower credit information could compromise the accuracy of our credit assessment and adversely affect the effectiveness of our
control over our default rates, which could in turn harm our reputation and materially and adversely affect our business, financial
condition and results of operations.
In addition, our business
of connecting investors and individual borrowers may constitute an intermediary service, and our contracts with these investors
and borrowers may be deemed as intermediation contracts, under the PRC Contract Law. Under the PRC Contract Law, the intermediary
should truthfully inform the principal of the relevant contracts being entered into. If the intermediary deliberately conceals
material facts pertaining to the contracts being entered into or provides false information concerning the contracts, to the extent
harming the principal’s interest, the intermediary may not be entitled to compensation from the principal and may be liable
for damages to the principal. See “Regulations—Regulations on Loans between Individuals.” Therefore, if we fail
to provide material information to investors, or if we fail to identify false information received from borrowers or others and
in turn provide such information to investors, and in either case if we are also found to be at fault, due to failure or deemed
failure to exercise proper care, such as to conduct adequate information verification or employee supervision, we could be held
liable for damages caused to investors as an intermediary pursuant to the PRC Contract Law. In addition, if we fail to complete
our obligations under the agreements entered into with investors and borrowers, we could also be held liable for damages caused
to borrowers or investors pursuant to the PRC Contract Law. On the other hand, we do not assume any liability solely on the basis
of failure to correctly assign a loan grade to a particular borrower in the process of facilitating a loan transaction, as long
as we do not intentionally conceal any material fact or provide false information and are not found to be at fault otherwise.
However, due to the lack of detailed regulations and guidance in the area of peer-to-peer lending services and the possibility
that the PRC government authority may promulgate new laws and regulations regulating peer-to-peer lending services in the future,
there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations
for the peer-to-peer lending service industry, and there can be no assurance that the PRC government authority will ultimately
take a view that is consistent with ours.
Our business model could be negatively
affected by changes and fluctuation in the banking industry.
Our business model is
premised on the fact that SMEs and microenterprises are generally underserved by the banking industry because commercial banks
in China have been reluctant to transact with SMEs and microenterprises that have no credit support, such as third-party guarantees,
or adequate collateral of tangible assets, and we believe that these conditions will remain so in the foreseeable future. This
has created opportunities for us to develop and expand our business. However, new trends in the banking industry or the applicable
regulatory requirements may alleviate the high transaction costs or the lack of collateral and public information generally associated
with bank financing to our target clients or otherwise make this business more attractive to banks. In the event that commercial
banks begin to compete with us by making loans directly to our target clients without our facilitation, we may experience less
demand for and greater competition with respect to our business. Furthermore, any such direct competition with our cooperating
banks will undermine our relationship with them and may adversely affect our business, results of operations and prospects.
Misconduct or errors by our management
and employees and third-party service providers could harm our business and reputation.
We are exposed to many
types of operational risks, including the risk of misconduct and errors by our management, employees and third-party service providers.
Our business depends on our management, employees and third-party service providers interacting with potential borrowers, conducting
sufficient due diligence review and collecting borrowers’ information, all of which involve the use and disclosure of personal
information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly
executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing
of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations
or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and banks
is governed by various PRC laws. It is not always possible to identify and deter misconduct or errors by management and employees
or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses. If any of our management and employees or third-party service providers take, convert or
misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for
damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the
illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or
criminal liability.
The laws and regulations governing
the online lending information intermediary service industry in China are developing and evolving and subject to change. If we
fail to obtain and maintain requisite approvals, licenses or permits or fail to satisfy related governmental requirements or our
practice is deemed to be in violation of any PRC laws, our business, financial condition and results of operations would be materially
and adversely affected.
Due to the relatively
short history of the online lending information intermediary service industry in China, the PRC government has yet to establish
a comprehensive regulatory framework governing our industry. Before any industry-specific regulations were introduced in mid-2015,
the PRC government simply relied on general and basic laws and regulations in governing the online lending information intermediary
service industry, including the PRC Contract Law, the General Principles of the Civil Law of the PRC, and related judicial interpretations
promulgated by the Supreme People’s Court.
In July 2015,
the People’s Bank of China, or the PBOC, together with nine other PRC regulatory agencies jointly issued a series of policy
measures applicable to the online lending information intermediary service industry entitled the “Guidelines on Promoting
the Healthy Development of Online Finance Industry”, or the Guidelines. For the first time, the Guidelines formally introduced
a regulatory framework and basic principles for administering the online lending information intermediary service industry in
China. Based on the core principles of the Guidelines, in August 2016, the China Banking Regulatory Commission (“CBRC”)
together with three other PRC regulatory agencies jointly issued Interim Measures on Administration of Business Activities of
Online Lending Information Intermediaries (the “Interim Measures”). The Interim Measures require online lending information
intermediaries and their branch offices to file a record with the local financial regulatory department where its business is
registered within ten business days after obtaining the business license. Local financial regulatory departments have the
power to assess and classify the online lending information intermediaries and to publicize the record-filing information and
the classification results on their official websites. After completion of the records filing, the intermediary must apply
for the appropriate telecommunication business license in accordance with the relevant requirements of the telecommunication authorities
and is required to explicitly identify itself as an online lending information intermediary in its business scope.
The Guidelines
and Interim Measures provide that online lending intermediaries shall not engage in or be commissioned to engage in thirteen prohibited
activities, including: (i) directly or indirectly financing its own projects; (ii) directly or indirectly receiving or collecting
lenders’ funds; (iii) directly or indirectly offering guarantees to lenders or guaranteeing principal and interest payments;
(iv) commissioning or authorizing a third-party to advertise or promote financing projects at any physical locations other
than through electronic channels such as the Internet and mobile phones; (v) providing loans (unless otherwise permitted
by laws and regulations); (vi) breaking down longer-term financing projects into shorter-term ones; (vii) offering its own wealth
management products or other financial products to raise funds or act as a proxy in the selling of banks’ wealth management
products, brokers’ asset management products, funds, insurance or trust products; (viii) providing services similar to asset-based
securitization services or conducting credit assignment activities in the form of asset packaging, asset securitization, asset
trusts or fund shares; (ix) mixing with, bundling with or acting as a proxy in relation to investment, sales agent and brokerage
services of other businesses (unless permitted by laws and regulations); (x) fabricating or exaggerating the authenticity or earnings
outlook of a financing project, concealing its flaws and risks, falsely advertising or promoting a project with intentional ambiguity
or other deceptive means, or spreading false or incomplete information to damage the commercial reputation of others, or to mislead
lenders or borrowers; (xi) providing intermediary services for loans used to invest in high-risk financing projects such as stocks,
over-the-counter margin financing, futures contracts, structured products and other derivatives; (xii) operating equity-based
crowd-funding; and (xiii) other activities prohibited by laws and regulations. The Interim Measures also require the intermediaries
to strengthen their risk management by enhancing screening and verifying efforts on the borrowers and investors’ information,
and setting up custody accounts with qualified banks to hold customer funds, among other things. We believe the Guidelines and
the Interim Measures represent the beginning of the PRC government’s measures to regulate the online lending information
intermediary service industry, which will be followed by more implementation rules and regulations. For example, in February 2017,
the CBRC issued the Guidelines on Online Lending Funds Custodian Business, or the Custodian Guidelines, which clarify the requirement
of setting up custody accounts with commercial banks for the funds of investors held by the online lending platforms.
In accordance with
the Guidelines and the Interim Measures, the relevant authorities are in the process of making detailed implementation rules regarding,
among other things, filing procedures, assessment standards and classification rules, and specific rules and procedures regarding,
among other things, the application for an appropriate telecommunication business license. We are unable to predict with certainty
the impact, if any, that future legislation, judicial precedents, rules or regulations relating to the online lending information
intermediary service industry will have on our business, financial condition and results of operations. According to the Circular
of the General Office of the State Council on Issuing the Implementation Plan for Special Rectification on Risks in Internet Finance
promulgated in April 2016, competent authorities are in the process of evaluating existing practices of online lending information
intermediaries in the market and requesting rectification of those that have been identified during the evaluation as in conflict
with the Guidelines and the Interim Measures. In addition, the Office of Task Force Responsible for Special Rectification
on Risks in Internet Finance in Beijing issued Notice for Factual Acknowledge by and Rectification of Online Lending Information
Intermediaries in Beijing (the "Notice") in March 2017, pursuant to which, P2P platforms in Beijing are prohibited from
setting up risk reserve fund or security fund for the purpose of providing guarantees to loans or promoting to investors regarding
such types of funds. P2P platforms in Beijing have the same transition period to be compliant with the Notice as set forth in
the Interim Measures. While we maintain a risk reserve fund for the protection of investors on our platform, unlike many other
P2P platforms, the source of the reserve fund is not set aside from our own capital, but contributed by borrowers (if a guarantor
is needed for the borrower, the guarantor) at 2% to 5% of the loan borrowed through our platform. Our risk reverse fund might
be deemed as a violation of applicable regulations. Although in compliance with the new regulation, we have stopped promoting
the reserve fund on our platforms, we may still be deemed to be in violation of the applicable regulations.
Although the Interim
Measures took effect immediately in August 2016, peer-to-peer platforms were given a year to adjust their practices to comply
with them. In June 2017, the PBOC together with sixteen other PRC regulatory agencies jointly issued a notice entitled the Notice
on Further Improvement of Internet Finance Risk Rectification and Clearance Task, or the Task Notice. The Task Notice, among other
things, gave peer-to-peer platforms until the end of June 2018 to adjust their practices to be compliant with the Interim Measures
and, in some complicated cases, up to two years for compliance upon approval by the provincial government. During such compliance
period, no new non-compliant activities shall be practiced, and existing non-compliant practices shall gradually cease.
On August 2, 2017,
the State Council issued Administrative Regulations on Supervision of Financing Guarantee Companies (“Financing Guarantee
Company Regulation”), which will be effective on October 1, 2017. The Financing Guarantee Company Regulation increases the
minimum requirement of registered capital from RMB 5,000,000 to RMB 20,000,000. Financing Guarantee Company Regulation also provides
that the balance amount of guarantee liability of a financing guarantee company shall not exceed 10 times the amount of its net
assets. Where a financing guarantee company mainly provides services to small and micro enterprises, agriculture sector, rural
villages and farmers, the balance amount of guarantee liability may be up to 15 times the amount of its net assets.
On August 23, 2017,
PBOC issued Disclosure Guideline for Information Regarding Business Activities of Online Lending Information Intermediaries (the
“Disclosure Guideline”) which clarifies, among other things, the items, timing, frequency and objects of disclosure
and gives online lending intermediaries six months to rectify its existing non-compliance business. If online lending intermediaries
fail to make the required rectifications, then the related rules set forth in Interim Measures and Guidance of Administration
shall govern.
To comply with
existing laws, rules and regulations relating to the online lending information intermediary service industry, we have implemented
various policies and procedures, which we believe set the best practice in the industry, including, without limitation, the following:
(i) we do not use our own capital to invest in loans facilitated through our online marketplace; (ii) we do not commit
to providing guarantees to investors under any agreement for the full return of loan principal and interest; (iii) we do
not hold investors’ funds, and funds loaned through our platform are deposited into and settled by a third-party custody
account managed by a qualified bank, Jiangxi Bank; (iv) we strengthen the compliance in information disclosure and disclose
on our website all relevant information to investors and borrowers; (v) we have been making strong effort to maintain the
security of our platform and the confidentiality of the information provided and utilized across our platform; (vi) we have been
gradually reducing the business volume generated under the module of having a third-party cooperative partner’s creditor’s
rights transferred to us, and instead expanding the business directly matching Lenders and Borrowers and increasing the type and
amount of small size products within the cap set forth under laws and regulation, such as automobile loans, small portion loans
and other consumer financing products; (vii) we no longer require new contributions from most of the borrowers and guarantors
to the risk reserve fund since December 2017, and stopped advertising the establishment of risk reserve funds on the platform.
Existing reserve funds are being returned to borrowers and /or guarantors as loans mature and are repaid.
However, the laws, rules and regulations
are expected to continue to evolve in this emerging industry. The PRC government is expected to provide detailed implementation
rules on certain key requirements of the Interim Measures, and the interpretation of the Interim Measures by the local authorities
may be different from our understanding. We cannot be certain that our existing practices would not be deemed to violate any existing
or future laws, rules and regulations. For instance,
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our
current business includes third-party cooperative partners loan assignment process
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which goes beyond the simple one-to-one matching between investors and borrowers
and may involve in providing services similar to asset-based securitization services.
We might be deemed directly or indirectly to hold investors’ funds and form a capital
pool incidentally by third-party cooperative partners and could be viewed as violating
some of these requirements.
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for
investor protection purpose, we set up a risk reserve fund with the purposes of limiting
investors’ potential losses due to borrower defaults. Although we are aiming for
the protection of the investors, the risk reserve fund, however, has not been set aside
from our capital, which is what has been prohibited, the fund is paid by borrowers (or
by a guarantor if a guarantee is needed in such loan) with the amount of 2-5% of loan
amount. Even though we do capitalize the risk reserve fund, the fund may still be deemed
by the PRC regulatory authorities to be a credit enhancement service or a form of guarantee
prohibited by the Interim Measures;
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the Interim Measures set upper limits on
the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending intermediaries.
In the case of natural persons, this limit shall not be more than RMB200,000 (approximately $30,734) for one online lending
intermediary and not more than RMB1 million (approximately $153,671) in total from all platforms, while the limit for a legal
person or organization shall not be more than RMB1 million (approximately $153,671) for one online lending intermediary and
not more than RMB5 million (approximately $768,356) in total from all platforms. Although we are in the process of adjusting
our relevant policy and plan to stop facilitating loans with principal over the upper limits, certain loans on our platform
that have been facilitated in the past have outstanding balance over such limit. In addition, due to lack of industry-wide
information sharing arrangement, we cannot assure you that the aggregate amount of loans taken out by a borrower on our platform
and other online lending information intermediary platforms at a point in time does not exceed the limit set in the Interim
Measures.
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the
Task Notice requires P2P lending platform to complete all rectification before June 2018
and the term is extendable for up to 2 years in certain complicated situations with the
approval of provincial level government. During the compliance period, no new non-compliant
activities shall be practiced, and existing non-compliant practices shall gradually drop
down to nil. If our new business is deemed to the new non-compliant activities by the
government, the related government authority will order us to stop certain of our business
immediately which may prolong the filing period and have adverse effects on our business.
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Currently,
all the loans in our platform are secured by third-party cooperation institutions, of
which certain of our third-party cooperation institution may not be qualified as Financing
Guarantee Company under Financing Guarantee Company Regulation. It might violate the
law for the provision of guarantee by a non-Financing Guarantee Company. In addition,
from October 1, 2017, Financing Guarantee Company shall not provide the guarantee liability
in excess of 10 times the amount of its net assets. Although our cooperation institutions
have not been subject to penalty, we cannot assure you that our cooperation institutions
will fully be in compliance with related laws and not be subject to any penalty. Any
penalty of our cooperation institution may adversely affect our business.
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Currently,
our information disclosure has not fully been complied with Disclosure Guideline and
we will try our best to rectify our disclosure system. We cannot assure you we will fully
comply with Disclosure Guideline after transition period of six months. If we still fail
to satisfy all requirements under Disclosure Guideline, we may be subject to the penalty
of government authority and our filing procedure with related government authority will
be adversely affected, which will adversely affect our current business.
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We cannot assure
you that our practices will not be required to be rectified or that our rectification measures and results will be satisfactory
to the relevant authorities, and we cannot assure you that we will be able to successfully make filings, obtain and maintain requisite
licenses and meet other regulatory requirements set forth in applicable laws, rules and regulations. To the extent
that we fail to conduct our business in a manner required by the relevant authorities or take rectification measures when required
by the relevant authorities, or obtain and maintain any requisite approvals, licenses or permits or meet other requirements applicable
to our business, our business, financial condition and results of operations would be materially and adversely affected.
As of the date of
this prospectus, we have not been subject to any material fines or other penalties under any PRC laws or regulations including
those governing the online lending information intermediary service industry in China. However, if our practice is deemed to violate
any rules, laws or regulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other
penalties as determined by the relevant government authorities as well. If such situations occur, our business, financial condition
and prospects would be materially and adversely affected. In addition, given the evolving regulatory environment in which we operate,
we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry. If such a
licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely
manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.
If we do not compete effectively, our results of operations
could be harmed.
The internet finance platform
industry in China is intensely competitive and evolving. We compete with a large number of internet finance platforms. We also
compete with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily
compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers
and other consumer finance companies. With respect to investors, we primarily compete with other investment products and asset
classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes.
Our competitors operate
with different business models, have different cost structures or participate selectively in different market segments. They may
ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current
and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able
to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have
longer operating histories, more extensive borrower or investor bases, greater brand recognition and brand loyalty and broader
partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors
or form a strategic alliance with one or more of our competitors. Our competitors may be better at developing new products, offering
more attractive investment returns or lower fees, responding faster to new technologies and undertaking more extensive and effective
marketing campaigns. In response to competition and in order to grow or maintain the volume of loan transactions facilitated through
our platform, we may have to offer higher investment return to investors or charge lower transaction fees, which could materially
and adversely affect our business and results of operations. If we are unable to compete with such companies and meet the need
for innovation in our industry, the demand for our platform could stagnate or substantially decline, we could experience reduced
revenues, or our platform could fail to achieve or maintain more widespread market acceptance, any of which could harm our business
and results of operations.
Our business is subject to risks related to lawsuits
and other claims brought by our clients.
We are subject to lawsuits
and other claims in the ordinary course of our business. In particular, we may face arbitration claims and lawsuits brought by
our clients who have bought internet finance products, such as suits alleging misconduct by the managers of our Creditor Partners
that we have recommended or made available to our clients. In connection with our facilitating small short-term loans, we may
encounter complaints alleging breach of contract or potentially usury claims in our ordinary course of business. We may also encounter
complaints alleging misrepresentation on the part of our relationship managers or other employees or that we have failed to carry
out a duty owed to our clients. This risk may be heightened during periods when credit, equity or other financial markets are
deteriorating in value or are volatile, or when clients or investors are experiencing losses. Actions brought against us may result
in settlements, awards, injunctions, fines, penalties or other results adverse to us, including harm to our reputation. Even if
we are successful in defending against these actions, we may incur significant expenses in the defense of such matters. Predicting
the outcome of such matters is inherently difficult, particularly where claimants seek substantial or unspecified damages, or
when arbitration or legal proceedings are at an early stage. A substantial judgment, award, settlement, fine, or penalty could
be materially adverse to our operating results or cash flows for a particular future period, depending on our results for that
period.
Our failure to respond to rapid
product innovation in the financial industry in a timely and cost-effective manner may have an adverse effect on our business
and operating results.
The financial industry
is increasingly influenced by frequent new service introductions and evolving industry standards. We believe that our future success
will depend on our ability to continue to anticipate service innovations and to offer additional services that meet evolving standards
on a timely and cost-effective basis. There is a risk that we may not successfully identify new service opportunities or develop
and introduce these opportunities in a timely and cost-effective manner. In addition, products and services that our competitors
develop or introduce may render our products and services less competitive. As a result, failure to respond to product and service
innovation that may affect our industry in the future may have a material adverse effect on our business and results of operations.
Our operating history may not provide an adequate basis
to judge our future prospects and results of operations.
We commenced our business
in 2013 as an online financial platform focusing on online peer-to-peer lending services. We seek to develop new internet finance
products, but it is difficult to predict whether our new products will be well-accepted by our customers. Although we recorded
net income in the prior year, we cannot assure you that our results of operations will not be adversely affected in any future
period. We have limited operating history and as a result limited experience in delivering services, which makes the prediction
of future results of operations difficult, and therefore, past results of operations achieved by us should not be taken as indicative
of the rate of growth, if any, that can be expected in the future. As a result, you should consider our future prospects in light
of the risks and uncertainties experienced by early stage companies in a rapidly evolving and increasingly competitive market
in China.
The proper functioning of our
technology platform is essential to our internet finance business. Any failure to maintain the satisfactory performance of our
website and systems could materially and adversely affect our business and reputation.
We are constantly upgrading
our platform to provide increased scale, improved performance for both PC and mobile version of our internet finance platform.
The satisfactory performance, reliability and availability of our technology platform are critical to our success and our ability
to attract and retain customers and provide quality customer service. To adapt to new products and upgrade our technology infrastructure
requires significant investment of time and resources, including adding new hardware, updating software and recruiting and training
new engineering personnel. Maintaining and improving our technology infrastructure require significant levels of investment. Adverse
consequences could include unanticipated system disruptions, slower response times, impaired quality of clients’ experiences
and delays in reporting accurate operating and financial information. Any system interruptions caused by telecommunications failures,
computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or
reduced performance could reduce the number of loans transacted and the attractiveness of product offerings on our platform. Our
servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead
to system interruptions, website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability
to accept and fulfill customer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our
industry. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any
third-party intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such future occurrences
could reduce customer satisfaction, damage our reputation and our financial condition, results of operations and business prospects,
as well as our reputation, could be materially and adversely affected.
Any deficiencies in China’s
internet infrastructure could impair our ability to consummate loans over our website and mobile apps, which could cause us to
lose customers and harm our operating results.
Our internet finance business
depends on the performance and reliability of the internet infrastructure in China since substantially all of our computer hardware
is currently located in China. The availability of our website depends on telecommunications carriers and other third-party providers
for communications and storage capacity, including bandwidth and server storage, among other things. If we are unable to enter
into or renew agreements with these providers on commercially acceptable terms, or if any of our existing agreements with such
providers are terminated as a result of our breach or otherwise, our ability to provide our services to our customers could be
adversely affected. Almost all access to the internet in China is maintained through state-owned telecommunication carriers under
administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and internet service
providers to give customers access to our website. We may experience service interruptions in the future, which are typically
caused by service interruptions at the underlying external telecommunications service providers, such as the internet data centers
and broadband carriers from which we lease services. Service interruptions prevent consumers from accessing our website and mobile
apps and consummating loans, and frequent interruptions could frustrate customers and discourage them from attempting to consummate
loans, which could cause us to lose customers and harm our operating results.
If we fail to adopt new technologies
or adapt our website, mobile apps and systems to changing customer requirements or emerging industry standards, our internet finance
business may be materially and adversely affected.
To remain competitive
in the internet finance business, we must continue to enhance and improve the responsiveness, functionality and features of our
website and mobile apps. The internet finance industry in China is characterized by rapid technological evolution, continual changes
in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the
emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. The
success of our internet finance business will depend, in part, on our ability to identify, develop, acquire or license leading
technologies useful in our business, and respond to technological advances and emerging industry standards and practices, such
as mobile internet, in a cost-effective and timely way. The development of websites, mobile apps and other proprietary technology
entails significant technical and business risks. We cannot assure you that we will be able to use new technologies effectively
or adapt our website, mobile apps, proprietary technologies and systems to meet evolving customer requirements or emerging industry
standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer
requirements, whether for technical, legal, financial or other reasons, the overall prospects, financial condition and results
of operations of our internet finance business may be materially and adversely affected.
A severe or prolonged downturn
in the Chinese or global economy could materially and adversely affect our business and financial condition.
Any prolonged slowdown
in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In
particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and
unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. Economic
conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions
since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows
of 2008 and 2009 has been uneven and there are new challenges. There is considerable uncertainty over the long-term effects of
the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s
leading economies, including the United States and China. There have also been concerns about the economic effect of the tensions
in the relationship between China and surrounding Asian countries. Adverse economic conditions could also reduce the number of
qualified borrowers seeking loans through us. Should any of these situations occur, the amount of loans facilitated through us
and our net revenues will decline, and our business and financial conditions will be negatively impacted. Additionally, continued
turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
We may not be able to prevent
unauthorized use of our intellectual property, which could reduce demand for our products and services, adversely affect our revenues
and harm our competitive position.
We rely primarily on a
combination of copyright, trade secret, trademark and anti-unfair competition laws and contractual rights to establish and protect
our intellectual property rights in our research reports, our services and other aspects of our business. We cannot assure you
that the steps we have taken or will take in the future to protect our intellectual property or piracy will prove to be sufficient.
Implementation of intellectual property-related laws in China has historically been lacking, primarily due to ambiguity in the
PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protection in China may not
be as effective as in the United States or other countries. Current or potential competitors may use our intellectual property
without our authorization in the development of products and services that are substantially equivalent or superior to ours, which
could reduce demand for our solutions and services, adversely affect our revenues and harm our competitive position. Even if we
were to discover evidence of infringement or misappropriation, our recourse against such competitors may be limited or could require
us to pursue litigation, which could involve substantial costs and diversion of management’s attention from the operation
of our business.
Confidentiality agreements with
employees, product providers and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
We require our employees,
product providers, cooperating partners and others to enter into confidentiality agreements (or agreements that contain confidentiality
terms) in order to protect our trade secrets and other proprietary information and, most importantly, our client information.
These agreements might not effectively prevent disclosure of our trade secrets, know-how or other proprietary information and
might not provide an adequate remedy in the event of unauthorized disclosure of such confidential information. In addition, others
may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights
against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position.
We may face intellectual property
infringement claims, which could be time-consuming and costly to defend and may result in the loss of significant rights by us.
Although
we have not been subject to any litigation, pending or threatened, alleging infringement of third parties’
intellectual property rights, we cannot assure you that such infringement claims will not be asserted against us in the
future. We are applying to register nine trademarks, including the one we are currently using as the Company's logo. Although
we have conducted searches in trademark retrieval system prior to submitting the trademark registrations, these applications
may still be rejected due to potential intellectual property infringement.
Intellectual property
litigation is expensive and time-consuming and could divert resources and management attention from the operation of our business.
If there is a successful claim of infringement, we may be required to alter our services, cease certain activities, pay substantial
royalties and damages to, and obtain one or more licenses from, third parties. We may not be able to obtain those licenses on
commercially acceptable terms, or at all. Any of those consequences could cause us to lose revenues, impair our client relationships
and harm our reputation.
Our future success depends on
the continuing efforts to retain our existing management team and other key employees as well as to attract, integrate and retain
highly skilled and qualified personnel, and our business may be disrupted if we lose their services.
Our future success depends
heavily on the continued services of our current executive officers and senior management team. We also rely on the skills, experience
and efforts of other key employees, including management, marketing, support, research and development, technical and services
personnel in our internet finance businesses. Qualified employees are in high demand in the internet finance industries in China,
and our future success depends on our ability to attract, train, motivate and retain highly skilled employees and the ability
of our executive officers and other members of our senior management to work effectively as a team.
If one or more of our
executive officers or other key employees are unable or unwilling to continue in their present positions, we may not be able to
find replacements easily, which may disrupt our business operations. We do not have key personnel insurance in place. If any of
our executive officers or other key employees joins a competitor or forms a competing company, we may lose clients, know-how,
key professionals and staff members. In addition, although each of our executive officers has entered into an employment agreement
with us, not all of them contain non-competition provisions. Even for those executive officers whose employment agreements contain
confidentiality and non-competition provisions, we cannot assure you of the extent to which any of these agreements could be enforced
in China if any dispute arises between them and us because of the uncertainties of China’s legal system.
Our revenues and operating results
can fluctuate from period to period, which could cause the price of our common stock to fluctuate.
Our revenues and operating
results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of
which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following
factors, as well as other factors described elsewhere in this prospectus:
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negative
public perception and reputation of the internet finance industry;
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changes
in laws or regulatory policy that could impact our ability to provide internet finance
services to our clients;
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failure
to enter into contracts with new financial institutions;
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cancellations
or non-renewal of existing contracts with financial institutions; and
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changes
in the number of clients who decide to effectively terminate their relationship with
us.
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As a result of these and
other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our future revenues
or operating performance.
If we fail to implement and maintain
an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud, and
investor confidence and the market price of our common stock may be materially and adversely affected.
As a public company in
the United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section
404, requires that we include a report from management on the effectiveness of its internal control over financial reporting in
our annual report on Form 10-K. As a small reporting company, we currently do not need our independent registered public accounting
firm to attest to and report on the effectiveness of our internal control over financial reporting. However, we are required to
do so if we become an accelerated filer.
Our management
has concluded that our internal control over financial reporting is not effective as of December 31, 2017. As a result, our financial
statements could contain material misstatements and we could fail to meet our reporting obligations, which would likely cause
investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm
our results of operations, and lead to a decline in the trading price of our common stock.
We may need additional capital, and financing may not
be available on terms acceptable to us, or at all.
Although we believe that
our anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements and
capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you this will be the case. We
may need additional cash resources in the future if we experience changes in business conditions or other developments. We may
also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital
expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have
on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional
equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations
and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
From time to time we may evaluate
and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt
our business and adversely affect our financial results.
We may evaluate and consider
strategic investments, combinations, acquisitions or alliances to further increase the value of our platform and better serve
borrowers and investors. These transactions could be material to our financial condition and results of operations if consummated.
If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction
and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks
of such transaction.
Strategic investments
or acquisitions will involve risks commonly encountered in business relationships, including:
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difficulties
in assimilating and integrating the operations, personnel, systems, data, technologies,
products and services of the acquired business;
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inability
of the acquired technologies, products or businesses to achieve expected levels of revenue,
profitability, productivity or other benefits;
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difficulties
in retaining, training, motivating and integrating key personnel;
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diversion
of management’s time and resources from our normal daily operations;
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difficulties
in successfully incorporating licensed or acquired technology and rights into our platform
and loan products;
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difficulties
in maintaining uniform standards, controls, procedures and policies within the combined
organizations;
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difficulties
in retaining relationships with customers, employees and suppliers of the acquired business;
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risks
of entering markets in which we have limited or no prior experience;
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regulatory
risks, including remaining in good standing with existing regulatory bodies or receiving
any necessary pre-closing or post-closing approvals, as well as being subject to new
regulators with oversight over an acquired business;
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assumption
of contractual obligations that contain terms that are not beneficial to us, require
us to license or waive intellectual property rights or increase our risk for liability;
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failure
to successfully further develop the acquired technology;
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liability
for activities of the acquired business before the acquisition, including intellectual
property infringement claims, violations of laws, commercial disputes, tax liabilities
and other known and unknown liabilities;
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potential
disruptions to our ongoing businesses; and
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unexpected
costs and unknown risks and liabilities associated with strategic investments or acquisitions.
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We may not make any investments
or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not
generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.
In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the
successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if
developed, will achieve market acceptance or prove to be profitable.
Competition for employees is intense,
and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success
depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel.
Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees.
Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to
hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of
the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more
attractive terms of employment.
In addition, we invest
significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them.
If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality
of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our
business.
If we cannot maintain our corporate
culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical
component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity.
As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable
aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our
ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to natural
disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war,
riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform
failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well
as adversely affect our ability to provide products and services on our platform.
Our business could also
be adversely affected by the effects of Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory
Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having
Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to
be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the
extent that any of these epidemics harms the Chinese economy in general.
If our direct lending business
is deemed to violate any PRC laws or regulation, our business, financial conditions and results of operations would be materially
and adversely affected.
We launched
our direct lending business, whereby we provide loans to borrowers through a trustee, in June 2017. According to relevant PRC
rules and regulations, an entity must obtain a license to provide loans in China. Since we do not currently possess such a
license for direct lending, we have engaged a non-banking financial institution to provide entrusted loans to our customers.
This channel may not be available in future due to changes in relevant rules and regulations; even if it continues to be
available, the cost may be prohibitive. In addition, certain Interim Measures prohibit P2P platforms from providing loans
unless otherwise permitted by laws and regulations. Though our entrusted loan business is conducted offline, not via our
online platform, our direct lending business may still be deemed to violate relevant regulatory measures. There is currently
no communication from PRC regulatory agencies regarding such violation. However, if we were determined to be in violation, we
could be subject to monetary fines for these activities, and our reputation and operations may be adversely
affected.
We may not be able to collect
the payment when a borrower becomes delinquent in the payment of his/her outstanding obligation.
We launched our direct
lending business, whereby we provide loans to borrowers through a trustee, in June 2017. Although we maintain a risk control system
which supervises the borrower’s financial conditions and the repayment process, we are subject to risks that we may not
be able to collect the payment of a loan from the borrower or guarantor. In addition, the value of the collateral provided to
the guarantors by the borrowers for the loan may decrease during the loan period and may not be sufficient to cover the payment
of the loan when it is due. All of the loan contracts we have entered so far in our direct lending business have a loan term that
is no more than six months and as such, we are subject to high risks and pressures to collect those payments of loans within six
months. If we failed to do so, it could have a material adverse effect on our financial conditions, results of operations and
business operations.
A high degree
of reliance on the third-party referral service providers as investor sources to our online platform may have material
adverse effect on our business and operational results.
67% of loans facilitated
through our platform for the year ended December 31, 2016 were extended by investors referred to us by outside referral service
providers as a group, of which, 65% were extended by investors referred to us by one service provider. 91% of the loans facilitated
through our platform for the year ended December 31, 2017 were extended by investors referred to us by outside referral service
providers as a group, of which, 67% were referred by one service provider. Although we are actively developing our businesses
by channeling through other third-party referral service providers and by strengthening our platform's marketing efforts in order
to attract more investors, we are exposed to the risk of relying on a major service provider as our investor source, and an untimely
or an inadequate number of investors referred by third-party service providers or an increase in commissions by them may have
material adverse effects on our business and operational results.
We have no insurance coverage for our
direct lending business or our bank accounts, which could expose us to significant costs and business disruption.
Risks associated with our
business and operations include, but are not limited to, borrowers' failure to repay the outstanding principal and interest when
due, our loss reserve not being sufficient to cover such failure, loss of key personnel, business interruptions due to power shortages
or network failure, and risks posed by natural disasters including storms, floods and earthquakes, any of which may result in
significant costs or business disruption. We do not maintain any credit insurance, business interruption insurance, general third-party
liability insurance, nor do we maintain key-man life insurance or any other insurance coverage except the mandatory social insurance
for the employees of Benefactum Beijing. If we incur any loss that is not covered by our loss reserve, our business, financial
condition and results of operations could be materially and adversely affected.
We maintain our
cash with various banks. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our
cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we could lose the cash on deposit with that particular
bank or trust company.
Changes in the interest rates
and spread could have a negative impact on the Company’s revenues and results of operations.
We just launched our direct
lending business, whereby we provide loans to borrowers through a trustee, in June 2017. The revenues we will generate from our
entrusted loan business depends upon interest income, which is the difference between interest we receive from loans to customers
and the interest we pay on borrowings from other financial institutions (to the extent that we rely on debt financing, rather
than equity). A narrowing interest rate spread could adversely affect our earnings and financial condition. If we are unable to
control our funding costs or adjust our lending interest rates in a timely manner, our interest margin will decline. On August
6, 2015, the Supreme People’s Court of the PRC issued the Provisions on Several Issues Concerning Laws Applicable to Trials
of Private Lending Cases (“the provisions”), which came into effect on September 1, 2015. The provisions provided
that agreements between lenders and borrowers on loans with interest rates below 24% per annum are valid and enforceable; as to
loans with interest rates per annum between 24% and 36%, if the interest on the loans has already been paid to the lender, and
such payment has not damaged the interest of the state, the community and any third parties, the courts will turn down the borrower’s
request to demand the return of the interest payment; if the annual interest rate of a private loan is higher than 36%, the excess
will not be enforced by the courts. While this generally has the effect of raising the maximum interest rate at which we may lend
to borrowers, the provisions are a recent change in regulation and we may not be able to foresee all of the consequences of the
provisions.
An increase to the provision for loan losses will cause
the Company’s net income to decrease.
In June 2017, we launched
our direct lending business, whereby we provide loans to borrowers through a trustee. Our businesses are subject to fluctuations
based on local economic conditions. These fluctuations are neither predictable nor within our control and may have a material
adverse impact on our operations and financial condition. We may decide to increase our provision for loan losses in light of
the lack of clarity in the applicable banking regulations with regard to direct lending companies. The regulatory authority may
also require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different
from those of our management. Any increase in the provision for loan losses will result in a decrease in net income and may have
a material adverse effect on our financial condition and results of operations.
Risks Related to Our Corporate Structure
If the PRC government deems that
the contractual arrangements in relation to our variable interest entity (Benefactum Beijing) do not comply with PRC governmental
restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future,
we could be subject to penalties or be forced to relinquish our interests in those operations.
Foreign ownership of certain
types of internet businesses, such as internet information services, is subject to restrictions under applicable PRC laws, rules
and regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity interests in a
value-added telecommunication service provider. Any such foreign investor must also have experience and a good track record in
providing value-added telecommunications services overseas. All our revenue is generated by contractually controlled and managed
entity, Benefactum Beijing.
The contractual arrangements
give us effective control over Benefactum Beijing and enable us to obtain substantially all of the economic benefits arising from
it as well as consolidate the financial results of it in our results of operations. Although the structure we have adopted is
consistent with longstanding industry practice, and is commonly adopted by comparable companies in China, the PRC government may
not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future.
In the opinion of our
PRC counsel, the ownership structures of our material wholly-foreign owned enterprise and our material variable interest entity
in China, do not and will not violate any applicable PRC law, regulation or rule currently in effect; and the contractual arrangements
between our material wholly-foreign owned enterprise, our material variable interest entity and their respective equity holders
governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations
currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect. However, PRC Counsel
has also advised us that there are substantial uncertainties regarding the interpretation and application of current PRC laws,
rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary
to the opinion of our PRC legal counsel.
In January 2015, the PRC
Ministry of Commerce (“MOC” or “MOFCOM”) published a discussion draft of the PRC Foreign Investment Law
soliciting the public’s comments, or the draft of PRC Foreign Investment Law, which expands the definition of foreign investment
and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested
enterprise. Under the draft of PRC Foreign Investment Law, a VIE would be deemed to be a foreign-invested enterprise if it is
ultimately “controlled” by foreign investors, and accordingly it would be subject to restrictions on foreign investments.
However, the draft of the PRC Foreign Investment Law does not address what actions will be taken with respect to the existing
companies with structures similar to VIEs, whether or not these companies are controlled by Chinese parties. It is uncertain when
the draft will become law and whether the final version will differ from the draft. If any Contractual Arrangements we may implement
are found to be in violation of any existing or future PRC laws or regulations, or if we fail to obtain or maintain any of the
required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation,
including levying fines, confiscating our income or the income of our PRC subsidiary or consolidated VIE, revoking the business
licenses or operating licenses of our PRC subsidiaries or consolidated VIE, prohibiting our use of proceeds from this offering
to finance our business and operations in the PRC, and taking any other regulatory or enforcement actions that could be harmful
to our business. Any of these actions could cause significant disruption to our operations and adversely affect our business.
If any of these occurrences results in our inability to direct the activities of a consolidated VIE and/or our failure to receive
economic benefits from a consolidated VIE, we may not be able to consolidate its results into our consolidated financial statements
in accordance with U.S. GAAP.
Furthermore, it is uncertain
whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted,
what they would provide. If we or our variable interest entity are found to be in violation of any existing or future PRC laws,
rules or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities
would have broad discretion to take action in dealing with such violations or failures, including revoking the business and operating
licenses of our PRC subsidiary or variable interest entity, requiring us to discontinue or restrict our operations, restricting
our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other
regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect
on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government
actions would have on us and on our ability to consolidate the financial results of our variable interest entity in our consolidated
financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in
violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right
to direct the activities of any of our material variable interest entity or otherwise separate from it and if we are not able
to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the
financial results of our variable interest entity in our consolidated financial statements. Any of these events would have a material
adverse effect on our business, financial condition and results of operations.
Substantial uncertainties exist
with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law.
The MOFCOM, published
a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the major existing
laws and regulations governing foreign investment in China. While the MOFCOM solicited comments on this draft earlier this year,
substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign
Investment Law, if enacted as proposed, may materially impact the entire legal framework regulating foreign investments in China.
Among other things, the
draft Foreign Investment Law purports to introduce the principle of “actual control” in determining whether a company
is considered a foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established
in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction,
but cleared by the MOFCOM as “controlled” by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic
entity for investment in the “restriction category” on the “negative list.” In this connection, “control”
is broadly defined in the draft law to cover any of the following summarized categories:
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holding
50% or more of the voting rights or similar equity interest of the subject entity;
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holding
less than 50% of the voting rights or similar equity interest of the subject entity but
having the power to directly or indirectly appoint or otherwise secure at least 50% of
the seats on the board or other equivalent decision
-making
bodies, or having the voting power to materially influence the board, the shareholders’
meeting or other equivalent decision-making bodies; or
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having
the power to exert decisive influence, via contractual or trust arrangements, over the
subject entity’s operations, financial, staffing and technology matters.
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Once an entity is determined
to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within a “negative list”
purported to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts
would be required.
The “variable
interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary
licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the draft
Foreign Investment Law, variable interest entities that are controlled via contractual arrangements would also be deemed as FIEs
if they are ultimately “controlled” by foreign investors. For any companies with a VIE structure in an industry category
that is in the “restriction category” on the “negative list,” the existing VIE structure may be deemed
legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies,
or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest
entities will be treated as FIEs and any operation in the industry category on the “negative list” without market
entry clearance may be considered as illegal.
Based on the definition
of “control” in the draft Foreign Investment Law as currently proposed, we believe that there is strong basis for
a determination that we and our variable interest entity is ultimately controlled by PRC citizens for the following reasons:
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Hui Ying Financial takes full control of Benefactum Alliance which, in turn, controls
Benefactum Sino;
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Two Seychelles companies
owns 93.25% of Hui Ying Financial’s common stock and their sole shareholder is a PRC citizen or national;
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Because
Benefactum Alliance, through Benefactum Sino, indirectly controls Benefactum Shenzhen
which, in turn, via a series of contractual arrangements, has the right to appoint the
Chairman and directors of Benefactum Beijing, Benefactum Alliance effectively controls
the board and all management decisions of Benefactum Beijing. Effectively, Benefactum
Alliance also has the power to exert decisive influence over its operations, financial,
staffing and technology matters.
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However, there are significant
uncertainties as to how the control status of our company, our variable interest entity and our equity investees with a VIE structure
would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether any of the businesses
that we currently operate or plan to operate in the future through our consolidated entities and the businesses operated by our
equity investees with a VIE structure would be on the to-be-issued “negative list” and therefore be subject to any
foreign investment restrictions or prohibitions. We also face uncertainties as to whether the enacted version of the Foreign Investment
Law and the final “negative list” would mandate further actions, such as MOFCOM market entry clearance, to be completed
by companies with existing VIE structure and whether such clearance can be timely obtained, or at all. If we or our equity investees
with a VIE structure were not considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign
Investment Law, further actions required to be taken by us or such equity investees under the enacted Foreign Investment Law may
materially and adversely affect our business and financial condition.
In addition, our corporate
governance practice may be materially impacted, and our compliance costs could increase if we were not considered as ultimately
controlled by PRC domestic investors under the enacted version of the Foreign Investment Law. For instance, the draft Foreign
Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors
and the applicable FIEs. Aside from investment implementation report and investment amendment report that would be required for
each investment and alteration of investment specifics, a prospectus would be mandatory, and large foreign investors meeting certain
criteria would be required to report on a quarterly basis. Any company found to be non-compliant with these information reporting
obligations could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible
could be subject to criminal liabilities.
Our contractual arrangements may
not be as effective in providing control over the variable interest entities as direct ownership.
We rely on contractual
arrangements with our variable interest entity to operate our electronic platform in China and other businesses in which foreign
investment is restricted or prohibited. For a description of these contractual arrangements, see “History and Corporate
Structure — Contractual Arrangements with Benefactum Beijing.” These contractual arrangements may not be as effective
as direct ownership in providing us with control over our variable interest entity.
If we had direct ownership
of the variable interest entity, we would be able to exercise our rights as an equity holder directly to effect changes in the
boards of directors of the entity, which could effect changes at the management and operational level. Under our contractual arrangements,
we would be able to change the members of the boards of directors of the entity only by exclusively exercising the equity holders’
voting rights and would have to rely on the variable interest entity and the variable interest entity equity holders to perform
their obligations in the contractual arrangements in order to exercise our control over the variable interest entity. The variable
interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests
of our company or may not perform their obligations under these contracts. For example, our variable interest entity and its equity
holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including
maintaining our website and using our domain names and trademarks which the relevant variable interest entity has exclusive rights
to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the option, we may
replace the equity holders of the variable interest entity at any time pursuant to the contractual arrangements. However, if any
equity holder is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved,
we will have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial
agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. See “Any
failure by our variable interest entity or its equity holders to perform their obligations under the contractual arrangements
would have a material adverse effect on our business, financial condition and results of operations.” Consequently, the
contractual arrangements may not be as effective in ensuring our control over the relevant portion of our business operations
as direct ownership.
Any failure by our variable interest
entity or its equity holders to perform their obligations under the contractual arrangements would have a material adverse effect
on our business, financial condition and results of operations.
If our variable interest
entity or its equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur
substantial costs and expend additional resources to enforce such arrangements. Although we have entered into an option agreement
in relation to our variable interest entity, which provides that we may exercise an option to acquire, or nominate a person to
acquire, ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws,
rules and regulations, the exercise of the option is subject to the review and approval of the relevant PRC governmental authorities.
We have also entered into an equity interest pledge agreement with respect to the variable interest entity to secure certain obligations
of such variable interest entity or its equity holders to us under the contractual arrangements. However, the enforcement of such
agreement through arbitral or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC
legal system. Moreover, our remedies under the equity pledge agreement are primarily intended to help us collect debts owed to
us by the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the assets
or equity of the variable interest entity.
In addition, although
the terms of the contractual arrangements provide that they will be binding on the successors of the variable interest entity
equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case of the death,
bankruptcy or divorce of a variable interest entity equity holder will be subject to or will be willing to honor the obligations
of such variable interest entity equity holder under the contractual arrangements. If the relevant variable interest entity or
its equity holder (or its successor), as applicable, fails to transfer the shares of the variable interest entity according to
the relevant call option agreement or equity pledge agreement, we would need to enforce our rights under the call option agreement
or equity pledge agreement, which may be costly and time-consuming and may not be successful.
The contractual arrangements
are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover,
there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest
entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel
or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability
to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court
judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in
PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements,
we may not be able to exert effective control over the variable interest entities, and our ability to conduct our business, as
well as our financial condition and results of operations, may be materially and adversely affected.
We may lose the ability to use,
or otherwise benefit from, the licenses, approvals and assets held by our variable interest entity, which could severely disrupt
our business, render us unable to conduct some or all of our business operations and constrain our growth.
Our variable interest
entity, Benefactum Beijing, holds licenses and approvals and assets that are necessary for our business operations, to which foreign
investments are typically restricted or prohibited under applicable PRC law. The contractual arrangements contain terms that specifically
obligate variable interest entity equity holders to ensure the valid existence of the variable interest entities and restrict
the disposal of material assets of the variable interest entities. However, in the event the variable interest entity equity holders
breach the terms of these contractual arrangements and voluntarily liquidate our variable interest entity or our variable interest
entity declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise
disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from
the assets held by the variable interest entity, which could have a material adverse effect on our business, financial condition
and results of operations. Furthermore, if our variable interest entity undergoes a voluntary or involuntary liquidation proceeding,
its equity holders or unrelated third-party creditors may claim rights to some or all of the assets of such variable interest
entity, thereby hindering our ability to operate our business as well as constrain our growth.
The equity holders, directors
and executive officers of our variable interest entity, as well as our employees who execute other strategic initiatives may have
potential conflicts of interest with our company.
PRC laws provide that
a director and an executive officer owe a fiduciary duty to the company he or she directs or manages. The directors and executive
officers of the variable interest entity, Bodang Liu and Wei Zheng, must act in good faith and in the best interests of the variable
interest entity and must not use their respective positions for personal gain. On the other hand, as a director of our company,
Mr. Liu has a duty of care and loyalty to our company and to our shareholders as a whole under Nevada law. We control our variable
interest entity through contractual arrangements and the business and operations of our variable interest entity are closely integrated
with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these individuals may arise due
to dual roles both as directors and executive officers of the variable interest entity and as directors or employees of our company.
We cannot assure you that
these individuals will always act in the best interests of our company should any conflicts of interest arise, or that any conflicts
of interest will always be resolved in our favor. We also cannot assure you that these individuals will ensure that the variable
interest entity will not breach the existing contractual arrangements. If we cannot resolve any such conflicts of interest or
any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement action under
the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal proceedings. See “Any
failure by our variable interest entity or its equity holders to perform their obligations under the contractual arrangements
would have a material and adverse effect on our business, financial condition and results of operations.”
The contractual arrangements with
our variable interest entity may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction
pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China
is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly
different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entity or their equity
holders owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable
PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with
our variable interest entity, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine
that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable transfer
pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entity and/or variable interest entity
equity holders could be increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may
impose late payment interest. Our net income may be materially reduced if our tax liabilities increase.
Risks Related to Doing Business in the People’s Republic
of China
Changes in the political and economic
policies of the PRC government may materially and adversely affect our business, financial condition and results of operations
and may result in our inability to sustain our growth and expansion strategies.
All of our operations
are conducted in the PRC and all of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations
are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs
from the economies of most developed countries in many respects, including the extent of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment
of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by
the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing
industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions
and providing preferential treatment to particular industries or companies.
While the PRC economy
has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors
of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources.
Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition
and results of operation could be materially and adversely affected by government control over capital investments or changes
in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including
interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in
turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial
condition and results of operations.
There are uncertainties regarding the interpretation
and enforcement of PRC laws, rules and regulations.
Most of our operations
are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules
and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes.
Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government
began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect
of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment
in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may
not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by
PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of
the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations
often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws,
rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based
in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may
have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence
of the violation.
Any administrative and
court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual
terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection
we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered
into and could materially and adversely affect our business, financial condition and results of operations.
We may be required to obtain a
value-added telecommunication business certificate and be subject to foreign investment restrictions.
PRC regulations impose
sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet Content Provider,
or ICP, certificate. The Interim Measures provide that online lending information intermediaries must apply for value-added telecommunications
business licenses in accordance with the relevant provisions of telecommunications authorities after filing with a local financial
regulator. If we could not obtain such value-added telecommunication certificates pursuant to the relevant regulations, we may
not be able to conduct online lending intermediaries’ services, our business may be materially and adversely affected. We
plan to apply for the corresponding value-added telecommunication business certificates after completing the filing.
PRC regulations regarding acquisitions
impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through
acquisitions.
Under the PRC Anti-Monopoly
Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of any transaction where
the parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence
over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets
Supervision and Administration Commission, the State Administration of Taxation (“SAT”), the State Administration
of Industry & Commerce (“SAIC”), the China Securities Regulatory Commission (“CSRC”), and the State
Administration of Foreign Exchange (“SAFE”), jointly adopted the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22,
2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or
controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable
PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review. Our
proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million
(approximately $60.11 million) in the year prior to any proposed acquisition would be subject to MOFCOM merger control review.
Certain transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant
regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from
MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business
or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that
adopt a variable interest entity structure. If MOFCOM’s practice remains unchanged, our ability to carry out our investment
and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether transactions
that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be
able to complete large acquisitions in the future in a timely manner or at all.
We may be treated as a resident
enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on
our global income.
Under the PRC Enterprise
Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under
the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC
tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global
income. “De facto management body” refers to a managing body that exercises substantive and overall management and
control over the production and business, personnel, accounting books and assets of an enterprise. The SAT issued the Notice Regarding
the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto
Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether
the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although
Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or
individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general
position on how the “de facto management body” test should be applied in determining the tax resident status of offshore
enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate no revenues offshore. However,
if we generate revenues offshores in the future and if we were to be considered a PRC resident enterprise, we would be subject
to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially
reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities
outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject
to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de
facto management body.”
Restrictions on currency exchange may limit our ability
to utilize our revenue effectively.
Presently all of our revenue
is denominated in RMB. The RMB is currently convertible under the “current account,” which includes dividends, trade
and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct
investment and loans. Currently, our PRC subsidiary, which is a wholly-foreign owned enterprise, may purchase foreign currency
for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE
by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our
ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize
revenue generated in RMB to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders,
including holders of our common stock, or pay principal and interest in foreign currencies to the holders of the notes. Foreign
exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with,
SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or
equity financing for our subsidiaries and the variable interest entities.
Fluctuations in exchange rates
could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the 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. On July 21, 2005, the PRC government changed its policy of
pegging the value of the RMB to the U.S. dollar. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20%
against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange
rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB
to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. In April 2012, the PRC
government announced that it would allow more RMB exchange rate fluctuation. On August 11, 2015, the PRC government set the
central parity rate for the RMB nearly 2% lower than that of the previous day and announced that it will begin taking into account
previous day’s trading in setting the central parity rate. 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. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of our
financial assets and debt are also denominated in RMB. 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.
We may be adversely affected by
the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite
approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
The PRC government extensively
regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies
in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation
and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what
actions or omissions may be deemed to be in violation of applicable laws and regulations.
We only have contractual
control over our website. We do not directly own the website due to the restriction of foreign investment in businesses providing
value-added telecommunication services in China, including internet information provision services. This may significantly disrupt
our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects
on us.
The evolving PRC regulatory
system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State
Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State
Council Information Office, the Ministry of Industry & Information Technology, or the MITT, and the Ministry of Public Security).
The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and
coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory
matters in relation to the internet industry.
The interpretation and
application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet
industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the
businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained
all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or
obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates
new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of
any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses,
and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material adverse effect on our business and results of operations.
We rely on dividends and other
distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation
on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to conduct our
business.
We are a holding
company, and we rely on dividends and other distributions on equity paid by our PRC subsidiary for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur.
If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Benefactum Shenzhen to adjust
its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest entity
in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “Risks
Related to Our Corporate Structure—Contractual arrangements in relation to our consolidated variable interest entity may
be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entity
owe additional taxes, which could negatively affect our financial condition and the value of your investment.”
Under PRC laws and
regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of their respective
accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly
foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund
certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion,
a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Moreover, in November
2016, PBOC issued a Notice of the People’s Bank of China on Further Clarification of the Matters concerning the RMB Loans
Granted Overseas by Domestic Enterprise (“Circular 306”), pursuant to which the handling bank shall require the lender
to register with the local SAFE branch before granting overseas RMB loans. The handling bank shall strictly examine whether the
operation scale is compatible with the scale of the loan and the actual purpose of the funds loaned overseas, to ensure the authenticity
and the purpose of the loans. Circular 306 also expressly stipulated certain requirements for granting overseas RMB loans, such
as the existence of an equity relationship between the borrower and lender. There is no direct equity ownership in our VIE Benefactum
Beijing by the Company or its offshore subsidiaries in BVI and Hong Kong. Therefore, Benefactum Beijing may not be able to provide
funds directly to the Company or its wholly-owned offshore subsidiaries in BVI and Hong Kong for the purpose of cash dividends
or other distributions through extending overseas RMB loans. In addition, although we currently do not operate any overseas RMB
loan business, Circular 306 may restrict our ability to expand our business for overseas RMB loans.
Any limitation
on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our
ability to grow, make investments or acquisitions that could be beneficial to our business, `pay dividends, or otherwise fund
and conduct our business.
Governmental control of currency
conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The PRC government imposes
controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China.
We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company in the United States
relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC
foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign
exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from SAFE,
subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign
exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents.
But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The
PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency
demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our common stock.
Failure to make adequate contributions
to various employee benefit plans as required by PRC regulations may subject us to penalties.
We are required under
PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance,
housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages
of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from
time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented
consistently by the local governments in China given the different levels of economic development in different locations. Although
we have made contributions to some employee benefit plans, such as social security plans, we may have not made adequate employee
benefit payments required by PRC regulations. We may be required to make up the contributions for these plans as well as pay late
fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition
and results of operations may be adversely affected.
The M&A Rules and certain
other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could
make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules and
some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could
make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances
that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking
if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September
2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns
and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise
“national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting
to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the
future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned
regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes,
including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
PRC regulations relating to offshore
investment activities by PRC residents may limit our PRC subsidiary’ ability to increase their registered capital or distribute
profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.
SAFE promulgated the Circular
on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose
Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch
in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or
financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose
vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents,
name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents
Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the
Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February
2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register
with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity
established for the purpose of overseas investment or financing.
If our shareholders who
are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited from distributing
their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our
ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
However, we may
not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company,
nor can we compel our beneficial owners to comply with SAFE registration requirements. Mr. Bodang Liu is in the process of
completing registration under SAFE Circular 37. As a result, we cannot assure you that all of our shareholders or
beneficial owners who are PRC residents or entities have complied with and will in the future make or obtain any
applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to
comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could
subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC
subsidiary’ ability to make distributions or pay dividends to us or affect our ownership structure, which could
adversely affect our business and prospects.
Enhanced scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities
have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity
interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular
698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which
became effective in February 2015.
Under Circular 698,
where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident
enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise,
being the transferor, may be subject to PRC enterprise income tax if the indirect transfer is considered to be an abusive use
of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject
to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests
in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has
the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015, the
SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax
regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore
transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how
to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and
sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts
an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas
holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the
taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle,
the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose
and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
We face uncertainties
on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may
pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation and request
our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at
risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required
to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident
enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and
results of operations.
The PRC tax authorities
have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based
on the difference between the fair value of the taxable assets transferred and the cost of investment. We may pursue acquisitions
in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise
Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59
or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may
have an adverse effect on our financial condition and results of operations.
PRC regulations regarding peer-to-peer
lending impose significant regulatory restrictions on business scope, lending amount, and registration requirements, which may
materially and adversely affect our business, financial condition and results of operations and may result in our inability to
sustain our growth. In addition, the implementing regulations have yet to be announced and there is substantial uncertainty over
it. The costs and burden of compliance with such regulations may be sufficiently inhibitory to negatively affect our profitability
and growth.
Under the Interim
Measures, peer-to-peer platforms will not be able to accept deposits from the public, nor create asset pools, or provide any form
of guarantee for lenders. In addition, according to the Interim Measures, an individual may borrow a maximum of RMB 200,000 (approximately
$30,734) from a single peer-to-peer platform and a maximum of RMB 1 million (approximately $153,671) from all peer-to-peer platforms.
A company can borrow no more than RMB 1 million (approximately $153,671) from a single peer-to-peer platform, and no more than
RMB 5 million (approximately $768,356) from all peer-to-peer platforms. The Interim Measures require a peer-to-peer lending platform
to register with the local financial supervisory department, and to apply for related licenses for providing telecommunication
services.
Based on the review of
Beijing Finance Bureau, we are required to rectify our incompliance with certain requirements of the Interim Measures, including
that a majority of the loans facilitated through our platform have exceeded the maxim amounts allowed under the Interim Measures.
In order to meet the requirements of the Interim Measures as well as other applicable rules and regulations, the Company has taken
a series of measures, including: (i) execution of a fund depository agreement with Jiangxi Bank as custodian of investor funds,
(ii) strict qualification review of borrowers, investors and financing projects, (ii) strengthening protection of lenders and
borrowers; (iii) full information disclosure; (iv) expanding and restructuring loan product offerings and (v) adjustment of loan
balances. However, if we fail to comply with the requirements within the transition period, we may not be able to obtain the value-added
telecommunication business licenses to continue to operate our current business.
Although the Interim
Measures took effect immediately on August 17, 2016, peer-to-peer platforms were given a year to adjust their practices to comply
with them. In June 2017, the PBOC together with sixteen other PRC regulatory agencies jointly issued a notice titled the Notice
on Further Improvement of Internet Finance Risk Rectification and Clearance Task, or the Task Notice. The Task Notice, among other
things, gave peer-to-peer platforms till end of June 2018 to adjust their practices to be compliant with the Interim Measures
and in some complicated cases, up to two years for compliance upon approval by provincial government. During such compliance period,
no new non-compliant activities shall be practiced, and existing non-compliant practices shall gradually drop down to nil. We
have been advised by our Chinese counsel that regulations and rules regarding registration as an online lending intermediary information
agency, apart from the value-added telecommunication business licenses, remain unclear at this moment. There is significant uncertainty
as to whether practices that we may undertake would subject us to fines or other administrative penalties.
The future development and implementation
of anti-money laundering laws in China may increase our obligation to supervise and report transactions with our customers, thereby
increasing our compliance efforts and costs and exposing us to criminal measures or administrative sanctions for non-compliance.
The Interim Measures provide
that an internet lending intermediary information agency is obligated to “fulfill its anti-money laundering and anti-terrorist
financing obligations according to relevant laws, such as examining client identification, reporting suspicious transactions and
maintaining client identity documents and transaction records”. PRC laws and regulations relating to anti-money laundering
have evolved significantly in recent years and may continue to develop. In the future, we may be required to supervise and report
transactions with our customers for anti-money laundering or other purposes, which may increase our compliance efforts and costs
and may expose us to potential criminal measures or administrative sanctions if we fail to establish and implement the required
procedures or otherwise fail to comply with the relevant laws and regulations.
Increases in labor costs in the
PRC may adversely affect our business and results of operations.
The economy in China has
experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue
to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension,
housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate
payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment
fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our
services, our financial condition and results of operations may be adversely affected.
Risks Related to this Offering
Prior to this offering, we had
a limited public market for our shares of common stock and you may not be able to resell our shares at or above the price you
paid, or at all.
Prior to this offering,
there was a limited public market for our common stock in the OTC Market. We cannot assure you that an active public market for
our common stock will develop or that the market price of our shares will not decline below the public offering price. The public
offering price of our shares may not be indicative of prices that will prevail in the trading market following the offering.
Future sales of substantial amounts
of the shares of common stock by existing shareholders could adversely affect the price of our common stock.
If our existing
shareholders sell substantial amounts of the shares following this offering, the market price of our common stock could fall.
Such sales by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in
the future at a time and place we deem appropriate. The [●] shares of common stock offered in this offering will be eligible
for immediate resale in the public market without restrictions. All remaining shares, which are currently held by our existing
shareholders, may be sold in the public market in the future subject to the lock-up agreements and the restrictions contained
in Rule 144 under the Securities Act. If any existing shareholders sell a substantial number of shares, the prevailing market
price for our shares could be adversely affected.
The market price of our shares
is likely to be highly volatile and subject to wide fluctuations in response to factors such as:
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regarding gains or losses of customers or partners by us or our competitors;
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news
regarding gains or losses of key personnel by us or our competitors;
|
|
·
|
announcements
of competitive developments, acquisitions or strategic alliances in our industry by us
or our competitors;
|
|
·
|
changes
in earnings estimates or buy/sell recommendations by financial analysts;
|
|
·
|
the
imposition of fines or penalties related to our activities in the PRC and failure to
comply with applicable rules and regulations;
|
|
·
|
general
market conditions or other developments affecting us or our industry; and
|
|
·
|
the
operating and stock price performance of other companies, other industries and other
events or factors beyond our control.
|
In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and adversely affect the market price of the shares
We do not anticipate paying cash
dividends on our common stock in the foreseeable future.
We do not anticipate paying
cash dividends in the foreseeable future. Presently, we intend to retain all of our earnings, if any, to finance development and
expansion of our business. PRC capital and currency regulations may also limit our ability to pay dividends. Consequently, your
only opportunity to achieve a positive return on your investment in us will be if the market price of our common stock appreciates.
We will have discretion in applying
a portion of the net proceeds of this offering and may not use these proceeds in ways that will enhance the market value of our
common stock.
Our management will have
considerable discretion in the application of the proceeds received by us from this offering. Such proceeds may be used to expand
our research and development team, acquire new technological hardware, and expand our sales and marketing team all over China
and for working capital and general corporate purposes. You will not have the opportunity, as part of your investment decision,
to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application
of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability
or increase our common stock price. The net proceeds from this offering may also be placed in investments that do not produce
income or that lose value.
Future issuances of capital stock
may depress the trading price of our common stock.
Any issuance of shares
of our common stock after this offering could dilute the interests of our existing stockholders and could substantially decrease
the trading price of our common stock. We may issue additional shares of common stock in the future for a number of reasons, including
financing our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions).
Sales of a substantial
number of shares of our common stock in the public market could depress the market price of our common stock and impair our ability
to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common
stock or other equity-related securities would have on the market price of our common stock.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created
uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets
and public reporting. Our management team will need to invest significant management time and financial resources to comply with
both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and
a diversion of management time and attention from revenue generating activities to compliance activities.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this prospectus
that are not descriptions of historical facts are forward-looking statements that are based on management’s current expectations
and are subject to risks and uncertainties that could negatively affect our business, operating results, financial condition and
stock price. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,”
“can,” “continue,” “could,” “estimates,” “expects,” “intends,”
“may,” “plans,” “potential,” “predicts,” “should,” or “will”
or the negative of these terms or other comparable terminology.
We may not actually achieve
the plans, intentions or expectations disclosed in our forward-looking statements. We operate in a very competitive and rapidly
changing environment. It is not possible for our management to predict all risks, 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 may make. Accordingly, you should not place undue reliance on our forward-looking
statements. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk
Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements
that we make.
You should read this prospectus
and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this
prospectus is a part completely and with the understanding that our actual future results may be materially different from what
we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein
to reflect any change in our expectations or any changes in events, conditions or circumstances on which any such statement is
based, except as required by law.
USE OF PROCEEDS
We estimate that the net
proceeds from the sale of the [●] shares of common stock in the offering will be approximately $[●] million after
deducting the underwriting discounts and commissions and estimated offering expenses.
We intend to use the net
proceeds from the offering for the following purposes:
|
(1)
|
general corporate
purposes, which may include investment in product development, sales and marketing activities,
technology upgrading, capital expenditures, improvement of corporate facilities, attracting
qualified employees and other general and administrative matters.
|
|
(2)
|
We may also
use a portion of these proceeds for the acquisition of, or investment in, technologies,
solutions or businesses that complement our business.
|
The amounts and timing
of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive
and technological developments, and the rate of growth, if any, of our business.
Although we may use a
portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement
our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments.
We cannot assure you that we will make any acquisitions or investments in the future.
CAPITALIZATION
The following table
sets forth our capitalization as of December 31, 2017:
|
·
|
On
an actual basis; and
|
|
·
|
On a pro forma basis to give effect to the
sale of [●]shares of common stock by us in this offering at the assumed public offering price of $ [●] per share,
and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
|
You should read this table
in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the financial statements and related notes included elsewhere in this prospectus.
|
|
December 31, 2017
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(audited)
|
|
|
(unaudited)
|
|
Cash and cash equivalents
|
|
$
|
12,684,370
|
|
|
|
|
|
Accounts receivable
|
|
|
690,600
|
|
|
|
|
|
Short-term loans receivable
|
|
|
40,492,363
|
|
|
|
|
|
Prepayments
|
|
|
581,484
|
|
|
|
|
|
Other receivables
|
|
|
749,071
|
|
|
|
|
|
Total current assets
|
|
|
55,273,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
17,467,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding.
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 598,000,000 shares
authorized; 72,364,178 shares issued and outstanding;
|
|
|
72,364
|
|
|
|
|
|
Additional paid-in capital
|
|
|
9,527,326
|
|
|
|
|
|
Retained earnings
|
|
|
17,449,837
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
1,349,284
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
28,398,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and stockholders’ equity
|
|
|
59,055,384
|
|
|
|
|
|
The pro forma number
of shares to be outstanding immediately after this offering as shown above is based on shares outstanding as of December 31, 2017.
Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment
option.
DILUTION
If you invest in
our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price
per share you will pay in this offering and the pro forma as adjusted net tangible book value per share of our common stock after
this offering. Our pro forma net tangible book value as of December 31, 2017 was $[●], or $[●] per share of common
stock. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities,
divided by the number of shares of our common stock outstanding on December 31, 2017.
After giving effect to
our issuance and sale of [●] shares of common stock in this offering at an assumed public offering price of $[●] per
share, after deducting the underwriter discounts and commissions and estimated offering expenses payable by us, the pro forma as
adjusted net tangible book value as of December 31, 2017 would have been $ [●], or $ [●] per share. This represents
an immediate increase in net tangible book value to existing shareholders of $[●] per share. The public offering price per
share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares of common
stock in this offering will suffer an immediate dilution of their investment of $[●] per share. The following table illustrates
this per share dilution to the new investors purchasing shares of common stock in this offering:
Assumed public offering price per share
|
|
$
|
XX.XX
|
|
Net tangible book value per share as of December 31,2017
|
|
|
X.XX
|
|
Increase in net tangible book value per share
attributable to the offering
|
|
|
X.XX
|
|
Pro forma net tangible book
value per share as of December 31, 2107 after giving effect to the offering
|
|
|
X.XX
|
|
Dilution per share to new
investors
|
|
$
|
XX.XX
|
|
A $1.00 increase (decrease)
in the assumed public offering price of $[●] per share would increase (decrease) the pro forma net tangible book value by
$[●] million, the pro forma net tangible book value per share after this offering by $[●] per share and the dilution
in pro forma net tangible book value per share to investors in this offering by $[●] per share, assuming that the number
of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriter
discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise
their over-allotment option in full, the pro forma as adjusted net tangible book value will increase to $[●]per share, representing
an immediate increase to existing shareholders of $[●] per share and an immediate dilution of $[●] per share to new
investors. If any shares are issued in connection with outstanding options, you will experience further dilution.
If the underwriters exercise
their over-allotment option in full, the number of shares held by new investors will increase to [●] , or [●]% of
the total number of shares of common stock outstanding after this offering.
MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our
common stock is currently quoted on the OTCQB under the symbol “SFHD.”
Trading in stocks quoted
on the OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little
to do with a company’s operations or business prospects. We cannot assure you that there will be a market for our common
stock in the future.
For the periods indicated,
the following table sets forth the high and low bid prices per share of common stock based on inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. These high and low bid prices per share of common
stock have been adjusted to give effect to the 1-for-5 reverse stock split of our common stock effected on June 20, 2017.
Fiscal Year 2018
|
|
High Bid
|
|
|
Low Bid
|
|
First Quarter (through March 23, 2018)
|
|
$
|
-
|
|
|
$
|
-
|
|
Fiscal
Year 2017
|
|
High Bid
|
|
|
Low Bid
|
|
First Quarter
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Second Quarter
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Third Quarter
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Fourth Quarter
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
High Bid
|
|
|
Low Bid
|
|
First Quarter
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Second Quarter
|
|
$
|
10.50
|
|
|
$
|
0.00
|
|
Third Quarter
|
|
$
|
10.00
|
|
|
$
|
1.00
|
|
Fourth Quarter
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Holders of Our Common Stock
As of December
31, 2017, we had 226 shareholders of our common stock, including the shares held in street name by brokerage firms. The holders
of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders
of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are
no redemption or sinking fund provisions applicable to the common stock.
Dividend Policy
We have not paid dividends
on our common stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our
China operation entity for our funds and Chinese regulations may limit the amount of funds distributed to us from our China operation
entity, which will affect our ability to declare any dividends.
EXCHANGE RATE INFORMATION
Our business is conducted
in China and all of our revenues are denominated in RMB. Capital accounts of our consolidated financial statements are translated
into U.S. dollars from RMB at their historical exchange rates when the capital transactions occurred. RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. The following
table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
Assets and liabilities
are translated at the exchange rates as of the balance sheet date.
Balance sheet items, except for equity accounts
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
RMB:USD
|
|
|
6.5074
|
|
|
|
6.9448
|
|
Items in the statements
of operations and comprehensive income, and statements of cash flows are translated at the average exchange rate of the period.
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
RMB:USD
|
|
|
6.7578
|
|
|
|
6.6441
|
|
SELECTED HISTORICAL
FINANCIAL AND OPERATING DATA
The following table presents
our selected historical financial data for the periods presented and should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the financial statement and notes thereto
included elsewhere in this prospectus.
The following selected
consolidated financial and operating data for the fiscal years ended December 31, 2017 and 2016, and the consolidated balance
sheet data as of December 31, 2017 and 2016, have been derived from our consolidated financial statements included elsewhere in
this prospectus.
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,684,370
|
|
|
$
|
8,561,695
|
|
Prepayments, Deposits and Other Receivable
|
|
|
1,330,555
|
|
|
|
2,834,718
|
|
Total Assets
|
|
|
59,055,384
|
|
|
|
20,248,910
|
|
Total Current Liabilities
|
|
|
17,467,409
|
|
|
|
9,138,607
|
|
Total Liabilities
|
|
|
30,656,573
|
|
|
|
9,138,607
|
|
Total Stockholders’ equity
|
|
|
28,398,811
|
|
|
|
11,110,303
|
|
|
|
Years Ended
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
46,497,812
|
|
|
$
|
24,679,249
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
28,237,779
|
|
|
|
19,355,753
|
|
Business and related taxes
|
|
|
179,347
|
|
|
|
175,854
|
|
Depreciation
|
|
|
128,492
|
|
|
|
678,991
|
|
Total operating expenses
|
|
|
28,545,618
|
|
|
|
20,210,598
|
|
Income from Operations
|
|
|
17,952,194
|
|
|
|
4,468,651
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
17,837,775
|
|
|
|
4,497,302
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
15,274,091
|
|
|
$
|
3,439,205
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
Basic*
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
Diluted*
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
|
*
|
Retroactively
restated for the effect of 1-for-5 reverse stock split on June 20, 2017.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
of our financial condition and results of operations should be read in conjunction with our audited financial statements and the
related notes thereto and other financial information appearing elsewhere in this Form S-1. Some of the information contained
in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and
strategy for our business and related financing, includes forward looking statements that involve risks, uncertainties and assumptions.
As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our
actual results could differ materially from the results described in or implied by the forward-looking statements contained in
this prospectus.
Restatement of Prior Financial Information
In our Annual
Report on Form 10-K filed with the United States Securities and Exchange Commission on March 19, 2018, we restated
our Consolidated Balance Sheet as of December 31, 2016 and the related Statements of Operations and Comprehensive
(Loss) Income, Consolidated Statements of Changes in Shareholders’ Equity and Consolidated Statements of Cash Flows for
the fiscal year ended December 31, 2016.
The effects of the accounting adjustments made as a part of the restatement of our consolidated financial
statements are more fully discussed in Note 2 — “Restatement of Previously Issued Consolidated Financial Statements”
to our consolidated financial statements appearing elsewhere in this Form S-1. Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 has not been amended. These adjustments are discussed in this Management’s Discussion
and Analysis as the “Restatement.”
Overview
We are a holding
company that, through our wholly-owned subsidiaries, Benefactum Alliance, Benefactum Sino and Benefactum Shenzhen and our contractually
controlled and managed company, Benefactum Beijing, operates an electronic online financial platform, www.hyjf.com, which is designed
to match investors with SMEs and individual borrowers in China. We believe our services provide an effective financial credit
facility solution to under-served SMEs and individual borrowers. In addition, our online financial platform provides investors
with attractive returns ranging from 4.5%-12% based on the amount and term of different investment. Investors have the option
to individually select specific loans to invest in.
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 wholly foreign-owned enterprises, majority-owned entities and variable interest entities. Accordingly,
we operate our online financial platform in China through Benefactum Beijing, which was founded in September 2013.
We generate revenue
from our services that facilitate matching investors with individual and SME borrowers through our online platform. The Company’s
revenues are composed of fees collected from services provided with facilitating loan originations and services provided with
assisting in the repayment process through our online platform.
Loan Origination Service Fee
For our services
that match investors and borrowers through our online platform, we charge a service fee from borrowers for each effected loan
facilitated by us, which is accounted for as revenue, and immediately deducted from the proceeds to the borrowers when a loan
is initiated. The service fee is 1.5%-3.0% of the total amount of each loan, depending on the duration of the loan.
Loan Repayment Management Fee
For our services
that assist in repayments of outstanding loans through our online platform, we charge a separate fee from borrowers for each loan
repayment facilitated by us, which is accounted for as revenue, and immediately remitted to us when a loan matures and the borrower
repays the loan. The loan repayment management fee is based on an agreed upon percentage around 0.3% of the borrowing amount times
the duration of the loan and is collected from the borrower upon repayment of the loan.
Key Operating Metrics
From the launch
of our marketplace in December 2013 through December 31, 2017, we have facilitated a total of $2.87 billion in loans. As of December
31, 2017, we had 367,893 registered investors and 24 cooperative partners who frequently serve as guarantors of loans on our platform.
Total number of
loans facilitated through our online platform increased from 8,739 in 2016 to 23,263 in 2017. The value of loans facilitated increased
from $818.5 million in 2016 to $1.31 billion in 2017. The number of borrowers increased from 1,067 in 2016 to 8,047 in 2017, with
repeat borrower rates decreasing from 14.7% in 2016 to 7.8% in 2017.
The number of investors
increased by 73.1% from 39,999 in 2016 to 69,232 in 2017. The number of investors significantly increased in 2017 resulted from
our continuous efforts in marketing with our referral service providers.
Repeat investor
rates was consistently at 55.7% in 2016 and 54.7% in 2017. Loans outstanding increased from $246.1 million as of December 31,
2016 to $436.3 million as of December 31, 2017. In anticipation of the implementation of the Draft Measures, we altered our strategy
in 2016 and shifted our business focus toward attracting more small-enterprise borrowers, which required us to gradually decrease
the loan amounts facilitated for each loan in order to meet the requirements of the Draft Measures. This led to the decrease in
the average loan amount from $93,658 in 2016 to $56,258 in 2017. The loan origination service fee we charge is 1.5% to 3% of the
loan amount, depending on duration of the loan. The lower average loan amount will lead to lower loan origination service fee
per transaction for loans with the same duration. However, the aggregate amount of service fees earned in 2016 and 2017 were unaffected
since the platform was able to increase the total volume of loans facilitated.
The main operating
metrics we consider are set forth in the table below for the periods indicated:
|
|
Years Ended December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Number of borrowers
|
|
|
8,047
|
|
|
|
1,067
|
|
Repeat borrower rate
|
|
|
7.8
|
%
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
Number of investors
|
|
|
69,232
|
|
|
|
39,999
|
|
Repeat investor rate
|
|
|
54.7
|
%
|
|
|
55.7
|
%
|
|
|
|
|
|
|
|
|
|
Loan volume
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
23,263
|
|
|
|
8,739
|
|
Value of loans (in US$ millions)
|
|
$
|
1,309
|
|
|
$
|
819
|
|
Average loan amount
|
|
$
|
56,258
|
|
|
$
|
93,658
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding at end of period (in US$ millions)
|
|
$
|
436
|
|
|
$
|
246
|
|
The following tables
set forth loan volume facilitated through our online platform by product and guarantor type, including both number and value of
loans.
|
|
|
|
Years
Ended
December 31,
|
|
|
|
|
|
|
Years
Ended
December 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Loan volume by product:
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume by guarantor:
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
|
|
|
|
|
|
|
|
Xin Shou Zhuan Qu (1)
|
|
|
|
|
500
|
|
|
|
163
|
|
|
Pawn shops
|
|
|
|
|
9,765
|
|
|
|
6,152
|
|
Cai Fu Hui (2)
|
|
|
|
|
13,578
|
|
|
|
5,288
|
|
|
Financing guarantee companies
|
|
|
|
|
885
|
|
|
|
351
|
|
Zun Xiang (3)
|
|
|
|
|
485
|
|
|
|
139
|
|
|
Asset or investment management companies
|
|
|
|
|
2,545
|
|
|
|
1,143
|
|
Hui Ji Hua (4)
|
|
|
|
|
4,409
|
|
|
|
7
|
|
|
Micro credit companies
|
|
|
|
|
1,090
|
|
|
|
837
|
|
You Xuan Zhai Quan (5)
|
|
|
|
|
241
|
|
|
|
—
|
|
|
Others
|
|
|
|
|
8,978
|
|
|
|
256
|
|
Zhai Quan Zhuan Rang (6)
|
|
|
|
|
4,050
|
|
|
|
3,141
|
|
|
Total
|
|
|
|
|
23,263
|
|
|
|
8,739
|
|
Hui Xiao Fei (7)
|
|
|
|
|
|
|
|
|
1
|
|
|
Value of loans (in US$ millions)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
23,263
|
|
|
|
8,739
|
|
|
Pawn shops
|
|
|
|
$
|
876.3
|
|
|
$
|
572.3
|
|
Value of Loans (in US$ millions)
|
|
|
|
|
|
|
|
|
|
|
|
Financing guarantee companies
|
|
|
|
|
67.9
|
|
|
|
46.2
|
|
Xin Shou Zhuan Qu (1)
|
|
|
|
$
|
15.4
|
|
|
$
|
63.4
|
|
|
Asset or investment management companies
|
|
|
|
|
67.2
|
|
|
|
71.8
|
|
Cai Fu Hui (2)
|
|
|
|
|
1,211.5
|
|
|
|
734.0
|
|
|
Micro credit companies
|
|
|
|
|
117.2
|
|
|
|
111.6
|
|
Zun Xiang (3)
|
|
|
|
|
22.3
|
|
|
|
10.6
|
|
|
Others
|
|
|
|
|
180.1
|
|
|
|
16.7
|
|
Hui Ji Hua (4)
|
|
|
|
|
0.9
|
|
|
|
0.2
|
|
|
Total
|
|
|
|
$
|
1,308.7
|
|
|
$
|
818.5
|
|
You Xuan Zhai Quan (5)
|
|
|
|
|
37.6
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhai Quan Zhuan Rang (6)
|
|
|
|
|
21.1
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hui Xiao Fei (7)
|
|
|
|
|
—
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1,308.7
|
|
|
$
|
818.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Xin Shou Zhuan Qu: loan projects exclusive for new investors for them to experience the online registration, fund injection and
investing processes.
(2)
Cai Fu Hui: the blanket name for all loan products which are approved and posted on our platform after their borrowers’
profiles are collected and assessed for credit risk but cannot be classified into any of the other six product types.
(3) Zun Xiang: exclusive service for qualified VIP investors
which offers premiere services with higher investment returns.
(4) Hui Ji Hua: convenient and efficient automatic investment
service that, with the investors’ prior authorizations, offers automatic and diversified investment portfolio.
(5) You Xuan Zhai Quan: asset trading products promoted
in conjunction with local financial asset exchanges.
(6) Zhai Quan Zhuan Rang: specially designed service that
allows investors to transfer their creditors’ rights on our platform prior to the expiration date of the loans.
(7) Hui Xiao Fei: loan products designed jointly with cooperative
partners with focus on consumer financing.
Important Factors Affecting Our Results of Operations
Major factors affecting
our results of operations include the following:
|
●
|
Economic Conditions in China
|
The demand for
online financing marketplace services from borrowers and investors is dependent upon overall economic conditions in China. General
economic factors, including the interest rate environment and unemployment rates, may affect borrowers’ willingness to seek
loans and investors’ ability and desire to invest in loans. For example, significant increases in interest rates could cause
potential borrowers to defer obtaining loans as they wait for interest rates to become stable or decrease. Additionally, a slowdown
in the economy, such as a rise in the unemployment rate and a decrease in real income, may affect individuals’ level of
disposable income. This may negatively affect borrowers’ repayment capability, which in turn may decrease their willingness
to seek loans or potentially cause an increase in default rates. If actual or expected default rates increase generally in China
or the online financing market, investors may delay or reduce their investments in loan products in general, including on our
marketplace.
|
●
|
Ability to Acquire Borrowers and Investors Effectively
|
Our ability to
increase the loan volume facilitated through our marketplace largely depends on our ability to attract potential borrowers and
investors through sales and marketing efforts. Our sales and marketing efforts include those related to borrower and investor
acquisition and retention, and general marketing. We intend to continue to dedicate significant resources to our sales and marketing
efforts and constantly seek to improve the effectiveness of these efforts, in particular with regard to borrower and investor
acquisition.
We primarily attract
borrowers through our own platform and referrals from third-party guarantors, although the general public may also access our
platform and submit a borrower profile online. We also acquire borrowers through referrals from financial institutions we partner
with. As of December 31, 2017, we have entered into cooperation agreements with five pawn shops, four guaranty companies, a micro
loan company, an asset management company, three information technology companies, three financial consulting companies, four
technology companies, and three financial services companies. Other than online investors, we attract investors through cooperative
relationships with institutions. To obtain investors more efficiently, Benefactum Beijing has entered into co-operative agreements
with several third-party referral service providers, pursuant to which those service providers will refer potential investors
to Benefactum Beijing while Benefactum Beijing will pay those service providers service fees based on the value of loans those
referred investors actually lend through Benefactum Beijing.
Although we do
not provide incentives to borrowers to apply to the platform, as part of our strategy to attract investors, we offer investment
principal coupons and interest premium coupons to investors during promotions. Investment principal coupon has a face value usually
under RMB 300 each, which may be combined for use not to exceed RMB 1,000 by an investor at any given time and which can be used
at the time of investment to be added to the investment principal, thereby reducing the cash contribution made by the investor.
Interest premium coupon, with face value of 0.5%, 1%, 1.5% or 2% each, not to be used in combination, can be applied at the time
of investment to “boost” the interest rate the investor will receive. Our platform pays the added investment principals
and interests to investors for using investment principal coupons when investors receive their investment principal back and when
they receive interest payments, respectively; our platform also pays the added interests to investors for using interest premium
coupons.
|
●
|
Effectiveness of Risk Management
|
We manage credit
risk on behalf of the investors primarily in the following ways:
Our ability to effectively segment borrowers into appropriate
risk profiles affects our ability to offer attractive pricing to borrowers as well as our ability to offer investors attractive
returns, both of which directly relate to the level of user confidence in our marketplace.
|
i.
|
We evaluate the borrower’s repayment
ability via our pre-transaction credit assessment and fraud detection using our big data credit assessment system. Potential
borrowers who do not meet our credit assessment grade are denied;
|
|
ii.
|
We offer a risk reserve fund
which is 2-5% of the credit extended to the borrowers (as of December 2017, we no longer
require new contributions from most of the borrowers and guarantors to the risk reserve
fund. Existing reserve funds are being returned to borrowers and /or guarantors as loans
mature and are repaid. See description of Risk Reserve Fund below);
|
|
iii.
|
Except for third-party loan assignments,
each loan transaction facilitated on our platform is guaranteed by a third-party guarantor who is jointly and severally liable
for the loan, in certain instances the third-party guarantor may require the borrower to collateralize the guaranty, however
we do not require borrowers to provide collateral directly to investors as security for the loans;
|
|
iv.
|
In the case of the third-party loan assignment
where third-party creditors (“Credit Partners”) seek to sell their rights as creditors on third-party loans with
borrowers who are not borrowers on our platform (“Original Borrowers”), since these Creditor Partners are usually
our third-party cooperative partners with pre-established cooperative relationship with us, we do 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 loans if the Original Borrowers default and we require them to
deposit 2% to 5% of the loan amount into the risk reserve fund as usual.
|
|
v.
|
We prohibit borrowers from having more than
one loan outstanding at a time, and require the borrower to undergo a subsequent review prior to facilitating any future new
loans; and
|
|
vi.
|
Additionally, after the debt financing is
provided to the borrower, the guarantor will monitor the borrower’s performance and will provide the platform with the
feedback on the borrower’s credit condition, contract performance and debt repayment capabilities. In the event of any
material development resulting in a negative turn in a borrower’s financial standing and potential ability to repay
its loan, our management will determine the proper action to take to avert or minimize the risk of non-payment.
|
Our growth to date
has in part depended on, and our future success will depend on, successfully meeting borrower and investor demand with new and
innovative loan and investment products. We have made and intend to continue to make efforts to develop loan and investment products
for borrowers and investors. We regularly evaluate the popularity of our existing product offerings and develop new products and
services that cater to the ever-evolving needs of our borrowers and investors. Over time we will continue to expand our offerings
by introducing new products. From the borrower perspective, we will continue to develop tailored credit products to meet the specific
needs of our target borrowers. We plan to expand our ability to implement risk-based pricing by developing more pricing grades
to optimize loans based on a borrower’s credit criteria, enabling us to facilitate customized loans tailored to borrowers’
specific credit profiles.
|
●
|
Regulatory Environment in China
|
The regulatory
environment for the peer-to-peer lending service industry in China is developing and evolving, creating both challenges and opportunities
that could affect our financial performance. Due to the relatively short history of the peer-to-peer lending service industry
in China, the PRC government is in the process of building a regulatory framework governing our industry.
We will continue
to make efforts to ensure that we are compliant with the existing laws, regulations and governmental policies relating to our
industry and to comply with new laws and regulations or changes under existing laws and regulations that may arise in the future.
While new laws and regulations or changes to existing laws and regulations could make loans more difficult to be accepted by investors
or borrowers on terms favorable to us, or at all, these events could also provide new product and market opportunities. For more
details, please see “Regulations - Regulations on Value-Added Telecommunication Services” and “Regulations on
Peer-to-Peer Lending Service Provider”.
Recent Developments
In March 2017,
we engaged Jiangxi Bank to provide fund depository services for our marketplace, pursuant to which Jiangxi Bank will set up separate
accounts for borrowers and investors, and assume fund depository functions including settlement, accounting and safeguarding online
lending capital. Third-party payment agents operate as the payment channels and only transfer funds to and from fund depository
accounts. Relevant Chinese regulations require us to enter into a fund depository agreement with only one commercial bank to provide
fund depository services. For more details, see “Regulations on Peer-to-Peer Lending Service Provider.”
On September 1,
2017, Puhui Equity Investment Co., Ltd. (“Puhui”), a wholly owned subsidiary of Benefactum Beijing 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 $2,935,121 (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. 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. The Company believes this investment could offer new opportunities
for operational synergies in the financial information service industry.
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 effective on June 20, 2017 (the “Effective Date”). On August 7, 2017, the Reverse Stock Split was
reflected on the OTCQB. As a result of the Reverse Stock Split, every five issued and outstanding shares of the Company’s
Common Stock have been automatically combined into one issued and outstanding share. This reduced the total number of issued and
outstanding shares of Common Stock from 361,820,246 to approximately 72.4 million, and the Company’s authorized shares of
Common Stock also have been reduced from 2,990,000,000 to 598,000,000. No fractional shares were issued. All fractional shares
created by the Reverse Stock Split were rounded up to the nearest whole share.
On June 30, 2017,
we entered into a securities purchase agreement with various investors, pursuant to which we issued and sold senior convertible
promissory notes in the aggregate principal amount of $13,189,163.87 (RMB 90,357,316.73) (the “Notes”), convertible
into shares of the Company’s Common Stock following June 30, 2018 at a conversion price of $2.00 per share (the “Conversion
Price”) in a 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. 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 Note investors on the basis of one share of Common Stock per $1 loaned under the Note, for an aggregate
of 13,189,450 shares. Other than the shares pledged pursuant to the Stock Pledge Agreement, there is no recourse against the Company
upon a default of the Notes.
From June 30, 2017
to July 20, 2017, Benefactum Beijing provided RMB180,000,000 (approximately $26.56 million) in capital to Qingdao Weichuang Private
Capital Management Co., Ltd. (“Qingdao Weichuang”), as trustee, to lend funds directly to 18 SME borrowers as evidenced
by entrusted loan agreements. This is our first series of transactions in which we, through Qingdao Weichuang, are lending funds
directly to SME borrowers. The loans are short-term loans between three and six months with interest rates between 10% and 11%.
In connection with the entrusted loan contracts, Benefactum Beijing also entered into entrusted loan guarantee contracts with
guarantors, pursuant to which the guarantors have agreed to guarantee the obligations under the entrusted loan contracts. Benefactum
Beijing pays a processing fee equal to 0.15% of the aggregate loan amounts to Qingdao Weichuang for issuing the 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.
On September 27
and September 29, 2017, we filed Articles of Merger and a Certificate of Correction, respectively, with the Secretary of State
of Nevada to effect a change in our corporate name from “Sino Fortune Holding Corporation” to “Hui Ying Financial
Holdings Corporation”. The name change was the result of a merger of our wholly-owned subsidiary, “Hui Ying Financial
Holdings Corporation”, with and into us to effect the name change.
Results of Operations
The following table
sets forth a breakdown of revenue for the periods indicated, both in dollar amount and as a percentage of total revenues. The
information should be read together with our consolidated financial statements and related notes included elsewhere in this report.
For the Years Ended December 31, 2017 and 2016
The following table
sets forth a breakdown of revenue for the periods indicated, both in dollar amount and as a percentage of total revenues. The
information should be read together with our consolidated financial statements and related notes included elsewhere in this Report.
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
Loan origination service fee
|
|
$
|
26,699,769
|
|
|
|
57
|
%
|
|
$
|
17,488,391
|
|
|
|
71
|
%
|
Loan repayment management fee
|
|
|
18,214,656
|
|
|
|
40
|
%
|
|
|
7,190,858
|
|
|
|
29
|
%
|
Financing income from entrusted loans
|
|
|
1,583,387
|
|
|
|
3
|
%
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
46,497,812
|
|
|
|
100
|
%
|
|
$
|
24,679,249
|
|
|
|
100
|
%
|
Revenue
Our revenues for
the years ended December 31, 2017 and 2016 consist of loan origination service fees and repayment management fees we charge the
borrowers on the loans facilitated through our platform as well as financing income from entrusted loan lending transactions.
The online Peer-to-Peer lending platform industry has experienced rapid growth in China in recent years. Our revenue increased
88.4% from approximately $24.7 million for the year ended December 31, 2016 to approximately $46.5 million for the year ended
December 31, 2017, primarily due to the substantial increase in the volume of loans facilitated through our platform, which increased
from approximately RMB 5.7 billion in 2016 to approximately RMB 8.8 billion in 2017, a 55.6% increase. Loan origination service
fee and repayment management fee accounted for 57% and 40% of our revenue in 2017, respectively, as compared to 71% and 29% in
2016. The change is due to the shift in structure of our loan products towards longer duration loans. Since our loan repayment
management fee is based on a certain percentage of the borrowing times the duration of a loan, .the more loans with longer terms,
the more loan repayment management fees we generate. For all the loans facilitated through the Company’s platform, approximately
70% of loans had three to six months term in fiscal 2017, while only 58% of loans had three to six months term in fiscal 2016.
As a result, our loan repayment management fee more than doubled from last year. We expect this trend will continue as the industry
becomes more regulated and investors are getting more comfortable to invest in loans with longer terms. We will continue to adjust
our loan product offerings accordingly.
In addition, In
June 2017, the Company started to lend entrusted loans through a licensed loan provider to SME and individual borrowers in China.
The Company has engaged Qingdao Weichuang as partner at launch of the service. As of December 31, 2017, the Company granted entrusted
loans in the aggregate principal amount of $40.5 million to SME borrowers with related financing income of $1.6 million in fiscal
2017. This is our first series of transactions in which the Company, through a partner, are lending funds directly to borrowers.
The loans are short-term loans between three and six months with interest payable on a monthly basis.
Operating Expenses
Our total operating expenses increased
41.2% from approximately $20.2 million in 2016 to approximately $28.5 million in 2017, primarily attributable to an increase of
approximately $6.1 million in sales and marketing expenses. Our general administrative expense also increased by approximately
$2.8 million from last year.
The following table sets forth the main
components of our operating expenses for the years ended December 31, 2017 and 2016:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
Sales & Marketing Expenses
|
|
$
|
22,293,503
|
|
|
|
78.1
|
%
|
|
$
|
16,194,783
|
|
|
|
80.1
|
%
|
General & Administrative Expenses
|
|
|
5,944,276
|
|
|
|
20.8
|
%
|
|
|
3,160,970
|
|
|
|
15.6
|
%
|
Business & related taxes
|
|
|
179,347
|
|
|
|
0.6
|
%
|
|
|
175,854
|
|
|
|
0.9
|
%
|
Depreciation
|
|
|
128,492
|
|
|
|
0.5
|
%
|
|
|
678,991
|
|
|
|
3.4
|
%
|
Total Operating Expenses
|
|
$
|
28,545,618
|
|
|
|
100
|
%
|
|
$
|
20,210,598
|
|
|
|
100
|
%
|
Our sales and marketing
expenses increased by 37.7% from approximately $16.2 million in 2016 to approximately $22.3 million in 2017, which was primarily
due to the increase in variable promotion and marketing expenses driven by increased loan origination volume. Our general and
administrative expenses increased by 88.1% from approximately $3.2 million in 2016 to approximately $5.9 million in 2017. The
increase in general and administrative expense was primarily due to over $1.2 million professional, consulting and related expense
associated with the Company’s uplisting efforts onto NASDAQ. The rest of increase in general and administrative expense
was mainly from higher salary and employee benefits incurred in fiscal 2017.
Depreciation expense
decreased by 81.1% from approximately $0.7 million in fiscal 2016 to $0.1 million in fiscal 2017. The higher depreciation expense
in fiscal 2016 was primarily because of a $0.5 million amortization charge on our leasehold improvements during 2016.
Net Income
For the year ended
December 31, 2017, we recorded net income of approximately $15.3 million, a 32.8% net profit margin, compared to net income of
approximately $3.4 million in 2016 with 13.9% net profit margin. The significant increase in net profit margin was due to following
reasons:
a.
For all the loans facilitated through the Company’s platform, approximately 70% of loans had over 2 months term in
fiscal 2017 with typical term of three to six months, while only 58% of loans had over 2 months term in fiscal 2016. The Company
earned more loan repayment management fee for loans with three to six months term since the fee is calculated based on the length
of loan term. In addition, the Company charged higher loan facilitation fee for longer term loans. We have generated more revenue
from the loans with longer terms while we still incur the same amount of expenses.
b.
Investors invested in our platform are either from online channels or referred by offline referral companies. The Company
generally incurs higher marketing expenses to referral companies to attract investors. With the increasing brand awareness of
our platform, more investors are flowing through from online channel. The percentage of investor from online channel increased
from 8% in fiscal 2016 to 22% in fiscal 2017, as a result, the Company had less increase in marketing expense in relation to the
overall revenue growth.
c.
In June 2017, the Company started to lend entrusted loans through a licensed loan provider to SME and individual borrowers
in China. For fiscal 2017, the Company earned $1.6 million financing income from entrusted loans.
Changes in Financial Position
The following table
sets forth selected information from our consolidated balance sheet as of December 31, 2017 and 2016. This information should
be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
Selected Consolidated Balance Sheets Data
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,684,370
|
|
|
$
|
8,561,695
|
|
Short-term investments
|
|
|
—
|
|
|
|
8,274,306
|
|
Short-term loans receivable
|
|
|
40,492,363
|
|
|
|
—
|
|
Prepayments
|
|
|
581,484
|
|
|
|
2,078,926
|
|
Total current assets
|
|
|
55,273,037
|
|
|
|
19,951,757
|
|
Investment in equity
|
|
|
2,935,121
|
|
|
|
—
|
|
Total assets
|
|
|
59,055,384
|
|
|
|
20,248,910
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Liabilities from risk reserve fund guarantee, without recourse to the Company
|
|
|
12,105,557
|
|
|
|
7,297,123
|
|
Convertible notes payable
|
|
|
13,189,164
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Taxes payable
|
|
|
3,326,474
|
|
|
|
1,285,160
|
|
Total liabilities
|
|
|
30,656,573
|
|
|
|
9,138,607
|
|
Retained earnings
|
|
|
17,449,837
|
|
|
|
2,175,746
|
|
Total stockholders’ equity
|
|
$
|
28,398,811
|
|
|
$
|
11,110,303
|
|
Cash and Cash Equivalents
As of December
31, 2017, our cash and cash equivalents balance was approximately $12.7 million, representing an increase of $4.1 million from
approximately $8.56 million as of December 31, 2016. During fiscal 2017, we received cash proceeds in the amount of approximately
$13.4 million from the issuance of convertible notes, and net cash provided by operating activities amounted to approximately
$24.1 million, which was offset by negative net cash flows from investing activities of approximately $34.0 million. The rest
of the increase in the cash balance is attributable to the exchange rate change of approximately $0.7 million.
Short-term Investments
Short-term investments
consist of principal-guaranteed investments placed with investment management companies and wealth management products offered
by commercial banks, with maturities within six months. Balance of short-term investments as of December 31, 2016 was approximately
$8.3 million, consisting of the six-month wealth management products purchased with Shandong Wenye Investment Co., Ltd., which
expired in the second quarter of 2017 and fully collected by the Company.
Short-term Loans Receivable
In June 2017, the
Company launched entrusted loan service through a licensed loan provider to small and medium-sized enterprises (“SME”)
and individual borrowers in China. As of December 31, 2017, all the entrusted loans issued were short-term with maturities within
six months and the balance of loans receivable amounted to approximately $40.5 million. We did not have such service for the year
ended December 31, 2016.
Prepayments
As of December
31, 2017, the balance of prepayments decreased by approximately $1.5 million from December 31, 2016, which was mainly due to less
prepaid service fees to our referral service providers . The prepaid service fees are refundable if the service providers fail
to refer potential investors to us.
Investment in equity
On September 1,
2017, the Company acquired 4.4538% of equity interests in Shenzhen TouZhiJia Financial Information Service Co., Ltd. from three
individuals with a total cash consideration of $2.9 million. Shenzhen TouZhiJia Financial Service Co., Ltd’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. The Company
believes this investment could offer new opportunities for operational synergies in the financial information service industry.
Liabilities from risk reserve fund guarantee, without
recourse to the Company
To minimize default
risk, we voluntarily 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 and will be
refunded to the borrowers (or guarantors) if the loan is paid in full at maturity. Balance of the risk reserve fund increased
by 65.9% from approximately $7.3 million as of December 31, 2016 to approximately $12.1 million as of December 31, 2017, primarily
due to the significant growth of loans facilitated through our online platform. In December 2017, we started to stop requiring
new contributions from most of the borrowers and guarantors to the risk reserve fund, and stopped advertising the establishment
of risk reserve funds on the platform. Existing reserve funds are being returned to borrowers and /or guarantors as loans mature
and are repaid.
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. Among other terms, the Notes contain various events of default
provisions which if breached, may result in the acceleration of all obligations under the Notes.
Taxes payable
The taxes payable
balance increased from approximately $1.3 million in 2016 to approximately $3.3 million in 2017. The higher taxes payable balance
was primarily due to an increase of $2.2 million in income tax payable balance, which was in line with our growth in earnings
during the periods presented.
Retained Earnings
Retained earnings
increased from approximately $2.2 million as of December 31, 2016 to approximately $17.4 million as of December 31, 2017, as a
result of our increased profitability during the period.
Liquidity and Capital Resources
Sources of Liquidity
Cash balances at
December 31, 2017 and 2016 were $12.7 million and $8.6 million, respectively. The cash balance included cash held in private loan
risk reserve accounts of $12.1 million and $7.3 million as of December 31, 2017 and 2016, respectively.
In fiscal 2017,
our principal sources of liquidity were cash generated from operating activities and proceeds from the issuance and sale of equity
and convertible notes in private placements.
The following table sets forth a summary of our cash flows
for the periods indicated:
Summary of Consolidated Cash Flow Data:
|
|
For The Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
(Restated)
|
|
Net cash provided by operating activities
|
|
$
|
24,067,574
|
|
|
$
|
4,825,042
|
|
Net cash used in investing activities
|
|
|
(34,022,598
|
)
|
|
|
(9,163,998
|
)
|
Net cash provided by financing activities
|
|
|
13,370,818
|
|
|
|
7,878,670
|
|
Effect of exchange rate change
|
|
|
706,881
|
|
|
|
(690,760
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Net increase
|
|
|
4,122,675
|
|
|
|
2,848,954
|
|
Balance at beginning of period
|
|
|
8,561,695
|
|
|
|
5,712,741
|
|
Balance at end of period
|
|
$
|
12,684,370
|
|
|
$
|
8,561,695
|
|
For the years ended
December 31, 2017 and 2016, net cash provided by operating activities totaled $24.1 million and $4.8 million, respectively. The
increase in cash flows from operating activities for the year ended December 31, 2017 was primarily due to $11.9 million increase
in net income and less prepayments of referral service fees to third-party partners well as more risk reserve funds collected
within increasing loan volume facilitated through our platform.
For the years ended
December 31, 2017 and 2016, net cash used in investing activities totaled $34.0 million and $9.2 million, respectively. The increase
in cash flows used in investing activities for the year ended December 31, 2017 was primarily due to $39.0 million entrusted loan
investments in fiscal 2017. 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 December 31, 2017, the Company granted entrusted
loans in the aggregate principal amount of $40.5 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. During fiscal 2016, in order to increase return of
the Company’s excess cash in bank, the Company entered into two short-term entrusted financial management contracts with
Wenye on November 7 and December 16, 2016, respectively. The total short-term investment through Wenye was $8.6 million, which
was fully collected by the Company during fiscal 2017.
For the years ended
December 31, 2017 and 2016, net cash provided by the financing activities totaled $13.4 million and $7.9 million, respectively.
The increase in cash flows provided by the financing activities for the year ended December 31, 2017 was primarily due to proceeds
of $13.4 million from convertible debt issued on June 30, 2017. During fiscal 2016, the Company completed a private placement
of $7.9 million financing closed on October 18, 2016.
As of December
31, 2017, we had $55.2 million in total current assets and $17.5 million in total current liabilities, representing a current
ratio of 3.2. As of December 31, 2016, we had $19.9 million in total current assets and $9.1 million in total current liabilities,
with a current ratio of 2.2.
Operating Leases
The Company leases
office space for its headquarters in Shanghai and branches in Beijing and Shandong province, and future minimum lease payments
under non-cancellable operating leases with a term of one year or more consist of the following:
Year
|
|
|
Minimum
lease
payment
|
|
2018
|
|
|
$
|
816,698
|
|
2019
|
|
|
$
|
81,776
|
|
Thereafter
|
|
|
|
—
|
|
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support and credit
risk support or other benefits.
Critical Accounting Policies
Basis of presentation and principles of consolidation
The consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States. The consolidated
financial statements include the accounts of Hui Ying Financial, Benefactum Alliance, including its wholly owned subsidiaries
Benefactum Sino and WFOE, and its variable interest entity Benefactum Beijing, and have been reported in United States dollars.
All inter-company balances and transactions have been eliminated in consolidation.
The series of contractual
agreements between WFOE and Benefactum Beijing (see Footnote 1 to financial statements) 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 in it when and to the extent permitted by PRC law. As a
result of these contractual arrangements, we have become the primary beneficiary of Benefactum Beijing and determined Benefactum
Beijing is our variable interest entity subject to consolidation under U.S. GAAP. Accordingly, the financial statements of Benefactum
Beijing are included in the consolidated financial statements of the Company.
Use of Estimates
Preparation of
the consolidated 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 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.
Short-term Investments
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, net
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 PRC 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. 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.
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. As of December 31, 2017, the Company did not provide any provision for loan losses.
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
individually 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 loan on June 30, 2017 through Qingdao Weichuang private Capital Management Co., Ltd (“Qingdao
Weichuang”) as an agent. All loans receivable consists of loans to small and medium sized enterprise (“SME”)
with the term period ranging from 3 months to 6 months. For the year ended December 31, 2017, the Company provided Nil provision
for loan losses, respectively.
Risk Reserve Fund
In order to better
protect the investors’ interests on our online platform, the Company has voluntarily 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 to loans facilitated through our online platform, including third-party loan assignments 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. In the role
of transaction intermediary, the Company does not assume credit risk for loans including third-party loan assignments 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 regularly if necessary,
usually every quarter to six months.
As of December
31, 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 assignments by our Creditor Partners. 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.
In December 2017, we started to stop requiring new contributions from most of the borrowers and guarantors to the risk reserve
fund, and stopped advertising the establishment of risk reserve funds on the platform. Existing reserve funds are being returned
to borrowers and /or guarantors as loans mature and are repaid.
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 duration of loan around 3 to
4 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
the 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 original loan term in accordance with the 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 marketplace’s borrowers and investors
The Company generates loan origination service fees and
loan repayment management fees by providing the following services:
|
●
|
Connecting investors to qualified borrowers and facilitating
loan arrangements 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 provides 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
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
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 investors within a limited period.
During the relevant incentive program period, the Company sets certain thresholds for the investor to qualify in order to enjoy
the cash incentive. When qualified investment is made, the cash incentive is provided to the investor. The cash incentives provided
are accounted for as a 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 shortfalls are 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 shortfalls. For the years ended December 31, 2017 and 2016,
we recorded cash incentives of $2,145,576 and $276,226, respectively, all of which were re-characterized and recognized as sales
and marketing expenses.
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.
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 filing 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 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. 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 May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with
Customers (Topic 606)
(ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605,
Revenue
Recognition
, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification.
The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an
amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued
ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods
within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently,
the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
,
which
is
intended to improve the operability and understandability of the implementation guidance on principal versus agent
considerations; ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing
,
which is intended to clarify two aspects of Topic 606: identifying performance obligations and the
licensing implementation guidance; ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
,
which contains certain provisions and practical expedients in response to identified
implementation issues; and ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers,
which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09
allows for either full retrospective or modified retrospective adoption. The Company adopted ASU 2014-09 and the related ASUs
on January 1, 2018 using the modified retrospective method, which will not result in a cumulative catch-up adjustment to the opening
balance sheet of retained earnings at the effective date.
Under ASC 606,
an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (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. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract.
The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers.
The Company has
performed an assessment of our revenue contracts and concluded that there will be no change to (1) the timing and pattern of revenue
recognition for its current revenue streams in scope of Topic 606, which includes loan facilitation fees, loan repayment management
fees, and financing income from entrusted loan lending transactions, (2) the presentation of revenue as gross versus net, or (3)
the amount of capitalized contract costs upon adoption of Topic 606. Because there will be no change to the timing and pattern
of revenue recognition, we believe there will be no material changes to the Company’s consolidated financial statements.
In February 2016,
the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize
lease assets and lease liabilities on the balance sheet and to disclose key information about the entity’s leasing arrangements.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A
modified retrospective approach is required. The Company anticipates the adoption of ASU 2016-02 will have a material impact on
the Company’s consolidated financial position; however, the Company does not believe adoption will have a material impact
on the Company’s results of operations. The Company believes the most significant impact relates to our accounting for operating
leases for office space and equipment.
In June 2016,
the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1,
2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes
an allowance based on the estimate of expected credit loss. The Company is evaluating the impact this ASU will have on its consolidated
financial statements.
In January 2017,
the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business “, which
provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group
of similar assets, the assets acquired (or disposed of) are not considered a business. Management does not believe the adoption
of this ASU would have a material effect on the Company’s consolidated financial statements.
In January 2017,
the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The
amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments
provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require
that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing
elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods
within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. The Company does not expect that the adoption of
this guidance will have a material impact on its consolidated financial statements.
In February 2017,
the FASB issued ASU No. 2017-05 (“ASU 2017-05”) to provide guidance for recognizing gains and losses from the transfer
of nonfinancial assets and in-substance nonfinancial assets in contracts with non-customers, unless other specific guidance applies.
The standard requires a company to derecognize nonfinancial assets once it transfers control of a distinct nonfinancial asset
or distinct in substance nonfinancial asset. Additionally, when a company transfers its controlling interest in a nonfinancial
asset, but retains a noncontrolling ownership interest, the company is required to measure any noncontrolling interest it receives
or retains at fair value. The guidance requires companies to recognize a full gain or loss on the transaction. As a result of
the new guidance, the guidance specific to real estate sales in ASC 360-20 will be eliminated. ASU 2017-05 is effective for annual
periods beginning after December 15, 2017, including interim periods within that reporting period. The effective date of this
guidance coincides with revenue recognition guidance. The Company does not expect that the adoption of this guidance will have
a material impact on its consolidated financial statements.
In May 2017, the
FASB issued ASU No. 2017-09 (“ASU 2017-09”) to provide guidance to clarify when to account for a change to the terms
or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only
if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of
the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective. The Company does
not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
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. 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. The Company does not expect
that the adoption of this guidance will have a material impact on its consolidated financial statements.
BUSINESS
Overview
We are a holding
company that, through our wholly-owned subsidiaries, Benefactum Alliance Holdings Company Limited, a British Virgin Islands company
(“Benefactum Alliance”), Benefactum Sino Limited, a Hong Kong company (“Benefactum Sino”) and Benefactum
Alliance (Shenzhen) Investment Consulting Company Limited, a People’s Republic of China company (“Benefactum Shenzhen”
or “WFOE”) and our contractually controlled and managed company, Benefactum Alliance Business Consultant (Beijing)
Co., Ltd., a People’s Republic of China company (“Benefactum Beijing”), operate an electronic online financial
platform, www.hyjf.com, which is designed to match investors with small and medium-sized enterprises (“SMEs”) and
individual borrowers in China. We believe our services provide an effective solution for under-served SME and individual borrowers
who need access to financing. Since the launch of our marketplace in December 2013 through December 31, 2017 we have facilitated
over $2.87 billion in loans. As of December 31, 2017, we had 367,893 registered investors and 24 institutional partners.
We generate revenue
from our services that facilitate matching lenders, who we refer to as investors, with individual and SME borrowers. We typically
charge borrowers a loan origination service fee between 1.5% and 3% of the loan amount, depending on the duration of the loan,
for each effected loan facilitated by us. Additionally, we charge a separate fee from borrowers for each loan repayment facilitated
by us, which is based on an agreed upon percentage around 0.3% on the borrowing times the duration of the loan.
In addition, in
June 2017 we engaged a qualified non-banking financial institution to provide entrusted loans to SMEs. Through this process we,
as the trustor, provide funds to a trustee, who enters into a three-party loan agreement with us and the borrower. The loans are
typically short-term and are guaranteed by a third-party financing guarantor. This is one step forward towards our long-term strategy
of building a financial ecosystem aimed at providing full service to our SME customers. We intend to expand our business in both
online and offline sectors to meet the demands of various customers.
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 wholly foreign-owned enterprises, majority-owned entities and variable interest entities. Accordingly, we plan
to continue operating our online financial platform in China through Benefactum Beijing, which is wholly-owned by two Chinese
shareholders, but is contractually controlled and managed through our wholly-owned WFOE.
The contractual arrangements
between WFOE and Benefactum Beijing collectively enable us to exercise effective control over and realize substantially all of
the economic risks and benefits arising from Benefactum Beijing. See “Corporate History and Structure — Contractual
Arrangements with Benefactum Beijing.” The contractual arrangements may not be as effective in providing operational control
as direct ownership. See “Risk Factors — Risks Related to Our Corporate Structure.” As a result, we include
the financial results of Benefactum Beijing in our consolidated financial statements in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP, as if it were our wholly-owned subsidiary.
We conduct our business
primarily in Beijing, Shanghai and Shandong Province, People’s Republic of China. Our principal executive offices are located
at Rooms 2401, 2402, 2403, 2404 and 2412 on 2299 Yan’an West Road, Shanghai, China.
Our Strategy
Our mission is
to provide SMEs and individual borrowers with easy and effective access to affordable financing and provide investors with a safe
and acceptable investment return. To achieve this goal, we have implemented the following strategies, each of which we intend
to continue to expand:
|
·
|
Expand
the base of borrowers on our platform by entering into cooperation agreements with guarantor
institutions, pawn shops, micro credit companies and asset management companies
|
We will continue to expand
our base of SMEs and individual borrowers by entering into cooperation agreements with various partners, including without limitation,
guarantor institutions, pawn shops, micro-credit companies and asset management companies, who can provide us with recommendations
for new borrowers. Currently, our cooperative partners are located in Shandong, Inner Mongolia and other areas in China. Since
the inception of our online platform, approximately 88.5% of the loans facilitated through our platform are for SME borrowers.
We will continue expanding the number, type and areas of cooperative partners, and seek cooperation with internet companies, e-commerce
companies, telecommunication companies and third-party payment platforms which are located throughout China.
|
·
|
Develop
new consumer financing products and penetrate niche markets
|
We are promoting
new personal consumer financing products to individual borrowers, such as automobile financing and consumer financing. In addition,
we will continue to design and develop diversified financing products to satisfy market demand.
Our platform
also allows investors to diversify their wealth management strategies by providing easy access to various lending opportunities
that can be designed with flexible terms.
|
·
|
Expand
our base of investors to include mutual fund and other institutional investors
|
Currently, all of
our investors are individuals. We are introducing mutual fund or other institutional investors to increase our overall number
and type of investors. In addition, we have implemented plans to attract more individual and institutional investors
by cooperating with institutions so that the cost to the borrowers would be reduced if there are more funds available for
loans.
|
·
|
Further
enhance our risk management capabilities
|
As loan volume in our
marketplace grows and consumer financing products expand, we have implemented protocols to enhance our risk
management capabilities. As for individual borrowers, we have improved the risk management model for individual
credit control so that risk management testing will be more effective and reasonable. For SME borrowers, besides the due
diligence process that our cooperative partners undertake, we have enhanced the onsite due diligence process
and appoint a risk management team.
In addition, we have enhanced
our cooperation with other third-party credit investigators to obtain more accurate information about the credit history of the
borrowers, so we can make reasonable and accurate assessments of borrower applications to reduce and avoid bad debts.
|
·
|
Continue
to invest in our technology platform
|
We
have made significant investments in our proprietary technologies in the areas of data collection and processing algorithms
to increase the precision, speed and scale at which we match the demand and supply of loans. Enhanced data analytics improves
our conversion of online leads into successful borrowers and investors. With the further application of big data, we can
acquire members of our target borrower and investor groups in a more focused and cost-efficient way. Furthermore, we will
continue to leverage technology to further automate our processes and improve the safety and efficiency of matching the loans
with investors. At the same time, we will also benefit from the operating leverage associated with our scalable platform as our
loan volume increases. We believe these investments will facilitate the long-term growth of our marketplace.
|
·
|
Increase
our merger and acquisition activities to enhance our competitive advantage in the financing
technology ecosystem and to improve the efficiency of our products and services
|
We will expand strategic
relationships with internet financing companies, internet companies, technology companies and financing companies, by mergers
and acquisitions to enhance our competitive advantage in the financing technology ecosystem and to improve the efficiency of our
products and services.
|
·
|
Various
Product and Service Offerings
|
As a long-term strategy,
we are planning to build a financial ecosystem for SME customers that are under-served in China's current financial system. We
will seek to expand our intermediary and direct lending services, both online and offline, to meet the demands of various customers.
As part of this initiative, we announced the launch of entrusted loan services on June 30, 2017, which leverages our improving
financial condition and years of experience in providing financing solutions to our customers in China. We believe the new
service allows us not only to generate new revenues but also to expand our scope beyond the existing service of being an intermediary
between investors and borrowers through the online platform. We will continue to devise customized product and service offerings
to meet customer demands and expand the scale and scope of our operations.
Our Business
We operate our business
through an electronic online financial platform, www.hyjf.com (“
website
”), which is designed to match
investors with SME and individual borrowers in China. We have developed user-friendly mobile applications for borrowers and
investors (“
mobile apps
”, collectively with our website, the “
platform
”), which enable
borrowers and investors alike to access our platform at any time or location that is convenient. We launched our first mobile
application in September 2015. In calendar years 2017 and 2016, we facilitated over RMB4.12 billion (approximately $609.22 million)
and RMB1.28 billion (approximately $188.14 million) in loans through our mobile apps, respectively, representing 46.58% and 22.54
% of the total amount of loans facilitated through our marketplace in the respective periods.
Our platform is
also accessible to those who guaranty the loans for our borrowers (“
third-party cooperative partners
”). Apar
from acting as guarantors, these third-party cooperative partners may, if they so choose, also use our platform for purposes of
transferring their creditor rights on loans made by them outside our platform (“
outside loans
”). For this service,
we charge these third-party cooperative partners similar loan origination service fees and repayment management fees.
We had 24 third-party
cooperative partners as of December 31, 2017, consisting of five pawn shops, four guaranty companies, a micro-loan company, an
asset management companies, three information technology companies, three financial consulting companies, four technology companies,
and three financial services companies, which frequently serve as guarantors of loans on our platform.
The following diagram
illustrates our current business model:
Our Online Marketplace
Our platform embraces
significant opportunities presented by a financial system that leaves many creditworthy individuals and SMEs underserved. We match
qualified borrowers who have completed profiles that are available on the platform with investors. Once an investor decides to
proceed with a specific loan, and the borrower accepts the terms of the loan, our system automatically generates electronic loan
contracts for execution. When the closing conditions are satisfied, our system directs the investors to the third-party payment
platform to consummate the loan. In addition, our platform allows third-party cooperative partners to assign outstanding loans
to other registered investors on our platform. The loans we facilitate are usually short-term loans that range from one month
to twelve months with interest rates ranging from 4.5% to 12%.
Online Loan Transaction Process
We provide a streamlined
application process combining both online and offline features. To borrowers and investors alike, we have designed the process
to appear simple, seamless and efficient, utilizing sophisticated, proprietary technology to make it possible. The entire process,
from posting the loan application on our platform to disbursement of funds, takes no longer than 19 days but, more typically,
only three to five days. At any given time, a borrower may have only one outstanding loan on our platform, and only after the
outstanding loan is paid off, can the borrower enter into a new loan. At such time the borrower submits a new application, we
undertake a new review of the borrower’s loan profile prior to making any determination as to whether to facilitate a new
loan transaction. This restriction on lending prevents a borrower from borrowing a new loan to pay off the old loan resulting
in an increase in the borrower’s total debt. The platform monitors and reviews borrowers, therefore preventing a “roll
over” of loans.
We post borrower
profiles and their loan information on our online platform, including loan amount, duration, interest rate or rate range they
are willing to pay, borrower’s basic information, its total assets and credit score etc. Investors can browse the loan information
on our platform and select loan products appropriate for them to invest in, based on their own availability of funds and their
risk preferences. Set forth below is a description of the steps in a typical online loan transaction.
Step 1: Online Application
Submission and Initial Assessment.
In order to access the
services provided by our online financial platform, potential borrowers open an account with us and complete an online loan application
form.
Our risk control department
determines whether the potential borrower meets our minimum requirements based on initial discussions between our risk control
department and the prospective borrower. We evaluate each borrower’s application and decide if we should process his/her
application on a case-by-case basis. As part of this process, we conduct an analysis of the borrower’s financial conditions,
loan amount and term, business industry and proposed use of the funds.
If the prospective borrower
meets our minimum requirements, the application is forwarded to our third-party cooperative partners who guarantee the borrower’s
loan after reviewing the borrower’s application materials.
As an alternative,
the borrower may also propose a third-party guarantor to guarantee the repayment of its loan. In these instances, we also conduct
an assessment of the referred guarantor’s credit-worthiness and financial standing using the same matrix as that for the
borrower. The third-party guarantor will be jointly and severally liable with the borrower for the borrower’s debt.
Typically, as part of
this process, prospective borrowers will be asked for documents to prove their identity and financial standing, including but
not limited to business licenses, tax reports, audited financial statements and appraisal reports (for enterprise borrowers),
national identification card and bank statements (for individual borrowers).
Step 2: Offline Anti-Fraud
Investigation and Credit Assessment
Our risk control
department reviews all borrower application materials and conducts its own due diligence, including third-party verification and
onsite visits, and a review of the sufficiency of collateral provided. Our risk management model utilizes big data capabilities
to systematically evaluate a borrower’s credit characteristics. After verifying the authenticity of the borrower’s
submitted documents, we will assign a credit rating to the borrower based on its credit history, business activities being undertaken,
assets and other criteria.
We have established
a risk management model for SME borrowers. We use over 120 factors to evaluate SME borrowers, with a weighted total score of 400
and a minimum score of 60. Our risk assessment matrix can be classified into the following categories: enterprise quality assessment,
operation and management assessment, repayment funding source assessment, and risk management assessment, and we use these four
categories to evaluate SME borrowers. At the same time, we use a third-party system and publicly available credit reporting system
to make necessary inquiries on SME borrowers, thereby establishing a risk management model suitable for China’s SME borrowers.
Based on a borrower’s credit history, business activities, assets and other criteria, we classify the borrower’s credit
rating into the following categories according to its weighted average score: AAA (> 90), AA+ (80-90), AA (70-80), AA- (60-70),
and A (< 60). In the order of AAA to A, the expected quality of borrowers decreases, and the expected default rates ascends,
even though, there have been no defaults of borrowers since the inception of the platform. Explanations of each credit rating
are as follows:
AAA: The SME borrower
operates its business normally without the presence of any operational issues; it has abundant repayment funding sources, good
financial standing, and no bad credit records. Borrowers with credit rating of AAA are expected to have a default rate of approximately
0%.
AA+: The SME borrower
operates its business normally without the presence of any operational issues; it has multiple repayment funding sources, good
financial standing, and no bad credit records or resolved bad records only.
AA: The
SME borrower operates its business normally; it has multiple repayment funding sources, moderate to good financial standing, and
resolved bad credit records or minor bad credit records, for which reasonable explanations are required by the Company.
AA-: The
SME borrower operates its business normally; it has some repayment funding sources, moderate financial standing, and resolved
bad credit records or minor bad credit records, for which reasonable explanations are required by the Company. For these borrowers,
the Company facilitates loans under the condition that the borrower meets stricter collateral requirements asked by the guarantors.
A: Any
SME borrowers that fail to meet the qualifications mentioned in AA- and above are unqualified to receive loans on our platform.
The following table sets forth the outstanding loan amounts
for SME borrowers by credit rating at end of each period as indicated:
(in US$ millions)
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
Credit Rating
|
|
2017
|
|
|
% Total
|
|
|
2016
|
|
|
% Total
|
|
AAA
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
10.1
|
|
|
|
4.7
|
%
|
AA+
|
|
|
15.4
|
|
|
|
3.6
|
%
|
|
|
24.4
|
|
|
|
11.3
|
%
|
AA
|
|
|
415.1
|
|
|
|
96.3
|
%
|
|
|
170.5
|
|
|
|
79.2
|
%
|
AA-
|
|
|
0.8
|
|
|
|
0.2
|
%
|
|
|
10.3
|
|
|
|
4.8
|
%
|
A
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
431.2
|
|
|
|
100
|
%
|
|
$
|
215.3
|
|
|
|
100
|
%
|
As percentage of total loans outstanding
|
|
|
98.8
|
%
|
|
|
|
|
|
|
87.5
|
%
|
|
|
|
|
We are also working
on establishing a risk management model for individual borrowers. The model for individual borrowers will have over 440 factors,
with a weighted total score of 1,085 and a minimum score of 550. The risk assessment matrix can be classified into the following
six controlling categories: borrower’s basic information, existing assets, repayment ability, credit status, indebtedness
status and behavioral analysis. At the same time, we obtain from the third-party the borrower’s relevant social activities,
telephonic records, creditworthiness, indebtedness status, and these four factors form an all-dimensional holistic assessment
mechanism, thereby establishing an objective and realistic risk management model for individual borrowers. Once the model is completely
established, we will rely on this model for risk management of individual borrowers.
We have stringent
requirements for the collateral in order to protect the investors’ interests. Generally, we only accept collateral that
is highly liquid and adequate to repay the loan amount. Borrowers who intend to use real estate to secure their loans will first
need to have the real estate appraised by qualified appraisers. The loan amount cannot be more than 80% of the value of the real
estate. The collateral provided by Borrowers is provided only to third-party guarantors, not to the investors.
Although we typically
do not accept personal property as collateral, we may do so under exceptional circumstances when the personal property will be
pledged and the loan amount is no more than 70% of the appraised value of the personal property.
Step 3: Approval
Once the borrower
is approved, we categorize the borrower’s credit facility into one or more of the following loan products and post it on
our platform. We also post the relevant third-party guarantor’s information and its letter of guarantee. The information
is accessible to all investors who have registered on our platform. They will have the option of accepting the credit facility
per the terms offered online. Once a credit facility is accepted by an investor, our platform automatically prepares the necessary
loan documents for execution by the parties online. The electronic signatures generated on platform are certified by China Financial
Certification Authority, a financial security certification authority designated by People’s Bank of China.
Product
|
|
Target
Investors
|
|
Term
of
Loan
|
|
Expected
Return
|
|
|
Minimum
investment
amount
(RMB)
|
|
|
Maximum
investment
amount
(RMB)
|
|
|
Fund-raising
period
|
|
Repayment
of
Loan
(for borrowers)
|
|
Assignability
(Yes/No)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xin Shou Zhuan Qu
|
|
For investors who have made
no investments in any products on our platform
|
|
30 days
|
|
|
Generally
8.5%
|
|
|
|
100
|
|
|
|
10,000
|
|
|
No more than 19 days
|
|
Repay capital with interest
when the loan is due
|
|
No
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cai Fu Hui
|
|
For all registered platform users
|
|
1 – 24 months
|
|
|
4.5%
- 12%
|
|
|
|
100
|
|
|
|
-
|
|
|
No more than 19 days
|
|
Repay capital with interest when the loan
is due
|
|
Yes, but only after holding this product
for at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zun Xiang
|
|
Premium customers and private business customers
|
|
6–12 months
|
|
|
11%
- 12%
|
|
|
|
100,000
|
|
|
|
-
|
|
|
No more than 19 days
|
|
Repay capital with interest when the loan
is due
|
|
Yes, but only after holding this product
for at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hui Ji Hua
|
|
For all registered platform users
|
|
7 days -12
months
|
|
|
4.5%
- 11%
|
|
|
|
1,000
|
|
|
|
-
|
|
|
No more than 19 days
|
|
Repay capital with interest when the loan
is due
|
|
Yes, but only after holding this product
for at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
You Xuan Zhai Quan
|
|
For all registered platform users
|
|
30 days –
12 months
|
|
|
6.5%
- 11%
|
|
|
|
10,000
|
|
|
|
-
|
|
|
No more than 19 days
|
|
Repay capital with interest when the loan
is due
|
|
Yes, but only after holding this product
for at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhai Quan Zhuan Rang*
|
|
For all registered platform users
|
|
Depending on the investment products
|
|
|
N/A
|
|
|
|
100
|
|
|
|
-
|
|
|
N/A
|
|
Repay capital with interest when the loan
is due
|
|
Yes, but only after holding this product
for at least 30 days and there will be a 0.5% assigning fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hui Xiao Fei
|
|
For all registered platform users
|
|
12 months
|
|
|
N/A
|
|
|
|
100
|
|
|
|
-
|
|
|
No more than 19 days
|
|
12 equal monthly payments
|
|
Yes
|
* Zhai Quan Zhuan Rang is a service
that allows investors to transfer their creditors’ rights. The minimum outstanding loan amount requirement before creditor
rights may be transferred is not less than RMB 1,000. After holding an investment product for at least 30 days, the investor may
then transfer this product at a price of at least 95% of the original price. The service was launched in October 2015. For the
years ended December 31, 2017 and 2016, service revenues from Zhai Quan Zhuan Rang product amounted to $158,227 and $55,342, respectively.
Revenue is recognized when the service is rendered and service fee is collected from transferor upon the completion of the transfer,
which is classified under Revenues on the Income Statement, the same as loan origination service fee collected for other loan
products.
Once we successfully
match investors and borrowers through our online platform, we provide following services during the loan origination process:
a)
Assisting in registering of liens or collaterals with relevant government agencies;
b)
Verifying accuracy of documents and loan information and assisting in loan offering transactions. There are often times multiple
investors involved in a single loan offering;
c)
Facilitating communications with borrowers and guarantors through various means to ensure smooth closings of transactions; and
d)
Coordinating with third-party online payment depository institutions to transfer funds upon closing.
Step 4: Funding
Since the inception
of our online platform in December 2013 through July 2017, we had contracted with a licensed third-party online payment service,
Hui Fu Tian Xia Limited Company (“ChinaPnR”), to assist in the disbursement and repayment of loans. Individual borrowers
were 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 was deposited in their ChinaPnR account. For SME borrowers, they paid RMB 10 per deposit. When borrowers withdrew
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 was repaid to ChinaPnR, ChinaPnR would
disburse the loan and interest back to the investors, who were not charged for the service provided by ChinaPnR.
However, 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. Upon successful
system transition from China PnR to Jiangxi Bank in July 2017, Jiangxi Bank started to assist in the disbursement and repayment
of loans. Both the investor and the borrower 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.
Currently, investors are
not charged for deposits made to their accounts in Jiangxi Bank. However, borrowers are charged a processing fee by Jiangxi Bank
in the amount of 0.10% (with a minimum of RMB2) 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 RMB1
per transaction.
Our dedicated team
closely monitors the whole process and solves any issues promptly to ensure closing of loan transactions are handled in a timely
and accurate manner. Once loans are closed and funds are transferred, we consider our loan origination service being rendered.
We then recognize revenue from fees collected from loan origination services. The fees are simultaneously deducted from loan proceeds
upon transfer of funds from lenders and remitted to our account on the same day. In most cases, the fees will be in our account
on the same day or next business day but occasionally may take up to three business days due to bank or internal processing delay.
The fees are not refundable. We retain borrowers’ loan records in our system as a part of their credit profile and for reference
in their future financing applications.
Step 5: Post-Funding
Supervisory
After the debt
financing is provided to the borrower, the guarantor monitors the borrower’s performance and provides the platform with
the feedback on the borrower’s credit condition, contract performance and debt repayment capabilities. The guarantor initially
monitors and examines the borrower’s performance within one month after the loan is provided to the borrower. For longer-term
loans, the guarantor conducts additional rounds of examination every two months after the first round. For every round of examinations,
the guarantors examine borrowers’ performance from multiple aspects, including reviewing their most recent credit histories,
monthly cash flows, operational activities, debt repayment capabilities, and occurrence of any contract breaches. If no material
changes are found, a Post-Funding Supervisory Report is provided to the company within five business days after the examination.
Examinations are conducted for two primary reasons. First, we create a separate credit file for each borrower on our platform.
The Post-Funding Supervisory Reports allow us to update the borrower profiles in a timely manner with additional information and
recent business developments. Post-Funding Supervisory Reports ensure the completeness of the borrower profiles. Moreover, additional
rounds of examinations give us timely access to the borrower’s financial and operational issues that could potentially result
in credit events. In this case, the additional examinations enable the Company to recognize any risks earlier and take actions
to avoid losses more promptly than we would have been without the examinations. As noted previously, after the initial examination,
the guarantor conducts additional rounds of examination every two months. The two-month period is a minimum requirement that we
set and is determined based upon our risk management experience and estimation of the average cash cycle among our borrowers.
In practice, we may recommend our guarantors, or the guarantors themselves may choose, to conduct examinations more frequently
as needed to better protect their interests. For example, if the default rate of a particular industry or a geographical area
surges during a period of time, we would recommend the guarantors to conduct more frequent and detailed examinations.
Since the inception
of the platform there have been no credit events giving rise to the possibility of a borrower default. However, we expect that
if a guarantor recognizes a credit event with any material changes that could potentially result in a negative turn in a borrower’s
financial standing and ability to repay its loan, the guarantor will notify us immediately, or at least within the same day, so
that our management can take prompt action to minimize the risk of non-payment. Although we have instituted a minimum two-month
period for rounds of examinations, each guarantor has its own terms of disclosure requirements and/or additional examinations
included in their guarantee contracts signed with the borrowers and may determine to put in place additional controls to detect
a possible credit default prior to an examination. For example, most of our guarantors require borrowers to report monthly on
the usage of loans guaranteed by them, the occurrence of any new borrowings and updated financial statements etc. Guarantors may
also monitor the borrowers’ credit status through reviewing their monthly credit reports on the People’s Bank of China’s
Credit Record Center website. Besides these standard checks, guarantors may also require borrowers to report any significant events,
such as equity restructuring and merger & acquisition etc., at least thirty days in advance. With the additional reporting
and examinations, the guarantors have comprehensive knowledge on the borrowers’ operational condition and credit status.
If any potential default risk is recognized, the guarantors will notify our platform immediately to discuss the severity of the
situation and the necessity to take actions to prevent a default.
We do not expect
any significant impact on the risk reserve fund since we have a process in place for payment from the fund and reimbursement to
the risk reserve fund. In the event of any negative credit event, our management will determine the proper action to take to avert
or minimize the risk of non-payment. One week before the loan is due, the risk control department informs Jiangxi Bank (China
PnR prior to July 2017), our third-party cooperative partners and the borrower and supervises the repayment of the loan.
Step 6: Collections
Towards the end
of each loan term, we provide repayment service to ensure the loan repayment process is handled smoothly through our online platform.
All loans originated through our online platform are repaid through our online platform and the terms are agreed upon at the time
of the original loan agreement. When a loan approaches its maturity, our team will typically send our notices to borrowers via
several means to remind them of the repayment deadlines. We will then calculate the amounts to be repaid by borrowers, including
the principals, accrued interests and service charges, and provide repayment notices to borrowers 7 days before the maturity day.
On the maturity day, borrowers log onto their accounts opened with our online platform, transfer funds into their depository accounts
in Jiangxi Bank’s depositary system, and process the repayment through our online system. 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.
The use of our
online system is a part of our service provided in connection with the repayment process. Borrowers authorize our platform to
send instructions to Jiangxi Bank’s fund depositary system, which, following pre-established rules, deduct calculated repayment
amounts from borrower’s depositary accounts and transfer the funds to lender’s depositary accounts. We also help with
making arrangement with release of liens or collateral if applicable. Our system closely monitors the whole repayment process
and solves any issues promptly to ensure the repayment proceeds arrive at lender accounts in a timely and accurate manner. It’s
only up to this point that we consider our loan repayment service has been rendered, we then recognize revenue for repayment services
upon the completion of the repayment services. Once loans are successfully repaid, we also retain borrowers’ repayment records
through our online platform for a minimum of 3 to 5 years per regulatory requirement, as part of their credit profile and for
reference in their future financing applications such as loan amount to be granted or interest rate charged.
Our platform is capable
of monitoring and tracking payment activity. With built-in payment tracking functionality and automated missed payment notifications,
the platform allows us to monitor the performance of outstanding loans on a real-time basis. Although we are not exposed to credit
risks, we assist the investors in collection as a service to the investors.
In the event of
a non- or partial repayment of a loan by the borrower, the third-party guarantor will primarily be responsible for the payment
of the outstanding amount.
In the event the
third-party guarantor defaults on the payment, we will pay the investor the sum owed from the reserve fund (See description of
Risk Reserve Fund
below) and then commence our collection proceedings. We may assist the guarantor with the sale or auction
of collateral or directly initiate actions to recover payment from the guarantor and/or borrower.
Though there have
been few cases since our platform’s inception where borrowers prepaid their loans, there are prepayment terms available
in our agreement with borrowers and investors. If the borrowers prepay within 8 days before loan maturity, they still need to
pay the full interests accrued as if the loans were repaid at the end of the loan term, which amounts are specified in the agreement
when entered. If the borrowers prepay more than 8 days (inclusive) before loan maturity, they need to pay interests accrued up
to the date of prepayment plus extra three days’ interests to the investors. In either case, however, according to our agreement,
the borrowers would still be obligated to pay our platform the full amount of the loan repayment management fee as if the loans
were repaid at the end of the loan term.
Third-Party Cooperative Partners Guarantees
Our cooperative partners
are party to cooperation agreements. The performance by the cooperative partner is unconditional pursuant to the terms and conditions
of the cooperation agreement.
Our management
has been in the lending business for more than a decade and has established a network of industry resources including access to
many financing guarantors who know many potential borrowers. Since inception in 2013, our online platform has established good
brand awareness in the industry and some guarantors come to us proactively. We typically select qualified and sizable guarantors
as our platform’s cooperative partners. They refer borrowers to us and assume financing guarantee responsibility. Factors
we consider when selecting a cooperative guarantor include its license and qualification, total assets, business process, risk
control capability and credit status etc. We conduct an Offline Anti-Fraud Investigation of guarantors by reviewing their credit
history, legal disputes, and/or using third-party verifications. However, we do not perform a credit assessment of the guarantors
like we perform for borrowers, therefore there are no underlying credit ratings for third-party guarantors. We will also conduct
on-site due diligence and sign a cooperative agreement with the guarantor including acceptable methods of liens and collaterals.
After that, the guarantor can start referring borrowers to our platform and provide loan guarantee. Guarantors usually charge
a separate fee for their loan guarantee service. Guarantors will sign a separate loan guarantee agreement with borrowers and upon
receipt of loan proceeds, borrowers will pay guarantors a separate guaranty fee, which is usually around 2% of the loan principal.
This arrangement is made offline between the guarantors and borrowers.
Cooperative
partners provide investigative reports on the veracity and credit condition of the borrower for every financing project
being recommended. After the debt financing is provided to the borrower, the cooperative partner will monitor the
borrower’s performance and will provide the platform with the feedback on the borrower’s credit condition,
contract performance and debt repayment capabilities. For the financing project, which the cooperative partner has
recommended, and has provided the guaranty, the cooperative partner will deposit a certain proportion of the loan into risk
reserve fund, thereby fulfilling its duty with a cash deposit. The cooperative partner provides a guaranty letter/guaranty
agreement for the financing project it has recommended, providing guaranty for the timely repayment of loans. The terms
provided by the cooperation partner are the same terms offered by third-party guarantors who the borrower may propose to
guarantee its loan.
Third-Party Creditor Loan Assignment Process
The process described
above also applies to third-party creditors (“
Creditor Partner(s)
”) that seek to sell their rights as creditors
on third-party loans with borrowers who are not borrowers on our platform (“
Original Borrowers
”). This service
generated revenues in the amount of $1,740,693 and $493,975 in 2017 and 2016, respectively. Since the inception of the platform,
no Original Borrower or Creditor Partner has defaulted on any loan payments, which would have required disbursement of funds from
the risk reserve fund. In the loan assignment process, Creditor Partners assume the role of borrowers on our platform and revenues
are recognized following the same revenue recognition policy as to other borrowers, which are classified under Revenues on our
Income Statement. While the transaction process for Creditor Partners is largely similar to those for individuals and SME borrowers,
there are certain procedural differences, as follows:
Step 1: Online Application
Submission and Initial Assessment
Similar to individual
and SME borrowers, Creditor Partners are required to open an account with us and send us the application materials before a third-party
loan may be listed and sold on our platform. These Creditor Partners are usually the third-party cooperative partners discussed
above, who refer borrowers to our platform and provide loan guarantee. As we have established cooperative relationships with these
Creditor Partners, a prior determination has already been made that they have met our minimum requirements and no additional verification
is conducted during the application process. Nonetheless, we re-evaluate these partners’ creditability from time to time,
usually every one to three months.
Step 2: Offline Anti-Fraud
Investigation and Credit Assessment
Since these Creditor
Partners use our platform in order to transfer their rights on third-party loans that were made outside of our platform, they
are responsible for conducting their own due diligence investigation into the Original Borrower’s credit-worthiness. Nonetheless,
our risk control department conducts its own due diligence on the creditor’s rights sought to be sold and the Original Borrower’s
credit-worthiness, using the same standards discussed above. As part of this process, our risk control department reviews the
loan contract between the Creditor Partner and the Original Borrower to determine whether the Original Borrower has agreed to
the proposed sale of creditor’s rights. We contact the Original Borrower directly to ensure that they have received notice
of proposed sale from the Creditor Partner.
Step 3: Approval
Once the Creditor
Partner is approved, we categorize the partner’s credit facility into one or more of the loan products discussed under “Step
3: Approval” above and post the loan on our platform. Investors will then have access to information regarding the Original
Borrower, the rights that are being transferred, the collateral that secures the amounts borrowed, if any, and other details related
to the right to transfer. We will also post the Creditor Partner’s “letter of promise,” which promises that
they will guarantee the loans and require them deposit 2% to 5% of the loan amount into the risk reserve fund as usual.
Once a credit facility
is accepted by an investor, our platform automatically prepares the necessary assignment documents for online execution by the
parties.
Steps 4 to 6:
Funding, Post-Funding Supervisory and Collections
The procedures of Funding,
Post-Funding Supervisory and Collections are similar with those discussed above for individuals and SME’s. However, because
the Creditor Partners usually have a high credit-rating due to their pre-established cooperative relationship with us, we do not
require them to provide additional guarantees when they seek to sell their creditor rights on our platform. Therefore, in the
event the Original Borrower defaults and the Creditor Partner also defaults on the payment, we will pay the investor the sum owed
from the reserve fund (See description of
Risk Reserve Fund
below).
Fees
For our services
that match investors and borrowers through our online platform, we typically charge borrowers and Creditor Partners a loan origination
service fee between 1.5% to 3% of the loan amount facilitated by us (or proceeds of sale of the creditors’ rights, as the
case may be) depending on, among other things, the duration of the loan. The loan origination service fee is payable when the
borrowers or Creditor Partners receive the loans (or in the case of Creditor Partners, the proceeds of the sale of their creditors’
rights) in their accounts with Jiangxi Bank (or China PnR prior to July 2017), which will separate the loan origination service
fee from the loan amount (or proceeds of sale, as the case may be) and send it to our account. Additionally, we charge a separate
fee from borrowers for each loan repayment facilitated by us, which is based on an agreed upon percentage around 0.3% on the borrowing
times the duration of the loan. The loan repayment management fee is payable when the borrower or Creditor Partner repays its
loan. In a transaction involving the sale of a Credit Partner’s creditor’s rights, the amount of fees charged to the
Credit Partner is the same as that charged to a borrower. In addition to the loan amount, they would have to deposit the repayment
management fee to their accounts with Jiangxi Bank, who will allocate the loan repayment to the investors’ accounts and
repayment management fee to our account. Currently, we do not charge any service fees to our investors.
Risk Management
Traditional risk
management tools and the types of consumer finance data available in developed economies, such as widely available consumer credit
reporting services, are currently at an early stage of development in China. We believe our risk management capabilities provide
us with a competitive advantage in attracting capital to our marketplace by providing investors with the comfort that they are
investing in high quality loans through a sustainable marketplace.
We primarily manage credit
risk on behalf of the investors by doing the following:
|
i.
|
We evaluate the
borrower’s repayment ability utilizing our pre-transaction credit and fraud detection
assessment using our big data credit assessment system. Our risk management model utilizes
big data capabilities to automatically evaluate a borrower’s credit characteristics.
Potential borrowers who do not meet our credit assessment grade will be denied loans.
|
|
ii.
|
We offer a risk reserve fund which is 2-5% of all the
credit extended to the borrowers (in December 2017, we have started to stop requiring new contributions from most of the borrowers
and guarantors to the risk reserve fund. Existing reserve funds are being returned to borrowers and /or guarantors as loans
mature and are repaid. See description of Risk Reserve Fund below).
|
|
iii.
|
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 with pre-established cooperative relationship
with us, we do 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
we require them to deposit 2% to 5% of the loan amount into the risk reserve fund as
usual.
|
Risk management is the
core task in the financial activities in which we engage. Our risk management department functions independently, creates detailed
risk management policies, loan management rules, and operation manuals. The risk management department provides an independent
expert assessment on the borrowers’ credentials in accordance with our loan policy and resolutely denies the applications
of unqualified borrowers.
Credit review is a key
part of risk management. The risk management department evaluates every application carefully without being affected by any subjective
considerations. Determining the borrower’s credentials is a key principle in the credit review. With respect to an individual
borrower’s loan application, the risk management department utilizes the risk management model for individual credit loans,
and this model both realistically and effectively establishes 440 assessment points for comprehensive evaluations. Weighing different
factors, this model requires the individual borrower to reach a threshold of 550 points in order to qualify for personal loans.
For business loans, the
risk management department is required to perform on-site visits, inspect the business’ operating conditions, financial
condition, use of loan proceeds, and the business owner’s individual reputations, among other factors. The risk management
department first provides a risk assessment report and then approves a loan with respect to the underlying project.
In the internet era, our
platform utilizes a third-party credit assessment system for our personal loan business. The borrower’s true financial condition
and credit history provided by third-party credit assessment agencies greatly assist our evaluation of the borrower’s loan
application. An important role of the risk management in the financial business is to minimize the risk of investor’s investment
and to protect the safety of the platform.
A key aspect of
the Company’s risk management is the full-tracking risk management. As a basic requirement of loan management, the risk
management department sets up three management modules: pre-lending, during-lending, and post-lending. “Pre-lending management”
emphasizes due diligence, including on-site inspections in order to obtain first-hand materials. “During-lending management”
emphasizes standardized operations and execution of operating procedures according to the contract in order to avoid omissions
or mistakes. “Post-lending management” emphasizes pre-warning mechanism and implements all-around debt collection
mechanism for post-due debt, including on-site inspection, account review, control of material assets, exposure of delinquent
activities, and legal recourse of litigation in order to protect the investor’s rights.
After the debt financing
is provided to the borrower, the guarantor will monitor the borrower’s performance and will provide the platform with the
feedback on the borrower’s credit condition, contract performance and debt repayment capabilities. In the event of any material
development resulting in a negative turn in a borrower’s financial standing and potential ability to repay its loan, our
management will determine the proper action to take to avert or minimize the risk of non-payment.
Finally, if enforcement
action needs to be taken, we assist the investors in taking all legal recourse against the defaulted party. As an intermediary
between the borrower and the investor, we deem ourselves to be independent from the debtor-creditor relationship and do not believe
that we are a proper party to any lawsuits arising from the borrowers’ and/or guarantors’ defaults. However, we may
offer necessary assistance to the investors, such as by disclosing the information of the borrowers and/or guarantors, provided
that such disclosure is permitted under any relevant agreement and pertinent laws.
Risk Reserve Fund
In order to better
protect our investors’ interests, we have voluntarily established a risk reserve fund which is generally equivalent to 2%
to 5% of all credit extended to borrowers. The determination of the 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 regularly if necessary,
usually every quarter to six months. The risk reserve account is currently maintained with Jiangxi Bank and China Construction
Bank. Under our risk reserve fund arrangement, if a loan is delinquent for a certain period of time, usually within three business
days, we will withdraw a sum from the risk reserve fund to repay the investor.
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. 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, we advise 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. When deciding to draw upon the reserve fund to pay back an investor, we calculate
the reserve fund to determine whether there are sufficient funds to repay. If the reserve fund is insufficient to repay investors,
the fund shall be allocated on a pro rata basis. We notify investors and the third-party guarantors, or Creditor Partner, as the
case may be, via website, text messages, email and then we implement a pre-set payment plan with the investors for each overdue
loan transaction in which they receive their corresponding pro rata distribution of the reserve fund. In case of a default by
a borrower, the investor bears the risk of not receiving a timely repayment or an investment failure, and the cooperative partners,
through a series of protective measures, protect the investors’ interest to the maximum possible degree. 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 our balance sheet.
According to
our Intermediary Service Agreement signed for each loan between the borrower, investors, and the platform, the interest and penalty
are paid to investors for the period between the time of a borrower default and the time of a risk-reserve-fund repayment. After
the repayment is withdrawn from the risk reserve fund, the guarantor is responsible for collecting loan repayments from the borrower
and re-contributing funds to the risk reserve fund. Thus, the guarantor is entitled to the interest and penalty for this period
of time.
Since the inception
of the platform, no borrower has defaulted on any loan payments. All investors through the platform have timely received
repayment of their investment funds. Our platform has not used the reserve fund to advance the repayment to investors, and our
cooperative partners have not had to advance any payments as part of their obligation as guarantors.
As a
transaction intermediary, we do 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. When loans
that are facilitated through our online platform default, we do not record an allowance for loan losses on our consolidated
financial statements and if we use risk reserve fund to repay investors, we will make a footnote disclosure to risk reserve
fund on withdraws for delinquent loans and subsequent reimbursements by borrowers or guarantors if any.
In March 2017,
the Office of Task Force Responsible for Special Rectification of Risks in Internet Finance in Beijing issued Notice for Factual
Acknowledge by and Rectification of Online Lending Information Intermediaries in Beijing (the “Notice”), pursuant
to which, P2P platforms in Beijing are prohibited from setting up risk reserve fund or security fund for the purpose of providing
guarantees to loans or promoting to investors regarding such types of funds. P2P platforms in Beijing have the same transition
period to be compliant with the Notice as set forth in the Interim Measures.
We believe P2P
platforms in Beijing are prohibited from setting up and promoting risk reserve funds by committing their own capital. Our platform,
however, sets up the risk reserve fund by requiring borrowers and/or guarantors to contribute their capital equal to 2% to 5%
of the loan amount. Nevertheless, as of December 2017, we no longer require new contributions from most of the borrowers and guarantors
to the risk reserve fund, and we have stopped advertising the establishment of risk reserve funds on the platform. Existing reserve
funds are being returned to borrowers and/or guarantors as loans mature and are repaid. As a result, we do not believe we are
in violation of the Notice and there is currently no communication from regulatory agencies regarding such violation. We have
not distributed a formal notice to our existing borrowers and/or guarantors about the regulations as the Notice is widely known,
and it is expected that participants in this industry are aware of the Notice. If it is determined that we are in violation of
the Notice, we would return the existing risk reserve contributions within the time frame provided by the regulatory agency. If
there is no such time frame provided or required, we expect we would return the contributions in cash to our borrowers and guarantors
within 3 to 5 business days or as soon thereafter as practicable.
As of December
31, 2017, balance of our risk reserve fund was approximately $ 12.1 million.
Information Technology & Cyber Security
Information technology
is an important component of an internet company. We have an expert team possessing a depth of technical know-how and expertise,
and we have carefully assembled a team of experts to operate the platform, communicate via the network, and for system maintenance.
Our technology team consists
of three major working groups, responsible for different technical areas but at the same time mutually supportive of one another’s
tasks. The structure working group is responsible for developing the system’s source code and constituting the system’s
structure to meet the business needs. The testing working group is responsible for the necessary testing of the already developed
operable system in order to examine its reliability and user’s experiences, thereby providing testing data and implementing
needed modifications to the operating system. The operation maintenance working group is responsible for the necessary maintenance
and inspection of the website’s technical system, including building fire wall, placing patches, preventing hackers’
attacks, thereby ensuring the normal operation of the system.
Our technology department
has established a comprehensive system for managing web technology. To prevent external infiltration and theft of data and other
illegal activities, we have established three levels of prevention mechanisms, thereby effectively implementing preventions from
physical, technical, and authorization aspects.
Our system security
protection is implemented from protective archiving and evaluation based on levels of information system security, disaster recovery,
and information security. First, we have already entered into a cooperation agreement with Alibaba Cloud Computing, ensuring that
the servers used on our platform are well protected and maintained. With respect to the data security on the platform’s
computers, besides backing up all data with Alibaba Cloud Computing, our platform also backs up all operation data in order to
prevent any data loss and ensure the reliable and prompt reading and retrieving data, therefore guaranteeing the normal operation
of the platform.
As a platform
used by both investors and borrowers, we have established an emergency response mechanism in the event of an emergency and built
a back-up database in order to restore the platform’s operations and minimize downtime of the platform.
Our Products
As discussed above,
we categorize the borrower credit facility into one or more loan products and post it on our platform. Those products include
Xin Shou Zhuan Qu, Cai Fu Hui, Zun Xiang, Hui Ji Hua, You Xuan Zhai Quan, Zhai Quan Zhuan Rang and Hui Xiao Fei. For more
detail regarding these products, please refer to the table listed under the “Step 3: Approval” of the transaction
process.
Customers
Our customers comprise
mainly Chinese individuals and SMEs. All of our investors are individuals while our borrowers include both individuals and SMEs.
Our SME borrower clients are mainly from the heavy industry, wholesale, public transportation and restaurant industries. No one
customer or group of customers’ accounts for 10% or more of our revenue. For the year ended December 31, 2017, SME borrowers
and individual borrowers accounted for approximately 84.1% and 15.9% of the loan amounts facilitated through our platform, respectively.
Currently, most
of our investors are in Shanghai, Shandong, Heilongjiang, Jiangsu, Henan and Jiangxi etc. provinces, and most of our borrowers
are currently in Shandong province. All of our current borrowers are referred to us by our guarantors, whose businesses operate
only in Mainland China. US-based investors and borrowers are prohibited from borrowing funds or being investors. Prospective borrowers
and investors must be Chinese citizens or enterprises located in the PRC in order to register for an account and submit borrowing
or investing applications through our platform. Our “Registration Agreement” and “Intermediary Service Agreement”
also requires that the borrowers and investors represent and confirm that they are Chinese citizens or enterprises located in
the PRC at the time of registration and submission of borrowing or investing applications, respectively, or they won’t be
able to proceed. In addition, when submitting an application, a confirmation window will pop up, requesting borrowers or investors
to confirm that they are located in the PRC before they can proceed with the submission. In the event that a non-PRC based citizen
or enterprise is able to register and submit an application, upon our review of such application, including the implementation
of our Step 1 and Step 2 protocols, such an application would be rejected, and such registration would be terminated.
Marketing
The borrowers are
made known to us primarily via two means, our own platform and referrals from third-party guarantors. The general public may get
access to our platform and submit a borrower profile online. We also obtain borrowers through referrals from financial institutions
we partner with. As of December 31, 2017, we have entered into cooperation agreements with 24 cooperative partners, including
five pawn shops, four guaranty companies, a micro-loan company, an asset management company, three information technology companies,
three financial consulting company, four technology companies, and three financial services companies. Besides online investors,
we also attract investors through cooperative relationships with institutions. To obtain investors more efficiently, Benefactum
Beijing has entered into co-operative agreements with third-party referral service providers, pursuant to which those service
providers will refer potential investors to Benefactum Beijing while Benefactum Beijing will pay those service providers service
fees based on the value of loans those referred investors actually lend through Benefactum Beijing.
Seasonality
We experience seasonality
in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual
borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience
lower transaction value on our online consumer finance marketplace during national holidays in China, particularly during the
Chinese New Year holiday season in the first quarter of each year. While our rapid growth has somewhat masked this seasonality,
our results of operations could be affected by such seasonality in the future.
Employees
As of December
31, 2017, we have 160 employees, located in Shanghai, Beijing and in Shandong province in China. The following table sets forth
the number of our employees by function as of the same date:
Functional Area
|
|
Number of
Employees
|
|
|
% of Total
|
|
Senior management
|
|
|
4
|
|
|
|
2.50
|
%
|
Product and service
|
|
|
17
|
|
|
|
10.63
|
%
|
Marketing
|
|
|
15
|
|
|
|
9.38
|
%
|
Human resources and administrative
|
|
|
11
|
|
|
|
6.88
|
%
|
IT
|
|
|
49
|
|
|
|
30.63
|
%
|
Accounting
|
|
|
7
|
|
|
|
4.38
|
%
|
Legal
|
|
|
2
|
|
|
|
1.25
|
%
|
Risk management
|
|
|
24
|
|
|
|
15.00
|
%
|
Operations
|
|
|
31
|
|
|
|
19.38
|
%
|
Total
|
|
|
160
|
|
|
|
100
|
%
|
As required by regulations
in China, we participate in various employee social security plans that are organized by local governments, including pension,
unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required
under Chinese law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain
allowances of our employees, up to a maximum amount specified by the local government from time to time.
We believe that we maintain
a good working relationship with our employees and to date, we have not experienced any significant labor disputes.
Competition
The online financial platform
industry in China is intensely competitive. In light of the low barriers of entry in this industry, more players may enter this
market which would result in increased competition. We anticipate that more established internet, technology and financial services
companies that possess large, existing user bases, substantial financial resources and established distribution channels may enter
the market in the future. Based on our research conducted in the database of Wang Dai Zhi Jia (www.wdzj.com), a third-party information
platform that specializes in providing information in China’s internet finance industry, we believe the following companies
are our major competitors in the various business segments set forth below:
Shanghai Lujiazui
International Financial Assets Trading Market Inc. (“Lujinsuo”)- Lujinsuo is the only financial assets trading information
service platform that runs its business through the trading platform of the State Counsel of China. It provides investment and
financing services to SMEs and individuals. As of December 31, 2017, it had approximately 32.9 million registered users.
Lujinsuo offers what is known as “financial instruments beneficial rights transfer” information services to financial
and non-financial companies. This is a process in which the borrowers (usually companies) pledge their bank acceptance bills,
and then transfer the beneficial interests to investors. Lujinsuo’s role is an informational intermediary between the holders
of bank acceptance bills and the investors.
Yirendai Ltd.(“Yirendai”)
– Yirendai is a leading online consumer financial platform in China connecting investors and individual borrowers. According
to Yirendai reports, they facilitated RMB 47.41 billion ($7.00 billion) in loans from their inception in March 2012 through
June 30, 2017. According to the database of Wang Dai Zhi Jia, Yirendai facilitated RMB 4.92 billion (approximately $755.94 million)
in loans in December 2017 and was ranked the 7
th
in the industry. Leveraging the extensive experience of their parent
company CreditEase, they have large client bases consisting of underserved investors and individual borrowers in China.
Kaixindai Financing
Service Jiangsu Co., Ltd. (“Kaixindai”) – Co-founded by China Development Bank, Kaixindai is a state-owned internet
finance platform that aims at providing safe, stable and convenient internet lending intermediary services to SMEs and individuals.
It facilitated RMB 41.88 billion (approximately $6.16 billion) in loans from December 2012 through June 2017. According to
Wang Dai Zhi Jia, Kaixindai facilitated RMB 33.85 million (approximately $5.20 million) in loans in December 2017 and was ranked
the 313
th
in the industry.
We also compete with other
financial products and companies that attract borrowers, investors or both. With respect to borrowers, we compete with other online
financial platforms and traditional financial institutions, such as financing business units in commercial banks, credit card
issuers and other financing companies. With respect to investors, we primarily compete with other investment products and asset
classes, such as equities, bonds, investment trust products, bank savings accounts and real estate.
Intellectual Property
Trademark
Our business is dependent
on a combination of trademarks, trademark application, trade secrets and industry know-how, copyright and patent, in order to
protect our intellectual property rights. We have submitted trademark and patent applications for “Benefactum Beijing”
in mainland China.
Set forth below is a detailed
description of our trademarks under application.
Country
|
|
Trademark
|
|
Application
Number
|
|
Classes*
|
|
Status
|
Mainland China
|
|
|
|
19915412
|
|
9
|
|
Approved
|
Mainland China
|
|
|
|
19915413
|
|
35
|
|
Approved
|
Mainland China
|
|
|
|
19915414
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
19915415
|
|
38
|
|
Approved
|
Mainland China
|
|
|
|
19915411
|
|
42
|
|
Approved
|
Mainland China
|
|
|
|
16773973
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
16774073
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
17945485
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
19915410
|
|
38
|
|
Approved
|
Mainland China
|
|
|
|
22745837
|
|
9
|
|
In process
|
Mainland China
|
|
|
|
22746011
|
|
35
|
|
In process
|
Mainland China
|
|
|
|
22745940
|
|
42
|
|
In process
|
Mainland China
|
|
|
|
22746083
|
|
45
|
|
In process
|
Mainland China
|
|
|
|
23328481
|
|
36
|
|
Partially rejected
|
Mainland China
|
|
|
|
25706455
|
|
36
|
|
In process
|
Mainland China
|
|
|
|
27772660
|
|
36
|
|
In process
|
Mainland China
|
|
|
|
29345199
|
|
36
|
|
In process
|
Mainland China
|
|
|
|
29341176
|
|
38
|
|
In process
|
Mainland China
|
|
|
|
29345129
|
|
42
|
|
In process
|
* Classes
Class 9
Scientific, nautical,
surveying, photographic, cinematographic, optical, weighing, measuring, signaling, checking (supervision), life-saving and teaching
apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling
electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs;
compact discs, DVDs and other digital recording media; mechanisms for coin-operated apparatus; cash registers, calculating machines,
data processing equipment, computers; computer software; fire-extinguishing apparatus.
Class 35
Advertising; business
management; business administration; office functions.
Class 36
Installment loans; capital
investment; financial loans; financial evaluation (insurance, banking, real estate); financial service; financial management;
mortgage loan; financial analysis; financial consultation; fund investment.
Class 38
Telecommunications services;
chat room services; portal services; e-mail services; providing user access to the Internet; radio and television broadcasting.
Class 42
Scientific and technological
services and research and design relating thereto; industrial analysis and research services; design and development of computer
hardware and software; computer programming; installation, maintenance and repair of computer software; computer consultancy services;
design, drawing and commissioned writing for the compilation of web sites; creating, maintaining and hosting the web sites of
others; design services.
Patent
As of the date of this
prospectus, we have submitted ten patent applications. Set forth below is a detailed description of our patents under application.
Country
|
|
Patent
|
|
Application
Number
|
|
Type
|
|
Status
|
Mainland China
|
|
The Certifying System, Device and Method that Are Based on the Random Instructive Distribution
|
|
201610401023.2
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Certifying System that Are Based on the Random Instructive Distribution
|
|
201620551196.8
|
|
Utility model
|
|
In process
|
Mainland China
|
|
The Random Encrypted Physical Information Block-Chain Secured Method, System and Device
|
|
201610401213.4
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Random Encrypted Physical Information Block-Chain Secured Device
|
|
201620551307.5
|
|
Utility model
|
|
In process
|
Mainland China
|
|
The Community Block Polypeptide Chain and Intelligent Processing System
|
|
201610441383.5
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Community Block Polypeptide Chain and Intelligent Processing Device
|
|
201610441834.5
|
|
Invention
|
|
In process
|
Mainland China
|
|
Physical Information Random Verification Block-Chain Secured Method, System and Device
|
|
201610472450.X
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Certifying System, Device and Method that Are Based on the Local Node Random Instructive Distribution
|
|
201610479798.1
|
|
Invention
|
|
In process
|
Mainland China
|
|
A Block Chain Consensus and Synchronization Method, System and Device
|
|
201610501761.4
|
|
Invention
|
|
In process
|
Mainland China
|
|
Asymmetrical Encrypted Block Chain Identification Verification Method and Device
|
|
201610413635.3
|
|
Invention
|
|
In progress
|
In addition, Benefactum
Beijing operates an electronic online financial platform at our website www.hyjf.com.
Copyright
As of the date of this
prospectus, we have registered with the National Copyright Administration of China six pieces of our artwork and received a Copyright
Certificate for each of them. Set forth below is a detailed description of our copyrights.
Artwork Copyright
Country
|
|
Name of Work
|
|
Work
|
|
Registration
Number
|
|
Type
|
Mainland China
|
|
Hui Ying Jin Fu (Whale)
|
|
|
|
2016 – F – 00288618
|
|
Artwork
|
Mainland China
|
|
Hui Ying Jin Fu APP
|
|
|
|
2016 – F – 00288617
|
|
Artwork
|
Mainland China
|
|
Jin Ding Hui Ju
|
|
|
|
2016 – F – 00337813
|
|
Artwork
|
Mainland China
|
|
Si Hai Yi Xin
|
|
|
|
2016 – F –00337814
|
|
Artwork
|
Mainland China
|
|
Zhong Guo Jin Kong
|
|
|
|
2016 – F – 00338579
|
|
Artwork
|
Mainland China
|
|
Hui Ju Tian Xia
|
|
|
|
2016 – F – 00338580
|
|
Artwork
|
Software Copyright
Country
|
|
Name of Work
|
|
Date of
First
Publication
and Date
of
Registration
|
|
Registration
Number
|
|
Type
|
Mainland China
|
|
Hui Ying Jin Fu Financial Investment Platform
|
|
January 19, 2016;
August 4, 2016
|
|
2016SR205944
|
|
Computer software
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
Hui Ying Jin Fu Investment Management System (WeChat version)
|
|
June 28, 2016;
August 18, 2016
|
|
2016SR224313
|
|
Computer software
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
Hui Ying Jin Fu Mobile Client Access Software (Android)
|
|
March 20, 2016;
August 18, 2016
|
|
2016SR224323
|
|
Computer software
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
Hui Ying Jin Fu Mobile Client Access Software (ios)
|
|
March 20, 2016;
August 1, 2016
|
|
2016SR199404
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jing Fu Internet Lending Information Intermediary Platform
|
|
January 19, 2016
May 4, 2017
|
|
2017SR156792
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Internet Lending Information Intermediary Platform(Android)
|
|
March 20, 2016
May 4, 2017
|
|
2017SR156783
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Internet Lending Information Intermediary Platform (IOS)
|
|
March 20, 2017
May 4, 2017
|
|
2017SR156674
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Internet Lending Information Intermediary Platform (WeChat version)
|
|
June 28, 2016
May 5, 2017
|
|
2017SR160200
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Information Data Management System
|
|
August 10, 2016
April 20, 2017
|
|
2017SR126893
|
|
Computer Software
|
Mainland China
|
|
Jin Rong Zhi Nan Intelligent Information Consulting Services Platform
|
|
December 28, 2016
April 20, 2017
|
|
2017SR126888
|
|
Computer Software
|
Domain Name
Benefactum Beijing
has two domain names,
www.hyjf.com
and
www.huiyingdai.com
. Both domain names lead to one website,
www.hyjf.com
,
and they have the same ICP Record No.: 13050958.
Benefactum Beijing registered
its website, www.hyjf.com, with the Ministry of Industry and Information Technology (Record No. 13050958) for the provision of
non-commercial internet information services on August 28, 2015.
However, on August
17, 2016, The Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries (the
“
Interim Measures
”) were promulgated with immediate effect and require all peer-to-peer lending platforms to
apply for value-added telecommunications business licenses in accordance with the relevant provisions of telecommunications authorities
after filing with a local financial regulator. Although the Interim Measures took effect on August 17, 2016, peer-to-peer platforms
were given up to 12 months to adjust their practices to comply with them. Further in June 2017, the PBOC together with sixteen
other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement of Internet Finance Risk Rectification
and Clearance Task, which, among other things, gave peer-to-peer platforms till end of June 2018 to adjust their practices to
be compliant with the Interim Measures and in some complicated cases, up to two years for compliance upon approval by provincial
government. For more details, please see “Regulations - Regulations on Value-Added Telecommunication Services” and
“Regulations on Peer-to-Peer Lending Service Provider”).
Regulations
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China.
As an online financial
platform connecting investors with borrowers, we are regulated by various government authorities, including, among others:
|
·
|
the
Ministry of Industry and Information Technology, or the MIIT, regulating the telecommunications
and telecommunications-related activities, including, but not limited to, the internet
information services and other value-added telecommunication services;
|
|
·
|
the
People’s Bank of China, or the PBOC, as the central bank of China, regulating the
formation and implementation of monetary policy, issuing the currency, supervising the
commercial banks and assisting the administration of the financing;
|
|
·
|
China
Banking Regulatory Commission, or the CBRC, regulating financial institutions and promulgating
the regulations related to the administration of financial institutions.
|
|
·
|
the
Ministry of Public Security, taking the lead in security supervision of the internet
services of internet lending information intermediaries, and penalizing violations of
laws and regulations on network security, and cracking down on financial crimes and relevant
crimes involved in internet lending.
|
|
·
|
the
State Internet Information Office, supervising financial information services and the
content of internet information.
|
Regulations Relating to Foreign Investment
The Draft PRC Foreign Investment Law
In January 2015, the MOFCOM
published a discussion draft of the proposed Foreign Investment Law for public review and comments. The draft law purports to
change the existing “case-by-case” approval regime to a “filing or approval” procedure for foreign investments
in China. The State Council will determine a list of industry categories that are subject to special administrative measures,
which is referred to as a “negative list,” consisting of a list of industry categories where foreign investments are
strictly prohibited, or the “prohibited list” and a list of industry categories where foreign investments are subject
to certain restrictions, or the “restricted list.” Foreign investments in business sectors outside of the “negative
list” will only be subject to a filing procedure, in contrast to the existing prior approval requirements, whereas foreign
investments in any industry categories that are on the “restricted list” must apply for approval from the foreign
investment administration authority.
The draft for the
first time defines a foreign investor not only based on where it is incorporated or organized, but also by using the standard
of “actual control.” The draft specifically provides that entities established in China, but “controlled”
by foreign investors will be treated as FIEs (“
Foreign Invested Enterprises
”). Once an entity is considered
to be an FIE, it may be subject to the foreign investment restrictions in the “restricted list” or prohibitions set
forth in the “prohibited list.” If an FIE proposes to conduct business in an industry subject to foreign investment
restrictions in the “restricted list,” the FIE must go through a market entry clearance by the MOC before being established.
If an FIE proposes to conduct business in an industry subject to foreign investment prohibitions in the “prohibited list,”
it must not engage in the business. However, an FIE that conducts business in an industry that is in the “restricted list,”
upon market entry clearance, may apply in writing for being treated as a PRC domestic investment if it is ultimately “controlled”
by PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined
in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity;
(ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats
on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board,
the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence,
via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business
operations. According to the draft, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled”
by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on
what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether
or not these companies are controlled by Chinese parties.
The draft emphasizes on
the security review requirements, whereby all foreign investments that jeopardize or may jeopardize national security must be
reviewed and approved in accordance with the security review procedure. In addition, the draft imposes stringent ad hoc and periodic
information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and
investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory,
and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant
with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities,
and the persons directly responsible may be subject to criminal liabilities.
In September 2016,
the Standing Committee of the National People’s Congress (the “
SCNPC
”) published
The Decision on Amending
Four Laws including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises
(the “
Decision
”).
According to the Decision, one provision is added to the Foreign Invested Enterprise Law, Sino-Foreign Joint Venture Law, Sino-Foreign
Cooperative Enterprise Law and the Law on Protection of Investment by Taiwanese Compatriots. Under this new provision, foreign
investments in business sectors outside of the “negative list” will only be subject to a filing procedure, in contrast
to the existing prior approval requirements, whereas foreign investments in any industry categories that are on the “restricted
list” must apply for approval from the foreign investment administration authority. This Decision means that the existing
“case-by-case” approval regime has been changed to a “filing or approval” procedure for non-“negative
list” foreign investments in China.
In October 2016, the
Interim Measures for the Filing Administration for the Establishment and Change of Foreign Invested Enterprises were approved
by the Ministry of Commerce’s Office Meeting upon consideration and are being implemented.
The draft is now
open for public review and comments. It is still uncertain when the draft would be signed into law and whether the final version
would have any substantial changes from the draft. When the Foreign Investment Law becomes effective, the trio of existing laws
regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary
regulations, will be abolished. See “Risk Factors—Risks related to Doing Business in China—Substantial uncertainties
exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law”.
Industry Catalog Relating to Foreign Investment
Investment activities
in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the
Catalog, which was promulgated and is amended from time to time by the MOC and the National Development and Reform Commission.
Industries listed in the Catalog are divided into three categories: encouraged, restricted and prohibited. Industries not listed
in the Catalog are generally deemed as constituting a fourth “permitted” category. Establishment of wholly foreign-owned
enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual
joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition,
restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in
industries in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless specifically
restricted by other PRC regulations.
Our PRC subsidiary, Benefactum
Shenzhen is mainly engaged in providing investment and financing consultations and technical services, which fall into the “encouraged”
or “permitted” category under the Catalog. Benefactum Shenzhen has obtained all material approvals required for its
business operations. However, industries such as value-added telecommunication services (except e-commerce), including internet
information services, are restricted from foreign investment. We provide the value-added telecommunication services that are in
the “restricted” category through our consolidated variable interest entity, Benefactum Beijing.
Regulations on Loans between Individuals
The PRC Contract
Law governs the formation, validity, performance, enforcement and assignment of contracts. The PRC Contract Law confirms the validity
of loan agreement between individuals and provides that the loan agreement becomes effective when the individual lender provides
the loan to the individual borrower. The PRC Contract Law requires that the interest rates charged under the loan agreement must
not violate the applicable provisions of the PRC laws and regulations. In accordance with the Provisions on Several Issues Concerning
Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private
Lending Judicial Interpretations, which came into effect on September 1, 2015, private lending is defined as financing between
individuals, legal entities and other organizations. When private loans between individuals are paid by wire transfer, through
online peer-to-peer lending platforms or by other similar means, the loan contracts between individuals are deemed to be validated
upon the deposit of funds to the borrower’s account. In the event that the loans are made through an online peer-to-peer
lending platform and the platform only provides intermediary services, the courts shall dismiss the claims of the parties concerned
against the platform demanding the repayment of loans by the platform as guarantors. However, if the online peer-to-peer lending
service provider guarantees repayment of the loans as evidenced by its web page, advertisements or other media, or the court is
provided with other proof, the lender’s claim alleging that the peer-to-peer lending service provider shall assume the obligations
of a guarantor will be upheld by the courts. The Private Lending Judicial Interpretations also provide that agreements between
the lender and borrower on loans with interest rates below 24% per annum are valid and enforceable. As to loans with interest
rates per annum between 24% and 36%, if the interest on the loans has already been paid to the lender, and so long as such payment
has not damaged the interest of the state, the community and any third parties, the courts will turn down the borrower’s
request to demand the return of the interest payment. If the annual interest rate of a private loan is higher than 36%, the excess
will not be enforced by the courts. A certain percentage of the loan transactions facilitated over our platform are between individuals
currently. The fixed interest rates for the term loans on our platform currently range from 4.5% to 12%. The transaction fee rates
we charge borrowers for our services range from 1.5% to 3%. The interest rate component, which is stipulated in the loan agreements,
does not and is not expected to exceed the mandatory limit for loan interest rates. In addition, Private Lending Judicial Interpretations
also provide that when a private lending contract is necessary for the purposes of production and business operations between
legal persons, other organizations or between a legal person and other organization, unless circumstances under Article 52 of
the Contract Law of the People's Republic of China and Article 14 of Private Lending Judicial Interpretations exist, if the party
claims that the private lending contract is valid, the People's Court shall uphold such claim.
Pursuant to the PRC Contract
Law, a creditor may assign its rights under an agreement to a third party, provided that the debtor is notified. Upon due assignment
of the creditor’s rights, the assignee is entitled to the creditor’s rights and the debtor must perform the relevant
obligations under the agreement for the benefit of the assignee. We operate a secondary loan market on our platform where investors
can transfer the loans they hold to other investors before the loan reaches maturity. To facilitate the assignment of the loans,
the loan agreement applicable to the lenders and borrowers specifically provides that a lender has the right to assign his/her
rights under the loan agreement to any third parties and the borrower agrees to such assignment.
In addition, according
to the PRC Contract Law, an intermediation contract is a contract whereby an intermediary presents to its client an opportunity
for entering into a contract or provides the client with other intermediary services in connection with the conclusion of a contract,
and the client pays the intermediary service fees. Our business of connecting investors with individual borrowers may constitute
intermediary service, and our service agreements with borrowers and investors may be deemed as intermediation contracts under
the PRC Contract Law. Pursuant to the PRC Contract Law, an intermediary must provide true information relating to the proposed
contract. If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion
of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees
and is liable for the damages caused.
Regulations on Illegal Fund-Raising
Raising funds by entities
or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid
administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial
Business Operations promulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on
Illegal Fund-Raising issued by the General Office of the State Council in July 2007, explicitly prohibit illegal public fund-raising.
The main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by
means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising
a return of interest or profits or investment returns in cash, properties or other forms within a specified period of time, and
(iii) using a legitimate form to disguise the unlawful purpose.
To further clarify
the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the
Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the
Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations
provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the
public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fund-raising has not been approved
by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation
or advertising such as social media, promotion meetings, leafleting and SMS advertising; (iii) the fundraiser promises to repay,
after a specified period of time, the capital and interests, or investment returns in cash, properties in kind and other forms;
and (iv) the fund-raising targets at the general public as opposed to specific individuals. An illegal fund-raising activity will
be fined or prosecuted in the event that it constitutes a criminal offense. Pursuant to the Illegal Fund-Raising Judicial Interpretations,
an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public
or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000 (approximately
$153,671), (ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets
exceeding RMB500,000 (approximately $76,836), or (iv) the illegal fund-raising activities have caused baneful influences to the
public or have led to other severe consequences. An individual offender is also subject to criminal liabilities but with lower
thresholds. In addition, an individual or an entity who has aided in illegal fund-raising from the general public and charges
fees including but not limited to agent fees, rewards, rebates and commission, constitute an accomplice of the crime of illegal
fund-raising. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the
Ministry of Public Security on Several Issues concerning the Application of Law in the Illegal Fund-Raising Criminal Cases, the
administrative proceeding for determining the nature of illegal fund-raising activities is not a prerequisite procedure for the
initiation of criminal proceeding concerning the crime of illegal fund-raising, and the administrative departments’ failure
in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trial of cases
concerning the crime of illegal fund-raising.
We have taken measures
to avoid conducting any activities that are prohibited under the illegal-funding related laws and regulations. We act as a platform
for borrowers and investors and are not a party to the loans facilitated through our platform. In addition, we do not directly
receive any funds from investors in our own accounts as funds loaned through our platform are deposited into and settled by a
third-party online payment service Hui Fu Tian Xia Limited Company.
Regulations on Peer-to-Peer Lending Service Provider
In July 2015, ten
PRC central government ministries and regulators, including the PBOC, the CBRC, the Ministry of Finance, the Ministry of Public
Security and the Cyberspace Administration of China, together released the Guidelines to Promote the Healthy Growth of Internet
Finance (the “
Guidelines
”), which identified the CBRC as the supervisory regulator for the online lending industry.
According to the Guidelines, online marketplace lending platforms shall only serve as intermediaries to provide information services
to borrowers and investors, and shall not provide credit enhancement services or illegally conduct fundraising. The Guidelines
also outlined certain regulatory propositions, which would require Internet finance companies, including marketplace lending platforms,
to (i) complete website registration procedures with the administrative departments overseeing telecommunications; (ii) use
banking financial institutions’ depository accounts to hold lending capital, and engage an independent auditor to audit
such accounts and publish audit results to customers; (iii) improve the disclosure of operational and financial information,
provide sufficient risk disclosure, and set up thresholds for qualified investors to provide better protections to investors;
(iv) enhance online security management to protect customers’ personal and transactional information; and (v) take
measures against anti-money laundering and other financial crimes.
In August 2016, the CBRC,
the MIIT, the Ministry of Public Security and the State Internet Information Office jointly promulgated the Interim Measures.
Apart from what had already been emphasized in the Guidelines and other previously released guidance, the Interim Measures include
(i) general principles; (ii) filing administration; (iii) business rules and risk management guidelines; (iv) protection measures
for investors and borrowers; (v) rules on information disclosure; (vi) supervision and administrative mechanisms; and (vii)
legal liabilities.
Under the general principles
and filing administration sections, the Interim Measures provide that online lending intermediaries shall not engage in credit
enhancement services, direct or indirect cash concentration or illegal fundraising. The sections also stipulate a supervisory
system and list the administrative responsibilities of different supervisory authorities, including the CBRC and its local counterpart
and local financial regulators. Furthermore, these sections require online lending intermediaries to file with the local financial
regulators, to apply for value-added telecommunications business licenses thereafter in accordance with the provisions of the
relevant telecommunications authorities and to include serving as an Internet lending information intermediary in its business
scope.
Under the business
rules and risk management guidelines section, the Interim Measures stipulate that online lending intermediaries shall not engage
in or be commissioned to engage in thirteen prohibited activities, including: (i) directly or indirectly financing its own projects;
(ii) directly or indirectly receiving or collecting lenders’ funds; (iii) directly or indirectly offering guarantees to
lenders or guaranteeing principal and interest payments; (iv) commissioning or authorizing a third-party to advertise or
promote financing projects at any physical locations other than through electronic channels such as the Internet and mobile phones;
(v) providing loans (unless otherwise permitted by laws and regulations); (vi) dividing the term of financing projects; (vii)
offering its own wealth management products or other financial products to raise funds or act as a proxy in the selling of banks’
wealth management products, brokers’ asset management products, funds, insurance or trust products; (viii) providing services
similar to asset-based securitization services or conducting credit assignment activities in the form of asset packaging, asset
securitization, asset trusts or fund shares; (ix) mixing with, bundling with or acting as a proxy in relation to investment, sales
agent and brokerage services of other businesses (unless permitted by laws and regulations); (x) fabricating or exaggerating the
authenticity or earnings outlook of a financing project, concealing its flaws and risks, falsely advertising or promoting a project
with intentional ambiguity or other deceptive means, or spreading false or incomplete information to damage the commercial reputation
of others, or to mislead lenders or borrowers; (xi) providing intermediary services for loans used to invest in high-risk financing
projects such as stocks, over-the-counter margin financing, futures contracts, structured products and other derivatives; (xii) operating
equity-based crowd-funding; and (xiii) other activities prohibited by laws and regulations. The Interim Measures, under the business
rules and risk management section, also stipulate specific obligations or business principles of online lending intermediaries,
including but not limited to online dispute resolution services, examination and verification functions, anti-fraud measures,
risk education and training, information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies,
service fees, electronic signatures and loan management. In addition, the Interim Measures stipulate that online lending intermediaries
shall not operate businesses other than risk management and necessary business processes such as information collection and confirmation,
post-loan tracking and pledge management in accordance with online-lending regulations, via offline physical locations. Furthermore,
the Interim Measures provide that online lending intermediaries shall, based on their risk management capabilities, set upper
limits on the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending
intermediaries. In the case of natural persons, this limit shall not be more than RMB200,000 (approximately $30,734) for one online
lending intermediary and not more than RMB1 million (approximately $153,671) in total from all platforms, while the limit for
a legal person or organization shall not be more than RMB1 million (approximately $153,671) for one online lending intermediary
and not more than RMB5 million (approximately $768,356) in total from all platforms.
In the protection for
investors and borrowers section, the Interim Measures require that online lending intermediaries (i) separate their own capital
from funds received from lenders and borrowers and (ii) select a qualified banking financial institution as their funding depository
institution, which shall perform depository and administration responsibilities as required. In the remaining sections, the Interim
Measures provide for other miscellaneous requirements for online lending intermediaries, including but not limited to, risk assessment
and disclosure, auditing and authentication, industry association, reporting obligations, information security and disclosure
and legal liabilities. Online lending intermediaries established prior to the effectiveness of the Interim Measures have a transition
period of twelve months to rectify any activities that are non-compliant with the Interim Measures, except with respect to criminal
activity, which must be terminated immediately.
In October 2016,
several regulations on Internet finance were publicly announced, including but not limited to, the Notice of the General Office
of the State Council on the Issuance of Special Rectification Implementation Plan regarding Internet Finance, Special Rectification
Implementation Plan regarding Online Marketplace Lending Risks, Special Rectification Implementation Plan for Risks of Asset Management
Business through the Internet and Trans-subject Business, Special Rectification Implementation Plan for Risks regarding Non-Bank
Payment Institutions, Special Rectification Implementation Plan for Risks of Internet Financing Advertising and Financial Activities
in the form of financial investment (together the “
Special Rectification Implementation Plans
”). The Special
Rectification Implementation Plans emphasize principles and rules in related to Internet financial regulations, and stipulate
that (i) “look-through” supervision method shall be adopted, and (ii) companies in the same group that hold a number
of financial business qualifications shall not violate rules of related party transactions and other related business regulations.
In November 2016,
the CBRC, the MIIT and the Industry and Commerce Administration Department, jointly issued the Guidance to the Administration
of Filling and Registration of Online Lending Information Intermediaries (the “Filling Guideline”), which provides
the general filing rules for online lending intermediaries, and delegates the filing authority to local financial authorities.
The Guidance of Administration sets forth that online lending intermediaries are approved locally. Under the general filing procedures
for online lending intermediaries, before a filing application is submitted to local financial regulators, the online lending
intermediaries may be required to: (i) rectify any breach of applicable regulations as required by local financial regulators;
and (ii) apply to the Industry and Commerce Administration Department to amend or register such entity’s the business scope.
The CBRC also authorizes
local financial regulators to make detailed implementation rules regarding filing procedures. However, relevant local financial
regulators are also in the process of making such implementation rules, which may require us to complete filing records under
such future requirements within a grace period.
In February 2017, the
CBRC released the Guidance to regulate funds depositories for online lending intermediaries (the “Depositories Guideline”).
The Guidance defines depositories as commercial banks that provide online lending fund depository services, and stipulates that
the depositories shall not be engaged in offering any guarantee, including: (i) offering guarantees for lending transaction activities
conducted by online lending intermediaries, or undertaking any liability for breach of contract related to such activities; (ii)
offering guarantees to lenders, guarantying principal and dividend payments or bearing the risks associated with fund lending
operations for lenders.
The Guidance also stipulates
certain conditions that must be met before depositories are entitled to develop an online lending fund depository business, including:
(i) having a good credit record and not having been included on the List of Enterprises with Abnormal Operations or the List of
Enterprises with Serious Illegal and Dishonest Acts; (ii) satisfying various requirements relating to the technological systems
of such entity’s depository fund business and general operations, including but not limited to assuming fund administration
responsibilities and not outsourcing or assigning such entity’s responsibilities to third parties to set up accounts, process
trading information or verify trading passwords; and (iii) setting up special deposit accounts to hold online lending capital
and sub-accounts for online lenders and borrowers as well as guarantors, and in order to assure fund security, use separate accounts
to hold private capital of online lending intermediaries. In addition, the Guidance prohibits depositories from outsourcing or
assigning their responsibilities to set up capital accounts, deal with transaction information, verify trading passwords and various
other services to third parties, provided, however, that certain cooperation regarding payment services with third-party payment
companies and depository banks is permitted in accordance with clarifications by the CBRC.
Apart from the requirements
set forth in the Interim Measures and the Guidance of Administration, the Guidance imposes certain responsibilities on online
lending intermediaries, including requiring them to enter into fund depository agreements with only one commercial bank to provide
fund depository services, organize independent auditing on funds depository accounts of borrowers and investors and various other
services. The Guidance also provides that online lending intermediaries are permitted to develop an online lending fund depository
business only after satisfying certain conditions, including: (i) completing registration, filing records and obtaining a business
license from the Industry and Commerce Administration Department; (ii) filing records with the local financial regulator; and
(iii) applying for a corresponding value-added telecommunications business license pursuant with the relevant telecommunication
authorities. The Guidance also requires online lending intermediaries to perform various obligations, and prohibits them advertising
their services with the information of their depository except for in accordance with necessary exposure requirements, the interpretation
and applicability of which is unclear, as well as oversight requirements. The Guidance also raises other business standards and
miscellaneous requirements for depositories and online lending intermediaries as well. Online lending intermediaries and commercial
banks conducting the online depository services prior to the effectiveness of the Guidance have a six-month grace period to rectify
any activities not in compliance with the Guidance.
In March 2017, the Office
of Task Force Responsible for Special Rectification of Risks in Internet Finance in Beijing issued Notice for Factual Acknowledge
by and Rectification of Online Lending Information Intermediaries in Beijing (the “Notice”), pursuant to which, P2P
platforms in Beijing are prohibited from setting up risk reserve fund or security fund for the purpose of providing guarantees
to loans or promoting to investors regarding such types of funds. P2P platforms in Beijing have the same transition period to
be compliant with the Notice as set forth in the Interim Measures.
Some elements of our marketplace
may not currently be operating in full compliance with the Guidelines, the rules proposed by the Interim Measures and other principles
that have been announced in recent years. Moreover, the Interim Measures also stipulated a 12-month transition period from the
time of its effectiveness for online lending intermediaries to adjust their business models.
In addition, pursuant
to the Guideline of CBRC on Risk Prevention and Control in Banking Industry promulgated by CBRC on April 7, 2017, the promotion
for the special risk rectification for internet lending platform (P2P) shall be continued. Internet lending intermediaries shall
not market the borrowers who do not have the repayment ability; and they are also prohibited to provide Internet loan services
to university students who are under the age of 18. It is also emphasized that the advertisement and sales which are fraud or
false shall be prohibited.
In June 2017, the PBOC
together with sixteen other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement of Internet
Finance Risk Rectification and Clearance Task, or the Task Notice. The Task Notice, among other things, gave peer-to-peer platforms
till end of June 2018 to adjust their practices to be compliant with the Interim Measures and in some complicated cases, up to
two years for compliance upon approval by provincial government. During such compliance period, no new non-compliant activities
shall be practiced and existing non-compliant practices shall gradually drop down to nil.
On August 23, 2017,
CBRC issued Disclosure Guideline for Information Regarding Business Activities of Online Lending Information Intermediaries (the
“Disclosure Guideline”) which clarifies, among other things, the items, timing, frequency and objects of disclosure
and gives online lending Intermediaries 6 months to rectify its existing non-compliance business. If online lending Intermediaries
fail to make rectification, then the related rule set forth in Interim Measures and Guidance of Administration shall be governed.
In December 2017,
the Office of Task Force Responsible for Special Rectification of Risks in P2P Online Lending issued the Notice on Inspection
Acceptance of Special Rectification of Risks in P2P Online Lending Intermediaries, or the Circular 57, which requires the Office
together with local financial regulatory authorities, local branches of the CBRC and the People's Bank of China, public security
bureaus, telecommunication administrative agencies and local administration of industry and commerce (“AIC”) to jointly
inspect and determine whether a P2P platform complies with the Interim Measures. Circular 57 further clarifies several matters
including, among other things, the assignment of creditor’s right, the risk reserve fund, the fund depository, the comprehensive
return rate of lending amount and cash loan, the registration requirements for P2P company and its branches, offline operation
and the scale of businesses for P2P platforms, co-operations between P2P platforms and local financial exchanges, the outsourcing
of the business and establishment of branches and disclosure of the information of P2P platforms and its infrastructure etc. Additionally,
Circular 57 promulgates that a P2P platform can be registered with the local financial regulatory authority only after passing
inspection and receiving acceptance certificate or document issued jointly by local financial regulatory authority and local counterparts
of CBRC. Circular 57 requires that the registration of major P2P platforms shall be completed before April 2018 and no later than
end of June 2018 for highly complicated cases.
Regulations on Financing
Guarantee Company
On August 2, 2017,
the State Council issued Administrative Regulations on Supervision of Financing Guarantee Companies (“Financing Guarantee
Company Regulation”), which will be effective on October 1, 2017. The Financing Guarantee Company Regulation increases the
minimum requirement of registered capital from RMB 5,000,000 to RMB 20,000,000. Financing Guarantee Company Regulation also provides
that the balance amount of guarantee liability of a financing guarantee company shall not exceed 10 times the amount of its net
assets. Where a financing guarantee company mainly provides services to small and micro enterprises, agriculture sector, rural
villages and farmers, the balance amount of guarantee liability may be up to 15 times the amount of its net assets.
Foreign Investment in Value-Added
Telecommunication Services
The Provisions on Administration
of Foreign Invested Telecommunications Enterprises promulgated by the State Council in December 2001 and subsequently amended
in September 2008 prohibit a foreign investor from owning more than 50% of the total equity interest in any value-added telecommunications
service business in China and require the major foreign investor in any value-added telecommunications service business in China
have a good and profitable record and operating experience in this industry. The Guidance Catalog of Industries for Foreign Investment
amended in 2015 and Circular 196 promulgated by MIIT in June 2015 allow a foreign investor to own more than 50% of the total equity
interest in an E-Commerce business.
In July 2006, the Ministry
of Information Industry, the predecessor of MIIT, issued the Circular on Strengthening the Administration of Foreign Investment
in the Operation of Value-added Telecommunications Business, pursuant to which a domestic PRC company that holds an operating
license for value-added telecommunications business is prohibited from leasing, transferring or selling such license to foreign
investors in any form and from providing any assistance, including resources, sites or facilities, to foreign investors that conduct
a value-added telecommunications business illegally in China. Further, the domain names and registered trademarks used by an operating
company providing value-added telecommunications services must be legally owned by that company or its shareholders. In addition,
the value-added telecommunication business license holder must have the necessary facilities for its approved business operations
and to maintain the facilities in the regions covered by its license.
In light of the
above restrictions and requirements, we operate our website through Benefactum Beijing, our consolidated variable interest entity.
Benefactum Beijing registered its website
www.hyjf.com
with the Ministry of Industry and Information Technology
(Record No. 13050958) for the provision of non-commercial internet information services on August 28, 2015.
The Interim Measures took
effect immediately on August 17, 2016 and the regulations now explicitly require peer-to-peer lending platforms to apply for value-added
telecommunication business licenses for providing telecommunication services. An online lending intermediary information agency
is not allowed to provide telecommunication services without such licenses. Further in June 2017, the PBOC together with sixteen
other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement of Internet Finance Risk Rectification
and Clearance Task, which, among other things, gave peer-to-peer platforms till end of June 2018 to adjust their practices to
be compliant with the Interim Measures and in some complicated cases, up to two years for compliance upon approval by provincial
government. We plan to apply for the appropriate value-added telecommunication business license immediately after we have rectified
incompliance with applicable regulations as required by local financial regulators, provided that the relevant telecommunication
authority clarifies which sub-set of telecommunication business certificates need to be obtained by online lending platforms and
how to apply for such certificate.
Anti-Money Laundering Regulations
The PRC Anti-money Laundering
Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial
institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary
and supervisory measures, establishment of various systems for client identification, retention of clients’ identification
information and transactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money
Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment
companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions as listed
and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will
be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and regulations
to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as payment
institutions. However, the State Council has not promulgated the list of the non-financial institutions with anti-money laundering
obligations.
The Guidelines jointly
released by ten PRC regulatory agencies in July 2015, purport, among other things, to require internet finance service providers,
including online peer-to-peer lending platforms, to comply with certain anti-money laundering requirements, including the establishment
of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information
and transaction records, and the provision of assistance to the public security department and judicial authority in investigations
and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the
anti-money laundering obligations of internet finance service providers.
The Interim Measures require
the online lending information intermediaries to comply with anti-money laundering and antiterrorism fund raising requirements,
including identifying their clients, reporting suspicious transactions, documenting and storing client identification information
and transaction records. We cannot assure you that our current risk control procedures will be deemed to be in full compliance
with any anti-money laundering laws and regulations that may become applicable to us in the future.
Regulations on Value-Added Telecommunication Services
The Telecommunications
Regulations promulgated by the State Council and its related implementation rules, including the Catalog of Classification of
Telecommunications Business issued by the MIIT, categorize various types of telecommunications and telecommunications-related
activities into basic or value-added telecommunications services, and internet information services, or ICP services, are classified
as value-added telecommunications businesses. In 2009, the MIIT promulgated the Administrative Measures on Telecommunications
Business Operating Licenses, which set forth more specific provisions regarding the types of licenses required to operate value-added
telecommunications services, the qualifications and procedures for obtaining such licenses and the administration and supervision
of such licenses. Under these regulations, a commercial operator of value-added telecommunications services must first obtain
a license for value-added telecommunications business from the MIIT or its provincial level counterparts.
The Guidelines jointly
released by ten PRC regulatory agencies in July 2015, purport, among other things, to require internet finance service providers,
including online peer-to-peer lending platforms, to complete registration with the relevant local counterpart of the MIIT in accordance
with implementation regulations that may be promulgated by the MIIT or/and the Office for Cyberspace Affairs pursuant to the Guidelines.
On August 17, 2016, the Interim Measures were promulgated to implement and enforce the principles set out in the Guidelines.
Pursuant to the Circular
issued on November 28, 2016, internet lending information intermediaries are required to register with the local financial regulatory
agency and with such registration, they can apply for the value-added telecommunication business licenses in accordance with the
relevant provisions of the telecommunication department.
As discussed above, Benefactum
Beijing, our consolidated variable interest entity, does not have the value-added telecommunication business license yet. Because
the Interim Measures took effect immediately on August 17, 2016, peer-to-peer lending platforms are required to hold licenses
for providing telecommunication services. Although the Interim Measures took effect immediately on August 17, 2016, peer-to-peer
platforms were given a year to adjust their practices to comply with them. Further in June 2017, the PBOC together with sixteen
other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement of Internet Finance Risk Rectification
and Clearance Task, which, among other things, gave peer-to-peer platforms till end of June 2018 to adjust their practices to
be compliant with the Interim Measures and in some complicated cases, up to two years for compliance upon approval by provincial
government.
Regulations on Internet Information Security
Internet information in
China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s
national legislative body, has enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal
punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate
politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual
property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among
other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service
provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license
and shut down its websites.
In addition, the Guidelines
jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require internet finance service
providers, including peer-to-peer lending platforms, to improve technology security standards, and safeguard customer and transaction
information. The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules and technology security
standards.
On November 7, 2016, the
Standing Committee of the National People’s Congress released the Cyber Security Law, which will take effect on June 1,
2017. The Cyber Security Law requires network operators to perform certain functions related to cyber security protection and
the strengthening of network information management. For instance, under the Cyber Security Law, network operators of key information
infrastructure generally shall, during their operations in the PRC, store the personal information and important data collected
and produced within the territory of PRC.
Regulations on Internet Advertising
The Interim Measures
for Administration of Internet Advertising, or the Internet Advertising Measures, were adopted by the State Administration for
Industry and Commerce and became effective on September 1, 2016. The Internet Advertising Measures regulate Internet advertising
activities. According to the Internet Advertising Measures, Internet advertisers are responsible for the authenticity of the content
of advertisements. The identity, administrative license, cited information and other certificates that advertisers are required
to obtain in publishing Internet advertisements shall be true and valid. Internet advertisements shall be distinguishable and
prominently marked as “advertisements” in order to enable consumers to identify them as advertisements. Publishing
and circulating advertisements through the Internet shall not affect the normal use of the Internet by users. It is not allowed
to induce users to click on the content of advertisements by any fraudulent means, or to attach advertisements or advertising
links in the emails without permission. The Internet Advertising Measures also impose several restrictions on the forms of advertisements
and activities used in advertising. “Internet advertising” as defined in the Internet Advertising Measures refers
to commercial advertisements that directly or indirectly promote goods or services through websites, web pages, Internet applications
or other Internet media in various forms, including texts, pictures, audio clips and videos. Where Internet advertisements are
not identifiable and marked as “advertisements”, a fine of not more than RMB100,000 (approximately $15,367) may be
imposed in accordance with Advertising Law. A fine ranging from RMB5,000 (approximately $768) to RMB30,000 (approximately $4,610)
may be imposed for any failure to provide a prominently marked “CLOSE” button to ensure “one-click closure”.
Advertisers who induce users to click on the content of advertisements by fraudulent means or without permission, attach advertisements
or advertising links in the emails shall be imposed a fine ranging from RMB10,000 (approximately $1,537) to RMB30,000 (approximately
$4,610). We are in the process of complying with the new Internet Advertising Measures during our advertising activities.
Regulations on Privacy Protection
In recent years, PRC government
authorities have enacted laws and regulations on internet use to protect personal information from any unauthorized disclosure.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in December 2011,
an ICP service operator may not collect any user personal information or provide any such information to third parties without
the consent of a user. An ICP service operator must expressly inform the users of the method, content and purpose of the collection
and processing of such user personal information and may only collect such information necessary for the provision of its services.
An ICP service operator is also required to properly maintain the user personal information, and in case of any leak or likely
leak of the user personal information, the ICP service operator must take immediate remedial measures and, in severe circumstances,
make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening
the Protection of Online Information issued by the Standing Committee of the National People’s Congress in December 2012
and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013,
any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality,
rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also keep such
information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information,
or selling or providing such information to other parties. An ICP service operator is required to take technical and other measures
to prevent the collected personal information from any unauthorized disclosure, damage or loss. Any violation of these laws and
regulations may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation
of filings, closedown of websites or even criminal liabilities. The Guidelines jointly released by ten PRC regulatory agencies
in July 2015 also prohibit internet finance service providers, including online peer-to-peer lending platforms, from illegally
selling or disclosing customers’ personal information. The PBOC and other relevant regulatory authorities will jointly adopt
the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s
Congress in August 2015 and becoming effective in November, 2015, any internet service provider that fails to fulfill the obligations
related to internet information security administration as required by applicable laws and refuses to rectify upon orders, shall
be subject to criminal penalty for the result of (i) any dissemination of illegal information on a large scale; (ii) any severe
effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe
situation, and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable
law, or (ii) steals or illegally obtain any personal information, shall be subject to criminal penalty in a severe situation.
In operating our online
platform, we collect certain personal information from borrowers and investors, and also need to share the information with our
business partners such as third-party online payment service and third-party cooperative partners for the purpose of facilitating
loan transactions between borrowers and investors over our platform. We have obtained consent from the borrowers and investors
on our platform to collect and use their personal information, and have also established information security systems to protect
the user information and privacy. However, as the implementing rules of the Guidelines have not been published, there is uncertainty
as to how the requirements for protecting customers’ personal information in the Guidelines will be interpreted and implemented.
We cannot assure you that our existing policies and procedures will be deemed to be in full compliance with any laws and regulations
that may become applicable to us in the future.
Regulation on Intellectual Property Rights
Patent.
Patents
in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20
years from the date of application, depending on the type of patent right.
Copyright.
Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and
regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark.
Registered
trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with
the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark
which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities
or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable
ten-year period, unless otherwise revoked.
Domain names.
Domain
name registrations are handled through domain name service agencies established under the relevant regulations, and applicants
become domain name holders upon successful registration.
Regulations Relating to Dividend Withholding Tax
Pursuant to the Enterprise
Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the
PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or
establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement
between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on
Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced
to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the
Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements,
or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced
withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise;
and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving
the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules
and regulations. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident
Taxpayers to Enjoy Treatments under Tax Treaties, or Circular 60, which became effective on November 1, 2015. Circular 60 provides
that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced
withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation
that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file
necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by
the relevant tax authorities. Accordingly, Benefactum Sino, our Hong Kong subsidiary, may be able to enjoy the 5% withholding
tax rate for the dividends they receive from Benefactum Shenzhen, our PRC subsidiary, if it satisfies the conditions prescribed
under Circular 81 and other relevant tax rules and regulations. However, according to Circular 81 and Circular 60, if the relevant
tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment,
the relevant tax authorities may adjust the favorable withholding tax in the future.
Regulations Relating to Foreign Exchange
Regulation on Foreign Currency Exchange
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August
2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments
and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE
by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities
is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as
direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities
outside of China. On February 28, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration
of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015,
instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment
from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified banks. The
qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration.
In August 2008, SAFE issued
the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested
enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142,
provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be
used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments
within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency
registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval,
and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations
may result in severe monetary or other penalties.
In November 2012, SAFE
promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment,
which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various
special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and
guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange
profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification
of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously.
In addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches
over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign
exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its
branches.
In July 2014, SAFE issued
SAFE Circular 36, which purports to reform the administration of settlement of the foreign exchange capitals of foreign-invested
enterprises in certain designated areas on a trial basis. Under the pilot program, some of the restrictions under SAFE Circular
142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the
designated areas and the enterprises are allowed to use its RMB capital converted from foreign exchange capitals to make equity
investment. On March 30, 2015, the SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force
and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make equity
investments by using RMB fund converted from foreign exchange capital. However, Circular 19 continues to, prohibit foreign-invested
enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business
scope, providing entrusted loans or repaying loans between non-financial enterprises.
On January 26, 2017, SAFE
issued SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from
domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions
regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic
entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to SAFE
Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide
board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.
Regulations on Dividend Distribution
Under our current corporate
structure, our Nevada holding company may rely on dividend payments from Benefactum Shenzhen, which is a wholly foreign-owned
enterprise incorporated in China, to fund any cash and financing requirements we may have. The principal regulations governing
distribution of dividends of foreign-invested enterprises include the Foreign-Invested Enterprise Law, as amended in October 2000,
and its implementation rules. Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only
out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In
addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises.
Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting
standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends.
Regulations on Overseas Listings
Six PRC regulatory agencies,
including the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,
or the M&A Rules, which became effective in September 2006. The M&A Rules, among other things, require offshore special
purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled
by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas
stock exchange.
While the application
of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, we are not required to submit an application
to the CSRC for the approval of the listing because (i) the CSRC currently has not issued any definitive rule or interpretation
concerning whether offerings like ours under this prospectus are subject to this regulation, and (ii) we did not acquire
any equity interest or assets of a "PRC domestic company" as such term is defined under the M&A Rules, and (iii) there
is no statutory provision that clearly classifies the contractual arrangement among our WFOE, and our PRC varies interest entity,
Benefactum Beijing and its shareholders as transactions regulated by the M&A Rules. However, as there has been no official
interpretation or clarification of the M&A Rules, there is uncertainty as to how this regulation will be interpreted or implemented.
Regulations Relating to Employment
The PRC Labor Law and
the Labor Contract Law require that employers must execute written employment contracts with full-time employees. If an employer
fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship
is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay
the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment
of the employment relationship to the day prior to the execution of the written employment contract. All employers must compensate
their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract
Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises in China are
required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely
a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity
insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of
salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations
where they operate their businesses or where they are located. Failure to make adequate contributions to various employee benefit
plans may be subject to fines and other administrative sanctions.
Although we have made
significant contributions to employee benefits plans, we do not believe those are adequate contributions as required by applicable
PRC laws and regulations. See “Risk Factors—Risks Related to Doing Business in China—Failure to make adequate
contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
Corporate History
and Structure
We were incorporated
as “Tapioca Corp.” in the State of Nevada on April 18, 2014. We were previously in the business of selling bubble
tea from mobile stands in Romania. However, we were not successful in implementing our business plan and only recognized $1,180
in revenue for the year ended December 31, 2015. Accordingly, we were re-classified as a “shell company” under Rule
405 of the Securities Act of 1933, as amended.
On February 22, 2016,
Slav Serghei, our previous sole director, President, Treasurer and Secretary, and holder of 3,500,000 shares of the Company’s
common stock representing approximately 64% of our issued and outstanding securities, entered into a stock purchase agreement
to sell his shares equally to Ms. Zhixian Jiang and Mr. Zhenqi Zhao for an aggregate cash consideration of $182,400 (the “Sale”).
The Sale was consummated on March 2, 2016.
As a result of the Sale
on March 2, 2016, a change in control occurred in the Board of Directors and executive management of the Company. Slav Serghei,
our previous sole director, President, Treasurer and Secretary resigned from all of his positions with the Company effective March
1, 2016. Concurrently therewith, Mr. Jing Xie was appointed to serve as our then sole director, Chief Executive Officer, Chief
Financial Officer and Secretary.
Effective April 18, 2016,
we amended our Articles of Incorporation (i) to change our name from “Tapioca Corp.” to “Sino Fortune Holding
Corporation”; (ii) to increase our authorized capital stock from 75,000,000 shares to 3,000,000,000 shares; and (iii) to
designate 10,000,000 of our authorized capital stock as preferred stock (the “Preferred Stock”), with the designations,
rights, preferences or other variations of each class or series within each class of the shares of Preferred Stock be designated
by the Board of Directors at a later time without shareholder approval.
On May 13, 2016, we entered
into a share exchange agreement (the “Share Exchange Agreement”) and on September 14, 2016, we entered into an amendment
to the Share Exchange Agreement (the “Amendment”) with Benefactum Alliance 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.
Immediately after the
closing of the Reverse Merger, we had a total of 342,960,000 issued and outstanding shares of common stock, all of which are held
by the Shareholders. As a result of the Reverse Merger, Benefactum Alliance is now our wholly-owned subsidiary.
Upon closing of the Reverse
Merger, Mr. Jing Xie resigned from all officers and director positions he held with the Company and Mr. Bodang Liu was appointed
as the Chief Executive Officer and sole director of the Company. In addition, Ms. Wei Zheng was appointed as the Chief Financial
Officer of the Company.
Benefactum Alliance is
a holding company incorporated under the laws of British Virgin Islands on March 15, 2016. On April 7, 2016, Benefactum Sino was
incorporated in Hong Kong SAR which is currently 100% owned by Benefactum Alliance. Benefactum Sino, in turn, incorporated Benefactum
Shenzhen, or the WFOE in the People’s Republic of China with a registered capital of RMB100,000 on April 21, 2016. WFOE
has entered into a series of contractual agreements with Benefactum Beijing, a company incorporated in the People’s Republic
of China on September 10, 2013 with a registered capital of RMB50,000,000.
Benefactum Beijing
incorporated Puhui Equity Investment Co., Ltd (“Puhui”) on February 24, 2017 and incorporated Qianhai Zhonghui Business
Information Consulting Co., Ltd (“Qianhai”) on May 9, 2017. Both Puhui and Qianhai are located in Xinjiang Khorgos
Economic Development Zone in China, where a favorable income tax holiday is offered for service-oriented entities.
On September 1,
2017, Puhui acquired 4.4538% of equity interests in Shenzhen TouZhiJia Financial Information Service Co., Ltd. (“Shenzhen
TouZhiJia Financial”), a company incorporated in the People’s Republic of China. The equity interest Puhui acquired
is held through three limited partnerships wherein each partnership’s sole purpose is to hold the equity interest of Shenzhen
TouZhiJia Financial.
On September 29,
2017, we amended our Articles of Incorporation to change our name from “Sino Fortune Holding Corporation” to “Hui
Ying Financial Holdings Corporation”.
The following diagram
illustrates our current corporate structure:
Contractual Arrangements with Benefactum Beijing
Due to PRC legal restrictions
on foreign ownership and investment in value-added telecommunications services, and internet content provision services in particular,
we currently conduct these activities through Benefactum Beijing, which we effectively control through a series of contractual
arrangements. These contractual arrangements allow us to:
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·
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exercise
effective control over Benefactum Beijing;
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·
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receive
substantially all of the economic benefits of Benefactum Beijing; and
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·
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have
an exclusive option to purchase all or part of the equity interests in Benefactum Beijing
when and to the extent permitted by PRC law.
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As a result of these contractual
arrangements, we have become the primary beneficiary of Benefactum Beijing, and we treat Benefactum Beijing as our variable interest
entity under U.S. GAAP. We have consolidated the financial results of Benefactum Beijing in our consolidated financial statements
in accordance with U.S. GAAP.
The following is a simplified
illustration of the ownership structure and contractual arrangements that we have in place for Benefactum Beijing and a summary
of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Benefactum Shenzhen, our consolidated
variable interest entity, Benefactum Beijing, and the shareholders of Benefactum Beijing.
Each of the contractual
agreements is described in detail below:
Trademarks, Technologies & Management and Consulting
Service Agreement
Pursuant to the Trademarks,
Technologies & Management and Consulting Service Agreement between WFOE and Benefactum Beijing, Benefactum Beijing would transfer
all its rights to its trademarks, technologies and other intellectual property to WFOE. Additionally, Benefactum Beijing has engaged
WFOE as its exclusive management consultant to provide client management, marketing counseling, corporate management, finance
consulting and personnel training services. As consideration for the provision of such services, Benefactum Beijing pays WFOE
a management and consulting fee equivalent to its net profits after tax.
The Trademarks, Technologies&
Management and Consulting Service Agreement remains effective until the date when the WFOE terminates this agreement or when Benefactum
Beijing ceases to exist.
The Equity Interest Pledge Agreement
Under the Equity
Interest Pledge Agreement by and among WFOE, the shareholders of Benefactum Beijing (the “
Benefactum Beijing Shareholders
”)
and Benefactum Beijing, WFOE has lent RMB200 to the Benefactum Beijing Shareholders, who, in turn, pledged all of their equity
interests in Benefactum Beijing to WFOE to guarantee the performance of their obligations to repay the loan. The term of the loan
is for 100 years and repayment of the loan can only occur on the loan maturity date or if WFOE decides to receive the repayment.
Under the terms of the
agreement, WFOE, as pledgee, will be entitled to all the dividends generated by the pledged equity interests.
Exclusive Right and Option to Purchase Agreement
Under the Exclusive Right
and Option to Purchase Agreement, the Benefactum Beijing Shareholders irrevocably granted WFOE an exclusive option to purchase
all assets and equity interests of Benefactum Beijing. The purchase price for the said assets and equity interests shall be the
lowest price allowed by the laws and regulations of the People’s Republic of China.
When WFOE considers it
necessary, feasible under the laws and regulations of the People’s Republic of China and mandatory at the request of the
U.S. Securities and Exchange Commission, WFOE shall exercise this exclusive right and option. When excising its exclusive right,
WFOE shall serve written notice to the Benefactum Beijing Shareholders. Within 7 days of receiving the written notice from WFOE,
the Benefactum Beijing Shareholders and Benefactum Beijing shall provide necessary assistance to transfer the assets and equity
interest.
Equity Interest Holders’ Voting Rights Proxy Agreement
Under the Equity Interest
Holders’ Voting Rights Proxy Agreement, the Benefactum Beijing Shareholders have agreed to authorize a representative/representatives
designated by WFOE to exercise their voting rights at a general meeting of equity interest holders of Benefactum Beijing to, amongst
other things, appoint the Chairman and directors of Benefactum Beijing. Additionally, the Benefactum Beijing Shareholders have
undertaken not to transfer any of their equity interests except to either WFOE or its representative(s). The term of this agreement
shall be the same term as the Equity Interest Pledge Agreement.
Emerging Growth Company Status
We are an “emerging
growth company”, as defined in the Jumpstart Our Business Startups Act enacted on April 5, 2012 (the “
JOBS Act
”).
For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding
advisory “say-on-pay” and “say-when-on-pay” votes on executive compensation and stockholder advisory votes
on golden parachute compensation. Under the JOBS Act, we will remain an emerging growth company until the earliest of:
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the
last day of the fiscal year during which we have total annual gross revenues of $1 billion
or more;
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the
last day of the fiscal year following the fifth anniversary of the date of the first
sale of our common stock;
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the
date on which we have, during the previous three-year period, issued more than $1 billion
in non-convertible debt; or
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the date on which we are deemed to be a “large
accelerated filer” under the Securities Exchange Act of 1934 (the “Exchange Act”) (we will qualify as a large
accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common
equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding common equity will
be measured each year on the last day of our second fiscal quarter
The JOBS Act also provides
that an emerging growth company may utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act,
for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition
period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such
standards is required for companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision
to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
DIRECTORS AND EXECUTIVE
OFFICERS
The following table
sets forth the respective positions and ages of the directors (including director nominees) and executive officers of the Company
as of the date of this prospectus. Each director nominee’s appointment will be effective immediately prior to our contemplated
listing on a national securities exchange. After such time, each director shall hold office until the next annual meeting of shareholders
and thereafter until his or her successor is elected and has qualified.
Name
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Age
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Position
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Bodang Liu
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39
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Chief Executive Officer, Chairman and Director
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Wei Zheng
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36
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Chief Financial Officer, Executive Director Nominee
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Henry F. Schlueter
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66
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Independent Director Nominee
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Io Wai (Alice) Wu
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47
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Independent Director Nominee
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Dr. Fangyu Fei
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68
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Independent Director Nominee
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Biographical Information
Bodang Liu.
Mr. Liu has served as our Chief Executive Officer, Chairman and a Director since September 29, 2016. He also has
been serving as the Executive Director of Benefactum Beijing since September 2013 and as Executive Director and General Manager
of Benefactum Shenzhen since April 2016. In addition, he has been serving as Executive Director at Ningsheng Financial Information
Service (Shanghai) Ltd. since December 2013. Mr. Liu took business management courses at Tsinghua University in October 2010.
He also attended Cheung Kong Graduate School of Business from August 2011 to December 2011, focusing on executive management studies.
In addition, Mr. Liu took courses in financing and secured transactions at Renmin University of China in March 2013 and received
a course-completion certificate. To further his studies in management, Mr. Liu took Executive Master of Business Administration
courses in international finance at Beijing University of Posts and Telecommunications from July 2016 to August 2016.
Wei Zheng.
Ms. Zheng has served as our Chief Financial Officer since September 29, 2016 and has been nominated to serve as a director
on the Board of Directors. Ms. Zheng is a senior accounting and financial manager with more than 10 years of progressive experience
in finance and operations management. Ms. Zheng was appointed as the Chief Financial Officer of Benefactum Beijing in September
2016. She served as the Finance Manager of CWT Commodities (Shanghai) Co., Ltd from March 2015 to August 2016. In addition, Ms.
Zheng worked as the Accounting Manager of Hyundai Heavy Industries (China) Investment Co., Ltd from July 2011 to January 2015.
She also served as the Company Consultant to Xieli Management Consulting (Shenzhen) Co., Ltd from June 2010 to July 2011. Ms.
Zheng’s professional experience also includes serving as the Chief Accountant of Shanghai Sunway Co., Ltd from April 2008
to June 2010. From February 2005 to April 2008, Ms. Zheng was an accountant at New Chen Yi (Shanghai) Industrial Development Co.,
Ltd. Ms. Zheng received her bachelor’s degree in accounting from Harbin University of Commerce in 2005. Ms. Zheng is a member
of the Chinese Institute of Certified Public Accountants (CPA).
Henry F.
Schlueter.
Mr. Schlueter has been the managing director of Schlueter & Associates, P.C., practicing in the areas
of securities, mergers and acquisitions, finance and corporate law, since 1992. Mr. Schlueter has been a director of Bonso
Electronics International Inc. (NASDAQ: BNSO) since October 2001. Mr. Schlueter was admitted to practice law in Colorado and Wyoming,
as well as before the U.S. District Courts for the District of Wyoming and the District of Colorado, and the Tenth Circuit Court
of Appeals. Mr. Schlueter is a registered foreign lawyer with the Hong Kong Law Society and a fellow of the Chartered Institute
of Arbitrators, and is qualified as an arbitrator for the Financial Industry Regulatory Authority (“FINRA”). Mr. Schlueter
is a certified public accountant (inactive) and a member of the American Institute of Certified Public Accountants. Mr. Schlueter
holds a bachelor’s degree in economics from the University of Wyoming, an MBA degree in accounting from the University of
Wyoming, and a J.D. degree from the University of Wyoming. Based on Mr. Schlueter’s substantial experience in the areas
of securities, mergers and acquisitions, finance and corporate law, we believe that Mr. Schlueter is well qualified to serve on
our Board.
Io Wai (Alice)Wu.
Ms. Wu has extensive experience in both auditing financial statements and internal controls of public and private companies.
Ms. Wu currently provides accounting, consulting and advisory services to public and private companies through her own company
Wu & Company, Inc., and has served as a director and the chair of the audit committee of Kingold Jewelry, Inc. since May 2016.
Ms. Wu also served as a director and chaired the audit committee of Yulong Eco-Materials Limited from June 2015 and February 2017.
Ms. Wu had previously held a variety of positions with accounting firms and companies, including serving as the chief financial
officer of The Future Education Group Inc., a Chinese company providing online and mobile education platforms and contents from
February 2015 to December 2015, being a partner of Anton & Chia, LLP from August 2013 to May 2014, being a partner at Cacciamatta
Accounting Corporation from January 2009 to July 2013. Ms. Wu graduated from California State University, Fullerton, with a bachelor’s
degree in business administration with accounting concentration. Given Ms. Wu’s extensive experience in accounting, auditing
and internal controls, we believe that Ms. Wu is well qualified to serve on our Board.
Dr. Fangyu
Fei
.
Dr. Fei is a professional researcher in economics. Dr. Fei has engaged in research and development in economics
with China Academy of Financial Research of Shanghai Jiao Tong University since January 2016. Prior to this, Dr. Fei had held
various positions as Vice Dean, Professor, Researcher with China Academy of Financial Research of Shanghai Jiao Tong University for
six years since April 2009. Dr. Fei currently serves as a director of Shanghai Fuiou Payment Service. Dr Fei has deep
understanding and knowledge in economics, the reform of state-owned enterprises and the supervision and management of state-owned
assets, and is an author of over ten published books. Dr. Fang holds a Ph.D. degree in economics from Shanghai University
of Finance and Economics, a master’s degree in economics from Peking University and a bachelor’s degree in law from
Shanghai Normal University. Based on Dr. Fei’s extensive research experience in China’s economy and in the area of
financial research in particular, we believe that Dr. Fei is well qualified to serve on our Board.
None of the events
listed in Item 401(f) of Regulation S-K has occurred during the past ten years that is material to the evaluation of
the ability or integrity of any of our directors, director nominees or executive officers.
Director Independence
Our board of directors
has identified and nominated for appointment each of Henry F. Schlueter, Io Wai (Alice) Wu and Fangyu Fei to serve as independent
directors on our board of directors. Each of Mr. Schlueter, Ms. Wu and Dr. Fei have agreed to serve on our board of directors
and their appointment will be effective immediately prior to the consummation of this offering. The board of directors has determined
that each of Mr. Schlueter, Ms. Wu and Dr. Fei are “independent” under the current independence standards of Rule
5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and meet the criteria for independence set forth in Rule 10A(m)(3)
under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our board of directors has also determined
that these persons have no material relationships with us — either directly or as a partner, shareholder or officer of any
entity — which could be inconsistent with a finding of their independence as members of our board of directors.
Corporate Governance
In connection with
this offering, we have applied to list our shares of common stock on the NASDAQ Capital Market. Under The NASDAQ Marketplace Rules,
we are required to comply with certain corporate governance standards at the time of listing, which include (i) having a majority
of independent directors on our board; and (ii) establishing an audit committee in compliance with Section 3(a)(58)(A) of the
Exchange Act, a compensation committee and a nominating and governance committee comprised of independent directors. Our audit
committee, compensation committee and nominating and corporate governance committee shall be established immediately prior to
the consummation of this offering, and each of Mr. Schlueter, Ms. Wu and Dr. Fei shall serve on all of the committees. Each committee
shall adopt a charter containing detailed descriptions of the committees’ duties and responsibilities.
Audit Committee
The members of
the audit committee shall consist of Henry F. Schlueter, Io Wai (Alice) Wu and Dr. Fangyu Fei. Ms. Wu will serve as chair of the
audit committee. Each member of the audit committee qualifies as an independent director under the corporate governance standards
of the NASDAQ Listing Rules and the independence requirements of Rule 10A-3 of the Exchange Act. Our board of directors has determined
that Ms. Wu qualifies as an "audit committee financial expert" as such term is currently defined in Item 407(d)(5) of
Regulation S-K and meets the financial sophistication requirements of the NASDAQ Listing Rules. The audit committee will adopt
a written charter that satisfies the applicable standards of the SEC and the NASDAQ Listing Rules, which we will post on our website
immediately prior to the consummation of this offering.
The audit committee
will assist the Board by overseeing the performance of the independent auditors and the quality and integrity of our internal
accounting, auditing and financial reporting practices. The audit committee is responsible for retaining (subject to shareholder
ratification) and, as necessary, terminating the engagement of, the independent auditors, annually reviews the qualifications,
performance and independence of the independent auditors and the audit plan, fees and audit results, and pre-approves audit and
non-audit services to be performed by the auditors and related fees.
Compensation Committee
The members of
the compensation committee shall consist of Henry F. Schlueter, Io Wai (Alice) Wu and Dr. Fangyu Fei. Mr. Schlueter shall serve
as chair of the compensation committee. Each member of the compensation committee shall be an independent director within the
meaning of Rule 16b-3 of the rules promulgated under the Exchange Act, each is an outside director as defined by Section 162(m)
of the United States Internal Revenue. The compensation committee will adopt a written charter that satisfies the applicable standards
of the SEC and the NASDAQ Listing Rules, which we will post on our website immediately prior to the consummation of this offering.
The compensation
committee will make recommendations to the Board concerning salaries and incentive compensation for our officers, including our
principal executive officer, and employees and administers our stock option plans.
Nominating and Corporate Governance
Committee
The members of
the nominating and corporate governance committee shall consist of Henry F. Schlueter, Io Wai (Alice) Wu and Fangyu Fei. Dr. Fei
shall serve serves as chair of the nominating and corporate governance committee. Each member of the nominating and corporate
governance committee shall be an independent director as defined by the NASDAQ Listing Rules. The nominating and corporate governance
committee will adopt a written charter that satisfies the applicable standards of the NASDAQ Listing Rules, which we will post
on our website immediately prior to the consummation of this offering.
The nominating
and corporate governance committee will assist the Board in identifying qualified individuals to become board members, in determining
the composition of the Board and in monitoring the process to assess Board effectiveness.
Board Leadership
Structure and Role in Risk Oversight
Mr. Liu holds the
positions of chief executive officer and chairman of the board of the Company. The board believes that Mr. Liu’s services
as both chief executive officer and chairman of the board is in the best interest of the Company and its shareholders. Mr. Liu
possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company in its business and is
thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical
matters relating to the business of the Company. His combined role enables decisive leadership, ensures clear accountability,
and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the Company’s
shareholders, employees and customers.
The board has not
designated a lead director given the limited number of directors comprising the Board. At such time that the independent director
appointees officially join the Board, we will consider the need for a lead director.
Management is responsible
for assessing and managing risk, subject to oversight by the board of directors. The board oversees our risk management policies
and risk appetite, including operational risks and risks relating to our business strategy and transactions. Once established,
each of the committees of the board will assist the board in this oversight responsibility in their respective areas of expertise.
|
·
|
The
Audit Committee shall assist the board with the oversight of our financial reporting,
independent auditors and internal controls. It will be charged with identifying any flaws
in business management and recommending remedies, detecting fraud risks and implementing
anti-fraud measures. The audit committee shall discuss the Company’s policies with
respect to risk assessment and management with respect to financial reporting.
|
|
·
|
The
Compensation Committee shall oversee compensation, retention, succession and other human
resources-related issues and risks.
|
|
·
|
The
Corporate Governance and Nominating Committee shall oversee risks relating to our governance
policies and initiatives.
|
Code of Business Conduct and Ethics
Our Board of Directors
has adopted a code of business conduct and ethics that applies to our directors, officers and employees, which was filed as Exhibit
14.1 to Form S-1/A on September 22, 2017. Upon completion of this offering, a copy of this code will be available on our website.
We intend to disclose on our website any amendments to the Code of Business Conduct and Ethics and any waivers of the Code of
Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer,
controller, or persons performing similar functions.
EXECUTIVE COMPENSATION
Set forth below is information
regarding the compensation paid during the year ended December 31, 2015 and 2016 to our principal executive officer, principal
financial officer and certain of our other executive officers.
Summary Compensation Table
The summary compensation
table below shows certain compensation information for services rendered in all capacities for the fiscal years ended December
31, 2017 and 2016. Other than as set forth herein, no executive officer’s salary and bonus exceeded $100,000 in any of the
applicable years. The following information includes the dollar value of base salaries, bonus awards, the number of stock options
granted and certain other compensation, if any, whether paid or deferred.
Name and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Slav Serghei, President, Treasurer and
|
|
2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Secretary (1)
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Jing Xie, Former CEO, CFO and director (2)
|
|
2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bodang Liu, CEO and Chairman (3)
|
|
2017
|
|
|
82,457
|
|
|
|
61,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,925
|
|
|
|
2016
|
|
|
24,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,031
|
|
(1) Slav Serghei resigned from all of his positions with
the Company effective March 1, 2016.
(2) Jing Xie served as our CEO, CFO and Chairman from March
1, 2016 through September 29, 2016.
(3) Baodang Liu was appointed our CEO and Chairman effective
September 29, 2016.
Employment Agreements
Mr. Liu entered into an
employment agreement with the Company on September 29, 2016 to serve as the Company’s Chief Executive Officer for a term
of three years. Pursuant to the agreement, Mr. Liu is entitled to an annual salary of $90,000 and annual bonuses as determined
by the Board of Directors. He is also eligible to participate in the Company’s equity incentive plan should the Company
adopts one. The Company can terminate the agreement for Cause (as such term is defined in the employment agreement) or for death
or disability, at any time, without any notice or compensation. The Company may terminate Mr. Liu’s employment without cause,
at any time, upon one-month prior written notice. Upon termination without cause and the occurrence of a Change of Control Transaction
(as such term is defined in the employment agreement), the Company shall provide the following severance payments and benefits
to Mr. Liu: (1) a lump sum cash payment equal to 3 months of his base salary as of the date of such termination; (2) a lump sum
cash payment equal to a pro-rated amount of her target annual bonus for the year immediately preceding the termination, if any;
(3) payment of premiums for continued health benefits under the Company’s health plans for 3 months fo1lowing the termination,
if any; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding equity awards held by Mr. Liu. Additionally,
Mr. Liu is entitled to the amount of base salary earned and not paid prior to termination in the event of termination without
cause. Mr. Liu may terminate his employment at any time with a one-month prior written notice to the Company, if (1) there is
a material reduction in his authority, duties and responsibilities, or (2) there is a material reduction in his annual salary.
Upon Mr. Liu’s termination of his employment due to either of the above reasons, the Company shall provide compensation
to Mr. Liu equivalent to 3 months of his base salary that he is entitled to immediately prior to such termination. In addition,
Mr. Liu may resign prior to the expiration of the agreement if such resignation is approved by the Board of Directors or an alternative
arrangement with respect to the employment is agreed to by the Board of Directors.
Compensation of Directors
Directors are permitted
to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix
the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.
As of the date
of this prospectus, our directors have received no compensation for their service on the Board of Directors. In connection with
their appointments to the Board of Directors, the Company entered into director agreements with each of Mr. Schlueter, Ms. Wu
and Dr. Fei, which agreements will be effective immediately prior to the consummation of this offering. The agreements provide
that the independent directors will be compensated for their services as follows: Mr. Schlueter shall receive $36,000 in cash
annually and shares of the Company’s common stock whose value at the times of award is equivalent to $36,000 annually, Ms.
Wu shall receive $36,000 in cash annually and shares of the Company’s common stock whose value at the times of award is
equivalent to $36,000, and Dr. Fei shall receive shares of the Company’s common stock whose value at the times of award
is equivalent to RMB 600,000. In addition, each of Mr. Schlueter, and Ms. Wu and Dr. Fei shall be reimbursed for reasonable expenses
incurred for meetings attended in person.
Outstanding Equity Awards at Fiscal Year-End
There were no individual
grants or stock options to purchase our common stock made to the executive officers named in the Summary Compensation Table through
December 31, 2017.
Compensation Committee Interlocks and Insider Participation
None of our executive
officers currently serves, or in the past year has served, as a member of the compensation committee or director (or other board
committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity
that has one or more executive officers serving on our Board of Directors.
Equity Compensation Plan
Information
None.
CERTAIN RELATIONSHIPS
AND RELATED-PARTY TRANSACTIONS
In support of the Company’s
efforts and cash requirements, it may rely on advances from related parties until such time that the Company can support its operations
or attains adequate financing through sales of its equity or traditional debt financing. There is no formal written commitment
for continued support by stockholders. Amounts represent advances or amounts paid in satisfaction of liabilities. The advances
are considered temporary in nature and have not been formalized by a promissory note.
During the period from
April 18, 2014 (Inception) to October 31, 2015, our previous sole director and officer loaned to the Company $10,450. The loan
was unsecured, non-interest bearing and due on demand. The balance due to him was $13,800 as of February 23, 2016, $13,800 as
of December 31, 2015 and $5,000 as of October 31, 2014. On February 23, 2016, our previous sole director and officer, Mr. Slav
Serghei forgave the debt owed to him in the amount of $13,800. There is no longer any outstanding balance due to him as a former
officer of the Company.
From June 30, 2017
to December 31, 2017, Benefactum Beijing, provided $40.5 million in capital to Qingdao Weichuang Private Capital Management Co.,
Ltd. (“Qingdao Weichuang”), as trustee, to lend funds directly to SME borrowers as evidenced by entrusted loan agreements.
Benefactum Beijing pays a processing fee equal to 0.15% of the aggregate loan amounts to Qingdao Weichuang for issuing the 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 year ended December 31, 2017, the processing fee expense paid to Qingdao Weichuang amounted to $78,798.
On September 1,
2017, Benefactum Beijing, through its wholly-owned subsidiary Puhui Equity Investment Co., Ltd., acquired 4.4538% of the equity
interests in Shenzhen TouZhiJia Financial Information Service Co., Ltd. (“Shenzhen TouZhiJia Financial”), who refers
potential investors to our online platform through online channel. The Company incurred $353,782 referral service expense to Shenzhen
TouzhiJia Financial for the period from September 1 to December 31, 2017. As of December 31, 2017, the balance of the referral
service fee prepayment to Shenzhen TouZhiJia Financial was $75,149.
For the years ended
December 31, 2017 and 2016, the Company incurred unreimbursed expense paid by Mr. Bodang Liu, our chief executive officer and
chairman, on behalf of the Company. As of December 31, 2017 and 2016, the due to related party balance was $214,571 and $194,313,
respectively. The balances are non-interest bearing and due on demand.
Contractual Arrangements with Benefactum Beijing
Due to PRC legal restrictions
on foreign ownership and investment in value-added telecommunications services, and internet content provision services in particular,
we currently conduct these activities through Benefactum Beijing, which we effectively control through a series of contractual
arrangements. These contractual arrangements allow us to:
|
·
|
exercise effective control over Benefactum
Beijing;
|
|
·
|
receive substantially all of the economic
benefits of Benefactum Beijing; and
|
|
·
|
have an exclusive option to purchase all
or part of the equity interests in Benefactum Beijing when and to the extent permitted by PRC law.
|
As a result of these
contractual arrangements, we have become the primary beneficiary of Benefactum Beijing, and we treat Benefactum Beijing as our
variable interest entity under U.S. GAAP. We have consolidated the financial results of Benefactum Beijing in our consolidated
financial statements in accordance with U.S. GAAP.
The following is a
simplified illustration of the ownership structure and contractual arrangements that we have in place for Benefactum Beijing and
a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Benefactum Shenzhen, our
consolidated variable interest entity, Benefactum Beijing, and the shareholders of Benefactum Beijing.
Each of the contractual
agreements is described in detail below:
Trademarks, Technologies & Management and Consulting
Service Agreement
Pursuant to the
Trademarks, Technologies & Management and Consulting Service Agreement between WFOE and Benefactum Beijing, Benefactum Beijing
would transfer all its rights to its trademarks, technologies and other intellectual property to WFOE. Additionally, Benefactum
Beijing has engaged WFOE as its exclusive management consultant to provide client management, marketing counseling, corporate
management, finance consulting and personnel training services. As consideration for the provision of such services, Benefactum
Beijing pays WFOE a management and consulting fee equivalent to its net profits after tax.
The Trademarks,
Technologies& Management and Consulting Service Agreement remains effective until the date when the WFOE terminates this agreement
or when Benefactum Beijing ceases to exist.
The Equity Interest Pledge Agreement
Under the Equity
Interest Pledge Agreement by and among WFOE, the shareholders of Benefactum Beijing (the “
Benefactum Beijing Shareholders
”)
and Benefactum Beijing, WFOE has lent RMB200 to the Benefactum Beijing Shareholders, who, in turn, pledged all of their equity
interests in Benefactum Beijing to WFOE to guarantee the performance of their obligations to repay the loan. The term of the loan
is for 100 years and repayment of the loan can only occur on the loan maturity date or if WFOE decides to receive the repayment.
Under the terms
of the agreement, WFOE, as pledgee, will be entitled to all the dividends generated by the pledged equity interests.
Exclusive Right and Option to Purchase Agreement
Under the Exclusive
Right and Option to Purchase Agreement, the Benefactum Beijing Shareholders irrevocably granted WFOE an exclusive option to purchase
all assets and equity interests of Benefactum Beijing. The purchase price for the said assets and equity interests shall be the
lowest price allowed by the laws and regulations of the People’s Republic of China.
When WFOE considers
it necessary, feasible under the laws and regulations of the People’s Republic of China and mandatory at the request of
the U.S. Securities and Exchange Commission, WFOE shall exercise this exclusive right and option. When excising its exclusive
right, WFOE shall serve written notice to the Benefactum Beijing Shareholders. Within 7 days of receiving the written notice from
WFOE, the Benefactum Beijing Shareholders and Benefactum Beijing shall provide necessary assistance to transfer the assets and
equity interest.
Equity Interest Holders’ Voting Rights Proxy Agreement
Under the Equity
Interest Holders’ Voting Rights Proxy Agreement, the Benefactum Beijing Shareholders have agreed to authorize a representative/representatives
designated by WFOE to exercise their voting rights at a general meeting of equity interest holders of Benefactum Beijing to, amongst
other things, appoint the Chairman and directors of Benefactum Beijing. Additionally, the Benefactum Beijing Shareholders have
undertaken not to transfer any of their equity interests except to either WFOE or its representative(s). The term of this agreement
shall be the same term as the Equity Interest Pledge Agreement.
Other than the transactions
described above, there are no material relationships between the Company and its current officers and directors or any of the persons
expected to become directors or executive officers of the Company other than the transactions and relationship contemplated in
the Share Exchange Agreement and the Amendment.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table
sets forth, as of December 31, 2017, certain information concerning the beneficial ownership of our common stock by (i) each
stockholder known by us to own beneficially five percent or more of our outstanding common stock or series a common stock; (ii) each
director; (iii) each named executive officer; and (iv) all of our executive officers and directors as a group, and their
percentage ownership and voting power. The column entitled “Percentage of Shares Beneficially Owned—Before Offering”
is based on a total of 72,364,178 shares of our common stock.
The information presented
below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities
and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed
to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the
security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security
as to which such person has the right to acquire sole or shared voting or investment power within sixty (60) days through the
conversion or exercise of any convertible security, warrant, option, or other right. More than one (1) person may be deemed to
be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is
calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which
such person has the right to acquire voting or investment power within sixty (60) days, by the sum of the number of shares outstanding
as of such date. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner.
Except as otherwise indicated below and under applicable community property laws, we believe that the beneficial owners of our
common stock listed below have sole voting and investment power with respect to the shares shown.
Name and Address (1)
|
|
Number of Shares
Beneficially Owned
|
|
|
Percentage
Ownership
of
Shares of
Common Stock
Before the Offering
|
|
|
Percentage
Ownership
of
Shares of
Common Stock
After the Offering
|
|
Directors and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bodang Liu
|
|
|
|
|
|
|
|
|
|
|
|
|
Household 1302, Unit 2, No. 35 Zhangzhou First Road, Shinan District, Qingdao, Shandong, China
|
|
|
67,479,419
|
(2)
|
|
|
93.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wei Zheng
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Officers and Directors (two persons)
|
|
|
67,479,419
|
|
|
|
93.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner of more than 5% of Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avis Genesis Inc. (3)
|
|
|
33,744,283
|
|
|
|
46.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NovaSage Incorporation (Seychelles) Limited, Second Floor, Capital City, Independence Avenue,
Victoria, Mahe, Seychelles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manor Goldie Inc. (4)
|
|
|
33,735,136
|
|
|
|
46.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NovaSage Incorporation (Seychelles) Limited, Second Floor, Capital City, Independence Avenue,
Victoria, Mahe, Seychelles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Except as otherwise set forth
below, the address of each beneficial owner is Rooms 2401, 2402, 2403, 2404 and 2412
on 2299 Yan’an West Road, Shanghai, China.
|
|
(2)
|
Includes
shares owned by Avis Genesis Inc. and Manor Goldie Inc., of which entities Chairman Liu
is sole shareholder and director and has sole investment and voting power over the shares
owned by Avis Genesis Inc. and Manor Goldie Inc.
|
|
(3)
|
Bodang
Liu, our Chairman and Chief Executive Officer, is the sole shareholder and director,
of Avis Genesis Inc., a Seychelles company and has sole investment and voting power over
the shares owned by Avis Genesis Inc.
|
|
(4)
|
Bodang
Liu, our Chairman and Chief Executive Officer, is the sole shareholder of Manor Goldie
Inc., a Seychelles company and has sole investment and voting power over shares owned
by Manor Goldie Inc.
|
DESCRIPTION OF SECURITIES
The following description
of our capital stock is only a summary, and is qualified in its entirety by reference to the actual terms and provisions of the
capital stock contained in our articles of incorporation and our bylaws.
As of December
31, 2017, there were 72,364,178 shares of common stock outstanding, which were held by approximately 226 record shareholders.
Our authorized capital
consists, post reverse stock split, of 608,000,000 shares, of which 598,000,000 shares are designated as shares of common stock,
par value $0.001 per share, and10,000,000 shares are designated as shares of preferred stock, par value $0.001 per share. No shares
of preferred stock are currently outstanding. Shares of preferred stock may be issued in one or more series, each series to be
appropriately designated by a distinguishing letter or title, prior to the issuance of any shares thereof. The voting powers,
designations, preferences, limitations, restrictions, relative, participating, options and other rights, and the qualifications,
limitations, or restrictions thereof, of the Preferred Stock shall hereinafter be prescribed by resolution of the board of director
before the issuance of any shares of Preferred Stock in such series.
Common Stock
Each share of our common
stock entitles its holder to one vote per share on all matters to be voted or consented upon by the stockholders. The holders
of our common stock are entitled to receive dividends, in equal amounts per share, when and as declared by our Board of Directors
from legally available sources, subject to any restrictions in our certificate of incorporation or prior rights of the holders
of our preferred stock. In the event of our liquidation or dissolution, the holders of our common stock are entitled to share
ratably in the assets available for distribution after the payment of all of our debts and other liabilities, subject to the prior
rights of the holders of our preferred stock. The holders of our common stock have no subscription, redemption or conversion privileges.
Our common stock does not entitle its holders to preemptive rights. All of the outstanding shares of our common stock are fully
paid and non-assessable. The rights, preferences and privileges of the holders of our common stock are subject to the rights of
the holders of shares of any series of preferred stock which we may issue in the future.
Transfer Agent
The transfer agent for
our common stock is Globex Transfer, LLC.
Listing
We have applied to have
our common stock listed on the Nasdaq Capital Market under the symbol “HYJF”.
Control Share Acquisitions
The “control share”
provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, apply to “issuing corporations” that are Nevada corporations
with at least 200 stockholders of record, including at least 100 stockholders of record who are Nevada residents, and that conduct
business directly or indirectly in Nevada, unless the corporation has elected to not be subject to these provisions.
The control share statute
prohibits an acquirer of shares of an issuing corporation, under certain circumstances, from voting its shares of a corporation’s
stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s
disinterested stockholders. The statute specifies three thresholds: (a) one-fifth or more but less than one-third, (b) one-third
but less than a majority, and (c) a majority or more, of the outstanding voting power. Generally, once a person acquires shares
in excess of any of the thresholds, those shares and any additional shares acquired within 90 days thereof become “control
shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These
provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority
or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares
are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’
rights. A corporation may elect to not be governed by, or “opt out” of, the control share provisions by making an
election in its articles of incorporation or bylaws, provided that the opt-out election must be in place on the 10th day following
the date an acquiring person has acquired a controlling interest, that is, crossing any of the three thresholds described above.
We have not opted out of these provisions and will be subject to the control share provisions of the NRS if we meet the definition
of an issuing corporation upon an acquiring person acquiring a controlling interest unless we later opt out of these provisions
and the opt out is in effect on the 10th day following such occurrence.
The effect of the Nevada
control share statute is that the acquiring person, and those acting in association with the acquiring person, will obtain only
such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or special meeting.
The Nevada control share law, if applicable, could have the effect of discouraging takeovers of our company.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering,
only a limited public market for our common stock existed on the OTCQB. Future sales of substantial amounts of our common stock
in the public market, including shares issued upon exercise of outstanding warrants, or the anticipation of such sales, could
adversely affect prevailing market prices of our common stock from time to time and could impair our ability to raise equity capital
in the future.
Upon the closing of this
offering, we will have outstanding [●] shares of our common stock. All of the shares sold in this offering will be freely
tradable unless purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933,
as amended, or the Securities Act.
In addition to the [●]
shares of common stock outstanding, upon the completion of this offering and the acquisitions, we will have outstanding [●]
shares of common stock issuable upon the exercise of the Underwriter’s Warrants.
Lock-Up
For further details on
the lock-up agreements, see the section entitled “Underwriting – Lock Up Agreements.”
Rule 144
In general, under Rule
144 of the Securities Act, as in effect on the date of this prospectus, any person who is not our affiliate at any time during
the preceding three months, and who has beneficially owned their shares for at least six months, including the holding period
of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares of our common stock
provided current public information about us is available, and, after owning such shares for at least one year, including the
holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares of
our common stock without restriction.
A person who is our affiliate
or who was our affiliate at any time during the preceding three months, and who has beneficially owned restricted securities for
at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
|
·
|
1%
of the number of shares of our common stock then outstanding, which will equal approximately
[●] shares, or
|
|
·
|
the
average weekly trading volume of our common stock during the four calendar weeks preceding
the filing of a Notice of Proposed Sale of Securities pursuant to Rule 144 with respect
to the sale.
|
Sales under Rule 144 by
our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public
information about us.
UNDERWRITING
In connection
with this offering, we will enter into an underwriting agreement with The Benchmark Company, LLC. Benchmark is acting as the
representative for the underwriters in this offering. Each underwriter named below has severally agreed to purchase from us,
on a firm commitment basis, the number of shares of common stock set forth opposite its name below, at the public offering
price, less the underwriting discount set forth on the cover page of this prospectus.
Underwriter
|
|
Number
of
Shares of
Common Stock
|
|
The Benchmark Company, LLC
|
|
|
|
|
Cuttone & Co., LLC
|
|
|
|
|
Total
|
|
|
|
|
The underwriters
have agreed to purchase all of the shares of common stock offered by this prospectus (other than those covered by the over-allotment
option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to
purchase the shares of common stock, the commitments of non-defaulting underwriters may be increased or the underwriting agreement
may be terminated, depending on the circumstances. The underwriting agreement provides that the obligations of the underwriters
to pay for and accept delivery of the shares of common stock are subject to the passing upon certain legal matters by counsel
and certain conditions such as confirmation of the accuracy of representations and warranties by us about our financial condition
and operations and other matters. The obligation of the underwriters to purchase the shares offered by this prospectus is conditioned
upon our receiving approval to list the shares of common stock on NASDAQ.
Neither the underwriters,
nor any of their respective affiliates have provided any services to us or our affiliates in the past.
Commissions and Discounts
The underwriting
discount is equal to the public offering price per share, less the amount paid by the underwriters to us per share. We estimate
expenses payable by us in connection with this offering, other than the underwriting discounts referred to above, will be approximately
$[●]. This estimate includes up to $105,000 of expenses of the underwriters, which includes the fees and expenses of underwriters’
counsel. In connection with the successful completion of this offering, for the price of $[●] (the public offering price),
the underwriters will receive a warrant to purchase shares of common stock equal to 3.5% of the shares sold in this offering on
the terms described below under “Underwriting — Underwriters’ Warrant.” Except as disclosed in this prospectus,
the underwriters have not received and will not receive from us any other item of compensation or expense in connection with this
offering considered by the Financial Industry Regulatory Authority, Inc. (“FINRA”), to be underwriting compensation
under its rule of fair price. The underwriting discount was determined through an arms’ length negotiation between us and
the underwriters.
The following table provides
information regarding the amount of the discount to be paid to the underwriters by us:
|
|
|
|
|
Total
|
|
|
|
Per Share
|
|
|
With Over-
Allotment
|
|
|
Without
Over-
Allotment
|
|
Public offering price
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Underwriting Discount and Commission (1)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Non-accountable expense allowance (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds, before expenses, to us (3)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(1) Represents underwriting discount
and commissions equal to 6.0% per share (or $[●] per share), which is the underwriting discount and commission we have agreed
to pay on all investors in this Offering introduced by the underwriters. Notwithstanding the foregoing, we have agreed to pay
underwriting discount and commissions equal to 4.0% per share (or $[●] per share) on the initial $20.0 million in offering
proceeds from the sale of shares of common stock in this Offering to investors introduced by us to the underwriters and 2.0% per
share (or $[●] per share) on all additional amounts above $20.0 million in offering proceeds from the sale of shares of
common stock in this Offering to investors introduced by us to the underwriters.
(2) Represents a non-accountable expense
allowance equal to the sum of 1% of the public offering price. We have paid to the underwriters a $60,000 advance to be applied
against the accountable expenses in connection with this offering.
(3) We estimate that the total expenses of
this offering excluding the underwriter discount and commissions and non-accountable expense allowance, will be approximately
$[●] million.
The underwriters may offer
some of the shares to other securities dealers at the public offering price less a concession of $[●] per share. The underwriters
may also allow, and such dealers may re-allow, a concession not in excess of $[●] per share to other dealers. After the
shares are released for sale to the public, the underwriters may change the offering price and other selling terms at various
times
Determination of Offering Price
Prior
to this offering, there has only been limited public market for our common stock. The public offering price of the shares was
determined by negotiation between us and the underwriters. The principal factors considered in determining the public offering
price of the shares included:
● the
information in this prospectus and otherwise available to the underwriters, including our financial information;
● the
history and the prospects for the industry in which we compete;
● the
ability of our management;
● the
prospects for our future earnings;
● the
present state of our development and our current financial condition;
● the
general condition of the economy and the securities markets in the United States at the time of this offering;
● the
recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and
● other
factors as were deemed relevant.
We
cannot be sure that the public offering price will correspond to the price at which the shares will trade in the public market
following this offering or that an active trading market for the shares will develop or continue after this offering.
Over-allotment Option
We have granted
the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus,
permits the underwriters to purchase a maximum of an additional 15% of the total number of shares of common stock offered to the
public from us to cover over-allotments, at the public offering price per share, less the underwriting discount set forth on the
cover page of this prospectus. If the underwriters exercise all or part of this option, they will purchase the shares covered
by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount.
If this option is exercised in full, the total price to the public will be $[●] million and the total proceeds to us, before
expenses, will be $[●] million, based on the public offering price of US$[●] per share and assuming the number of
shares issued in this offering does not change.
Underwriters’ Warrant
We have also agreed
to issue to the underwriters a warrant to purchase a number of shares equal to an aggregate of 3.5% percent of the aggregate number
of the shares sold in this offering. The warrants will be exercisable on a cashless basis at an exercise price equal to the offering
price of the shares sold in this offering. The warrants are exercisable commencing six months after the closing date of this offering,
and will be exercisable for five years from the effective date of the registration statement of which this prospectus forms a part.
The warrants are not redeemable by us. The Underwriters’ Warrants and the shares of common stock issuable upon exercise of
the Underwriters’ Warrants have been registered on the registration statement of which this prospectus forms a part. Pursuant
to applicable FINRA rules, and in particular Rule 5110, the warrants (and underlying shares) issued to the underwriters may not
be sold, transferred, assigned, pledged, or hypothecated, or the subject of any hedging, short sale, derivative, put or call transaction
that would result in the effective disposition of the securities by any person for a period of 180 days after the effective date
of the registration statement related to this offering; provided, however, that the warrants (and underlying shares) may be transferred
to officers or directors of the underwriters and their affiliates as long as the warrants (and underlying shares) remain subject
to the lockup.
Lock-up Agreements
We, each of our directors
and officers and holders of ten percent or more of our common stock on a fully diluted basis immediately prior to the consummation
of this offering have agreed or are otherwise contractually restricted for a period of 180 days after the date of this prospectus,
without the prior written consent of the underwriters, not to directly or indirectly:
|
·
|
issue
(in the case of us), offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or warrant
to purchase, lend or otherwise transfer or dispose of any shares of our common stock
or other capital stock or any securities convertible into or exercisable or exchangeable
for our common stock or other capital stock;
|
|
·
|
in
the case of us, file or cause the filing of any registration statement under the Securities
Act with respect to any shares of our common stock or other capital stock or any securities
convertible into or exercisable or exchangeable for our common stock or other capital
stock, other than registration statements on Form S-8 filed with the SEC after the
closing date of this offering; or
|
|
·
|
enter
into any swap or other agreement, arrangement, hedge or transaction that transfers to
another, in whole or in part, directly or indirectly, any of the economic consequences
of ownership of our common stock or other capital stock or any securities convertible
into or exercisable or exchangeable for our common stock or other capital stock,
|
whether any transaction
described in any of the foregoing bullet points is to be settled by delivery of our common stock or other capital stock, other
securities, in cash or otherwise, or publicly announce an intention to do any of the foregoing.
There are no existing
agreements between the underwriters and any person who will execute a lock-up agreement in connection with this offering providing
consent to the sale of shares prior to the expiration of the lock-up period. The lock up does not apply to the issuance of shares
upon the exercise of rights to acquire shares of common stock pursuant to any existing stock option or the conversion of any of
our preferred convertible stock.
Indemnification and Contribution
The underwriting agreement
provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities
Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities.
We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification of liabilities under the
Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.
Stabilizing Transactions and Penalty Bids
In order to facilitate
this offering, persons participating in this offering may engage in transactions that stabilize, maintain, or otherwise affect
the price of our shares of common stock during and after this offering. Specifically, the underwriters may engage in the following
activities in accordance with the rules of the Securities and Exchange Commission.
Stabilizing
transactions
. The underwriters may make bids for or purchases of shares of our common stock shares or shares for the purpose
of pegging, fixing, or maintaining the price of the shares of our common stock or shares, so long as stabilizing bids do not exceed
a specified maximum.
Penalty bids
.
If the underwriters purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. Stabilization
and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of these transactions.
The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resale of shares.
The transactions above
may occur on NASDAQ or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that
the transactions described above may have on the price of our shares. If these transactions are commenced, they may be discontinued
without notice at any time.
Miscellaneous
A
prospectus in electronic format may be made available on websites maintained by the underwriters. These websites and the information
contained on these websites, or connected to these websites, are not incorporated into and are not a part of this prospectus.
In connection with the offering, the underwriters or syndicate members may distribute prospectuses electronically. No forms of
electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of shares offered by this prospectus to accounts over which
they exercise discretionary authority.
Offer Restrictions Outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities
offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered
by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
China
THIS DOCUMENT HAS NOT
BEEN AND WILL NOT BE CIRCULATED OR DISTRIBUTED IN THE PRC AND THE ORDINARY SHARES MAY NOT BE OFFERED OR SOLD TO ANY PERSON FOR
RE-OFFERING OR RESALE, DIRECTLY OR INDIRECTLY, TO ANY RESIDENT OF THE PRC EXCEPT PURSUANT TO APPLICABLE LAWS AND REGULATIONS OF
THE PRC. FOR THE PURPOSE OF THIS SECTION ONLY, THE PRC DOES NOT INCLUDE TAIWAN AND THE SPECIAL ADMINISTRATIVE REGIONS OF HONG
KONG AND MACAU. THIS DOCUMENT HAS NOT BEEN NOR WILL IT BE APPROVED BY OR REGISTERED WITH THE RELEVANT CHINESE GOVERNMENTAL AUTHORITIES,
AND IT DOES NOT CONSTITUTE NOR IS IT INTENDED TO CONSTITUTE AN OFFER OF SECURITIES WITHIN THE MEANING PRESCRIBED UNDER THE PRC
SECURITIES LAW OR OTHER LAWS AND REGULATIONS OF THE PRC. ACCORDINGLY, THIS DOCUMENT SHALL NOT BE OFFERED OR MADE AVAILABLE, NOR
MAY THE COMMON STOCK BE MARKETED OR OFFERED FOR SALE TO THE GENERAL PUBLIC, DIRECTLY OR INDIRECTLY, IN THE PRC. THE COMMON STOCK
SHALL ONLY BE OFFERED OR SOLD TO PRC INVESTORS THAT ARE AUTHORIZED OR QUALIFIED TO BE ENGAGED IN THE PURCHASE OF THE COMMON STOCK
BEING OFFERED. POTENTIAL INVESTORS IN THE PRC ARE RESPONSIBLE FOR OBTAINING ALL THE RELEVANT REGULATORY APPROVALS/LICENSES FROM
THE CHINESE GOVERNMENT BY THEMSELVES, INCLUDING, WITHOUT LIMITATION, THOSE THAT MAY BE REQUIRED FROM THE STATE ADMINISTRATION
OF FOREIGN EXCHANGE, THE CHINA BANKING REGULATORY COMMISSION, THE MINISTRY OF COMMERCE AND THE NATIONAL DEVELOPMENT AND REFORM
COMMISSION, WHERE APPROPRIATE, AND FOR COMPLYING WITH ALL THE RELEVANT PRC LAWS AND REGULATIONS IN SUBSCRIBING FOR COMMON STOCK.
Hong Kong
THESE SECURITIES HAVE
NOT BEEN DELIVERED FOR REGISTRATION TO THE REGISTRAR OF COMPANIES IN HONG KONG AND, ACCORDINGLY, MUST NOT BE ISSUED, CIRCULATED
OR DISTRIBUTED IN HONG KONG OTHER THAN TO PERSONS WHOSE ORDINARY BUSINESS IT IS TO BUY OR SELL SHARES OR DEBENTURES, WHETHER AS
PRINCIPAL OR AGENT, WITHIN THE MEANING OF THE HONG KONG COMPANIES ORDINANCE (THE “ORDINANCE”) OR IN CIRCUMSTANCES
WHICH DO NOT CONSTITUTE AN OFFER TO THE PUBLIC FOR THE PURPOSES OF THE ORDINANCE. UNLESS PERMITTED BY THE SECURITIES LAWS OF HONG
KONG, NO PERSON MAY ISSUE OR CAUSE TO BE ISSUED IN HONG KONG THIS SECURITIES OR ANY OR OTHER INVITATION, ADVERTISEMENT OR DOCUMENT
RELATING TO THE SECURITIES TO ANYONE OTHER THAN A PERSON WHOSE BUSINESS INVOLVES THE ACQUISITION, DISPOSAL OR HOLDING OF SECURITIES,
WHETHER AS PRINCIPAL OR AGENT.
Singapore
THE SECURITIES REPRESENTED
MAY NOT BE OFFERED OR SOLD, NOR MAY ANY DOCUMENT OR OTHER MATERIAL IN CONNECT WITH SUCH SECURITIES BE DISTRIBUTED, EITHER DIRECTLY
OR INDIRECTLY, (I) TO PERSONS IN SINGAPORE OTHER THAN UNDER CIRCUMSTANCES IN WHICH SUCH OFFER OR SALE DOES NOT CONSTITUTE AN OFFER
OR SALE OF SUCH SECURITIES TO THE PUBLIC IN SINGAPORE OR (II) TO THE PUBLIC OR ANY MEMBER OF THE PUBLIC IN SINGAPORE OTHER THAN
PURSUANT TO, AND IN ACCORDANCE WITH THE CONDITIONS OF, AN EXEMPTION INVOKED UNDER DIVISION 5A OR PART IV OF THE COMPANIES ACT,
CHAPTER 50 OF SINGAPORE AND TO PERSONS TO WHOM THE SECURITIES MAY BE OFFERED OR SOLD UNDER SUCH EXEMPTION.
LEGAL MATTERS
The validity of
the shares of our common stock offered hereby has been passed upon for us by Loeb & Loeb LLP, New York, New York. Schiff Hardin
LLP, Washington, DC, is acting as counsel to the underwriters in connection with the securities offered hereby.
EXPERTS
Friedman LLP, independent
registered public accounting firm, has audited our financial statements at December 31, 2017 and 2016 and for each of the two
years ended December 31, 2017 and 2016 as set forth in their report.
WHERE YOU CAN FIND
MORE INFORMATION
We have filed with the
SEC a registration statement on Form S-1 under the Securities Act, with respect to the shares of common stock being offered
by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For
further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement
and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit
to the registration statement. Each of these statements is qualified in all respects by this reference.
You can read our SEC filings,
including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference facilities at 100 F Street NE, Washington, D.C. 20549. You may
also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F
Street NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facilities. You may also request a copy of these filings, at no cost, by writing us at Rooms 2401, 2402, 2403, 2404
and 2412 on 2299 Yan’an West Road, Shanghai, China or telephoning us at +86 021-2357-0077.
We are subject to the
information reporting requirements of the Exchange Act, and file reports, proxy statements and other information with the SEC.
These reports, proxy statements and other information are available for inspection and copying at the public reference room and
web site of the SEC referred to above. We also maintain a website at www.hyjf.com, at which, following the closing of this offering,
you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished
to, the SEC. The information contained in, or that can be accessed through, our website incorporated by reference in, and is not
part of, this prospectus.
HUI YING FINANCIAL HOLDINGS CORPORATION
(f/k/a SINO FORTUNE HOLDING CORPORATION)
Index to Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the stockholders and the board of directors of
Hui
Ying Financial Holdings Corporation (formerly known as Sino Fortune Holding Corporation) and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Hui Ying Financial Holdings Corporation (formerly known as Sino Fortune
Holding Corporation) and its subsidiaries (collectively, the “Company”) as of December 31, 2017 and 2016, and the
related consolidated statements of income and other comprehensive income (loss), changes in stockholders’ equity, and cash
flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as
the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statement. We believe that our audits provide a reasonable basis for our opinion.
We
have served as the Company’s auditor since 2017.
New
York, New York
March
19, 2018
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,684,370
|
|
|
$
|
8,561,695
|
|
Short-term investments
|
|
|
—
|
|
|
|
8,274,306
|
|
Accounts receivable
|
|
|
690,600
|
|
|
|
281,038
|
|
Short-term loans receivable
|
|
|
40,492,363
|
|
|
|
—
|
|
Prepayments
|
|
|
581,484
|
|
|
|
2,078,926
|
|
Other receivables
|
|
|
749,071
|
|
|
|
755,792
|
|
Due from related party
|
|
|
75,149
|
|
|
|
—
|
|
Total current assets
|
|
|
55,273,037
|
|
|
|
19,951,757
|
|
Property and equipment - net
|
|
|
833,828
|
|
|
|
279,408
|
|
Investment in an equity investee
|
|
|
2,935,121
|
|
|
|
—
|
|
Intangible assets
|
|
|
13,398
|
|
|
|
17,745
|
|
Total assets
|
|
$
|
59,055,384
|
|
|
$
|
20,248,910
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
980,031
|
|
|
$
|
327,071
|
|
Taxes payable
|
|
|
3,326,474
|
|
|
|
1,285,160
|
|
Deferred tax liability
|
|
|
—
|
|
|
|
16,673
|
|
Interest payable
|
|
|
551,087
|
|
|
|
—
|
|
Due to related party
|
|
|
214,571
|
|
|
|
194,313
|
|
Liabilities from risk reserve fund guarantee,
without recourse to the Company
|
|
|
12,105,557
|
|
|
|
7,297,123
|
|
Other payables
|
|
|
289,689
|
|
|
|
18,267
|
|
Total current liabilities
|
|
|
17,467,409
|
|
|
|
9,138,607
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
13,189,164
|
|
|
|
—
|
|
Total long-term liabilities
|
|
|
13,189,164
|
|
|
|
—
|
|
Total liabilities
|
|
|
30,656,573
|
|
|
|
9,138,607
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value, 598,000,000
shares authorized, 72,364,178 shares issued and outstanding as of December 31, 2017 and 2016, respectively
|
|
|
72,364
|
|
|
|
72,364
|
|
Additional paid-in capital
|
|
|
9,527,326
|
|
|
|
9,527,326
|
|
Retained earnings
|
|
|
17,449,837
|
|
|
|
2,175,746
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,349,284
|
|
|
|
(665,133
|
)
|
Total stockholders’ equity
|
|
|
28,398,811
|
|
|
|
11,110,303
|
|
Total liabilities and stockholders’ equity
|
|
$
|
59,055,384
|
|
|
$
|
20,248,910
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
|
|
For the Years Ended
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
Revenues:
|
|
|
|
|
|
|
Financing income from entrusted loans
|
|
$
|
1,583,387
|
|
|
$
|
—
|
|
Loan facilitation and repayment management fees and others
|
|
|
44,914,425
|
|
|
|
24,679,249
|
|
Total revenues
|
|
|
46,497,812
|
|
|
|
24,679,249
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
28,237,779
|
|
|
|
19,355,753
|
|
Business and related taxes
|
|
|
179,347
|
|
|
|
175,854
|
|
Depreciation
|
|
|
128,492
|
|
|
|
678,991
|
|
Total operating expenses
|
|
|
28,545,618
|
|
|
|
20,210,598
|
|
Income from Operations
|
|
|
17,952,194
|
|
|
|
4,468,651
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
196,500
|
|
|
|
112,344
|
|
Interest expense and bank charges
|
|
|
(697,609
|
)
|
|
|
(7,226
|
)
|
Realized gain on investments
|
|
|
393,146
|
|
|
|
—
|
|
Other
|
|
|
(6,456
|
)
|
|
|
(76,467
|
)
|
Total other (expense) income
|
|
|
(114,419
|
)
|
|
|
28,651
|
|
Income before provision for income taxes
|
|
|
17,837,775
|
|
|
|
4,497,302
|
|
Provision for income taxes
|
|
|
(2,563,684
|
)
|
|
|
(1,058,097
|
)
|
Net income
|
|
|
15,274,091
|
|
|
|
3,439,205
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on investments (net of tax effect)
|
|
|
(50,018
|
)
|
|
|
50,018
|
|
Foreign currency translation adjustment
|
|
|
2,064,435
|
|
|
|
(685,947
|
)
|
Total other comprehensive income (loss)
|
|
|
2,011,295
|
|
|
|
(632,952
|
)
|
Total comprehensive income
|
|
$
|
17,288,508
|
|
|
$
|
2,803,276
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
|
|
|
|
|
|
Basic
|
|
|
72,364,178
|
|
|
|
68,540,156
|
|
Diluted
|
|
|
75,697,703
|
|
|
|
68,540,156
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
Balance, January 1,
2016
|
|
|
67,500,000
|
|
|
$
|
67,500
|
|
|
$
|
1,653,520
|
|
|
$
|
(1,263,459
|
)
|
|
$
|
(29,204
|
)
|
|
$
|
428,357
|
|
Shares issued due to reorganization
|
|
|
1,092,000
|
|
|
|
1,092
|
|
|
|
(1,092
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Shares issued pursuant to Private Placement Subscription Agreement
dated October 18, 2016
|
|
|
3,772,178
|
|
|
|
3,772
|
|
|
|
7,874,898
|
|
|
|
|
|
|
|
|
|
|
|
7,878,670
|
|
Net income for the year ended December 31, 2016
(As
Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,439,205
|
|
|
|
|
|
|
|
3,439,205
|
|
Net unrealized gain on investments (net of tax effect)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,018
|
|
|
|
50,018
|
|
Foreign currency translation adjustment
(As Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(685,947
|
)
|
|
|
(685,947
|
)
|
Balance,
December 31, 2016 (Restated)
|
|
|
72,364,178
|
|
|
$
|
72,364
|
|
|
$
|
9,527,326
|
|
|
$
|
2,175,746
|
|
|
$
|
(665,133
|
)
|
|
$
|
11,110,303
|
|
Net income for the year ended December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,274,091
|
|
|
|
|
|
|
|
15,274,091
|
|
Net unrealized gain on investments
(net of tax effect)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,018
|
)
|
|
|
(50,018
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,064,435
|
|
|
|
2,064,435
|
|
Balance,
December 31, 2017
|
|
|
72,364,178
|
|
|
|
72,364
|
|
|
|
9,527,326
|
|
|
|
17,449,837
|
|
|
|
1,349,284
|
|
|
|
28,398,811
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
( Restated)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,274,091
|
|
|
$
|
3,439,205
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
128,492
|
|
|
|
678,991
|
|
Accrued interest for convertible notes
|
|
|
551,087
|
|
|
|
—
|
|
Gain or loss on disposal of fixed assets
|
|
|
—
|
|
|
|
(6,490
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(376,197
|
)
|
|
|
(293,756
|
)
|
Prepayments
|
|
|
1,576,506
|
|
|
|
(1,725,695
|
)
|
Other receivables
|
|
|
55,387
|
|
|
|
72,468
|
|
Due from related party
|
|
|
(72,364
|
)
|
|
|
—
|
|
Accounts payable and accrued liabilities
|
|
|
622,970
|
|
|
|
(701,703
|
)
|
Taxes payable
|
|
|
1,882,499
|
|
|
|
799,277
|
|
Due to related party
|
|
|
6,931
|
|
|
|
203,106
|
|
Liabilities from risk reserve fund guarantee
|
|
|
4,157,957
|
|
|
|
2,340,578
|
|
Other payable
|
|
|
260,215
|
|
|
|
19,061
|
|
Net cash provided by operating activities
|
|
|
24,067,574
|
|
|
|
4,825,042
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(636,915
|
)
|
|
|
(566,409
|
)
|
Purchases of intangible asset
|
|
|
(2,036
|
)
|
|
|
(18,548
|
)
|
Purchase of short-term investments
|
|
|
(7,398,858
|
)
|
|
|
(8,579,041
|
)
|
Proceeds from disposal of short-term investments
|
|
|
15,833,556
|
|
|
|
—
|
|
Disbursements for short-term entrusted loans made
|
|
|
(38,991,980
|
)
|
|
|
—
|
|
Investment in an equity investee
|
|
|
(2,826,365
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(34,022,598
|
)
|
|
|
(9,163,998
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes
|
|
|
13,370,818
|
|
|
|
—
|
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
7,878,670
|
|
Net cash provided by financing activities
|
|
|
13,370,818
|
|
|
|
7,878,670
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change
|
|
|
706,881
|
|
|
|
(690,760
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Net increase
|
|
|
4,122,675
|
|
|
|
2,848,954
|
|
Balance at beginning of year
|
|
|
8,561,695
|
|
|
|
5,712,741
|
|
Balance at end of year
|
|
$
|
12,684,370
|
|
|
$
|
8,561,695
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash received for interest income
|
|
$
|
1,407,769
|
|
|
$
|
112,344
|
|
Cash paid for interest
|
|
$
|
146,507
|
|
|
$
|
—
|
|
Cash paid for income taxes
|
|
$
|
692,655
|
|
|
$
|
15,733
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Transfer of fixed assets as payment to a service provider
|
|
$
|
—
|
|
|
$
|
247,200
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Organization and description of business
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 stockholders
of Benefactum Alliance, namely, Mr. Bodang Liu, Avis Genesis Inc. and Manor Goldie Inc. (each a “Stockholder” and
collectively the “Stockholders”), to acquire all the issued and outstanding capital stock of Benefactum Alliance in
exchange for the issuance to the Stockholders 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 Stockholders 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 Stockholders become the majority stockholders 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 Special Administrative Region (“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.
Note
1 - Organization and description of business - continued
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 Information Consulting 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 Khorgos
Economic Development Zone, where a favorable income tax holiday is offered for service-oriented entities.
Total
assets and liabilities presented on the Consolidated Balance Sheets and revenue, expenses, net income presented on the Consolidated
Statement of Income and Other Comprehensive Income as well as the cash flow from operation, investing and financing activities
presented on the Consolidated Statement of Cash Flows are substantially the financial position, operation and cash flow of the
Company’s VIE-Benefactum Beijing. The Company has not provided any financial support to the VIE for the years ended December
31, 2017 and 2016. The following assets and liabilities of the consolidated VIE are included in the accompanying consolidated
financial statements of the Company as of December 31, 2017 and 2016.
|
|
Balance as of
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Current assets
|
|
$
|
55,273,037
|
|
|
$
|
19,951,757
|
|
Non-current assets
|
|
|
3,782,347
|
|
|
|
297,153
|
|
Total assets
|
|
|
59,055,384
|
|
|
|
20,248,910
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
16,916,322
|
|
|
|
9,065,107
|
|
Non-current liabilities
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
16,916,322
|
|
|
$
|
9,065,107
|
|
Note
2 – Restatement of previously issued consolidated financial statement
During
the preparation of our Annual Report on Form 10-K for the fiscal year of 2017, the Company has discovered errors in expense
cutoff procedures and reclassification of a related party balance, which resulted in misstatements in our previously issued consolidated
financial statements for the year ended December 31, 2016. The consolidated financial statements for the year ended December
31, 2016 have been restated to reflect the correction of the misstatements. The Company has also corrected certain disclosures
related to the consolidated financial statements. The Company’s management discussed the circumstances surrounding the misstatements
with the Board of Directors. In connection with the accounting review, the Company identified material weaknesses in its
internal control over financial reporting, described in further detail in Item 9A, “Controls and Procedures,” contained
in this Annual Report on Form 10-K. As a result of these misstatements, the Company has restated its consolidated financial
statements in accordance with ASC 250,
Accounting Changes and Error Corrections
(the “restated consolidated
financial statements”).
Note
2 – Restatement of previously issued consolidated financial statement - continued
The
impact of these restatements on the consolidated financial statements as previously reported is summarized below:
|
|
As of December 31,
2016
|
|
|
|
As previously reported
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Other receivables
|
|
$
|
792,849
|
|
|
$
|
755,792
|
|
Total current assets
|
|
|
19,988,814
|
|
|
|
19,951,757
|
|
Total assets
|
|
|
20,285,967
|
|
|
|
20,248,910
|
|
Accounts payable and accrued liabilities
|
|
|
227,895
|
|
|
|
327,071
|
|
Due to related party
|
|
|
—
|
|
|
|
194,313
|
|
Other payables
|
|
|
219,911
|
|
|
|
18,267
|
|
Total current liabilities
|
|
|
9,046,762
|
|
|
|
9,138,607
|
|
Total liabilities
|
|
|
9,046,762
|
|
|
|
9,138,607
|
|
Retained earnings
|
|
|
2,310,480
|
|
|
|
2,175,746
|
|
Accumulated other comprehensive income
|
|
|
(670,965
|
)
|
|
|
(665,133
|
)
|
Total stockholder’s equity
|
|
$
|
11,239,205
|
|
|
$
|
11,110,303
|
|
|
|
For the year ended December 31,
2016
|
|
|
|
As previously reported
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
19,221,019
|
|
|
$
|
19,355,753
|
|
Total operating expenses
|
|
|
20,075,864
|
|
|
|
20,210,598
|
|
Income from Operations
|
|
|
4,603,385
|
|
|
|
4,468,651
|
|
Net income
|
|
|
3,573,939
|
|
|
|
3,439,205
|
|
Foreign currency translation adjustment
|
|
|
(691,779
|
)
|
|
|
(685,947
|
)
|
Total other comprehensive income (loss)
|
|
|
(641,761
|
)
|
|
|
(635,929
|
)
|
Total comprehensive income
|
|
$
|
2,932,178
|
|
|
$
|
2,803,276
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Note
3 – Summary of significant accounting policies
Basis
of presentation and principles of consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP” or the “Standard”). The 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, and have been reported in U.S. dollars. All inter-company balances and transactions have been
eliminated in consolidation.
The
series of contractual agreements between WFOE and Benefactum Beijing (see Note 1) 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. As a result of these contractual arrangements, we have become the primary beneficiary of Benefactum Beijing
and determined Benefactum Beijing is our variable interest entity subject to consolidation under U.S. GAAP. Accordingly, the financial
statements of Benefactum Beijing are included in the consolidated financial statements of the Company.
Note
3 – Summary of significant accounting policies - continued
Use
of Estimates
Preparation
of the consolidated 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 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
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 December 31, 2017 and 2016, the carrying amount of cash equivalent was $7,810,995 and Nil, respectively, which was measured
at fair value determined based upon Level 1 inputs.
Short-term
Investments
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 stockholders’ 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, net
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 PRC 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. 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.
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. As of December 31, 2017, the Company did not provide any provision for loan
losses.
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 individually 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.
Note
3 – Summary of significant accounting policies - continued
Prepayments
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
|
|
Shorter of the
lease term and
useful life
|
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.
Note
3 – Summary of significant accounting policies - continued
Fair
Value of Financial Instruments - continued
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 December 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Balance at fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investment – wealth products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash equivalents – money market
funds
|
|
|
7,810,995
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,810,995
|
|
Total
|
|
$
|
7,810,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,810,995
|
|
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
|
|
|
7,398,858
|
|
Unrealized gains
|
|
|
270,433
|
|
Repayments
|
|
|
—
|
|
- Principal
|
|
|
(15,833,556
|
)
|
- Realized gains
|
|
|
(270,433
|
)
|
Effect of exchange rate change
|
|
|
160,392
|
|
Balance, December 31, 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. For the years ended
December 31, 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 4 – Short-term investments.
Note
3 – Summary of significant accounting policies - continued
Risk
Reserve Fund
In
order to better protect the investors’ interests on our online platform, the Company has voluntarily 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 to loans facilitated through our online platform, including third party loan assignments 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.
In the role of transaction intermediary, the Company does not assume credit risk for loans including third party loan assignments
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 regularly if necessary,
usually every quarter to six months.
As
of December 31, 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 assignments by our Creditor Partners. 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. In December 2017, we have started to stop requiring new contributions from most of the borrowers
and guarantors to the risk reserve fund, and stopped advertising the establishment of risk reserve funds on the platform. Existing
reserve funds are being returned to borrowers and /or guarantors as loans mature and are repaid.
Note
3 – Summary of significant accounting policies - continued
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.
Note
3 – Summary of significant accounting policies - continued
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 years ended December 31, 2017 and 2016,
we recorded cash incentives of $2,145,576 and $276,226, all of which were re-characterized and recognized as sales and marketing
expenses, respectively.
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 December 31, 2017 and 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 stockholders’
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 years ended December 31, 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.
Note
3 – Summary of significant accounting policies - continued
The
following table outlines the currency exchange rates that were used in creating the condensed consolidated financial statements
in this report:
|
|
As
of December 31, 2017
|
|
As
of December 31, 2016
|
Balance sheet
items, except for equity accounts
|
|
US$1 = RMB 6.5074
|
|
US$1 = RMB 6.9448
|
|
|
For
the years ended December 31,
|
|
|
2017
|
|
2016
|
Items in the
statements of income and cash flows
|
|
US$1 = RMB 6.7578
|
|
US$1 = RMB 6.6441
|
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 consolidated statements of income and other comprehensive
income (loss) and the consolidated statements of stockholders’ 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.
Note
3 – Summary of significant accounting policies - continued
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.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
(ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605,
Revenue
Recognition
, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification.
The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an
amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued
ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods
within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently,
the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
,
which
is
intended to improve the operability and understandability of the implementation guidance on principal versus agent
considerations; ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing
,
which is intended to clarify two aspects of Topic 606: identifying performance obligations and the
licensing implementation guidance; ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
,
which contains certain provisions and practical expedients in response to identified
implementation issues; and ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers,
which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09
allows for either full retrospective or modified retrospective adoption. The Company adopted ASU 2014-09 and the related ASUs
on January 1, 2018 using the modified retrospective method, which will not result in a cumulative catch-up adjustment to the opening
balance sheet of retained earnings at the effective date.
Note
3 – Summary of significant accounting policies - continued
Under
ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects
the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition
for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (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. ASC 606 also impacts certain other areas, such as the accounting for costs
to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue
and cash flows arising from contracts with customers.
The
Company has performed an assessment of our revenue contracts and concluded that there will be no change to (1) the timing and
pattern of revenue recognition for its current revenue streams in scope of Topic 606, which includes loan facilitation fees, loan
repayment management fees, and financing income from entrusted loan lending transactions, (2) the presentation of revenue as gross
versus net, or (3) the amount of capitalized contract costs upon adoption of Topic 606. Because there will be no change to the
timing and pattern of revenue recognition, we believe there will be no material changes to the Company’s consolidated financial
statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires
an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity’s
leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. A modified retrospective approach is required. The Company anticipates the adoption of ASU 2016-02 will have
a material impact on the Company’s consolidated financial position; however, the Company does not believe adoption will
have a material impact on the Company’s results of operations. The Company believes the most significant impact relates
to our accounting for operating leases for office space and equipment.
In
June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be
effective January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model
for which a company recognizes an allowance based on the estimate of expected credit loss. The Company is evaluating the impact
this ASU will have on its consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.
The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these
amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first,
require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing
elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods
within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019. The Company does not expect that the adoption of
this guidance will have a material impact on its consolidated financial statements.
Note
3 – Summary of significant accounting policies - continued
In
February 2017, the FASB issued ASU No. 2017-05 (“ASU 2017-05”) to provide guidance for recognizing gains and losses
from the transfer of nonfinancial assets and in-substance nonfinancial assets in contracts with non-customers, unless other specific
guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control of a distinct nonfinancial
asset or distinct in substance nonfinancial asset. Additionally, when a company transfers its controlling interest in a nonfinancial
asset, but retains a noncontrolling ownership interest, the company is required to measure any noncontrolling interest it receives
or retains at fair value. The guidance requires companies to recognize a full gain or loss on the transaction. As a result of
the new guidance, the guidance specific to real estate sales in ASC 360-20 will be eliminated. ASU 2017-05 is effective for annual
periods beginning after December 15, 2017, including interim periods within that reporting period. The effective date of this
guidance coincides with revenue recognition guidance. The Company does not expect that the adoption of this guidance will have
a material impact on its consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09 (“ASU 2017-09”) to provide guidance to clarify when to account for a change
to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is
required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as
a result of the changes in terms or conditions. ASU 2017-09 is effective for all entities for annual periods, and interim periods
within those annual periods, beginning after December 15, 2017. Early adoption is permitted and application is prospective. The
Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
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. 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. The Company
does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.
Note
4 – 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 $220,810 (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 $49,623 (or RMB 335,342) on July 11, 2017.
Note
5 – Accounts receivable
Accounts
receivable include service fees generated through our loan original service and loan repayment service as well as interest receivable
from entrusted loans. As of December 31, 2017 and 2016, the Company has service fee receivable balance of $409,566 and $281,038,
respectively, from ChinaPnR and Jiangxi Bank.
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. Starting in March 2017, the Company engaged Jiangxi Bank to provide fund depository services for our marketplace,
pursuant to which Jiangxi Bank will set up separate accounts for borrowers and investors, and assume fund depository functions
including settlement, accounting and safeguarding online lending capital. Third-party online payment agents, such as ChinaPnR,
operate as the payment channels and only transfer funds to and from fund depository account. The service fee receivable balance
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
6 – 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 December 31, 2017, the Company granted entrusted loans in the aggregate principal
amount of $40,492,363 (or RMB 263.5 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 year ended December 31, 2017, the processing fee expense paid to Qingdao Weichuang amounted to $78,798.
Note
7 – Prepayments
The
following is a summary of prepayments as of December 31, 2017 and 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid service fees (i)
|
|
$
|
509,166
|
|
|
$
|
2,071,013
|
|
Prepayment for rent
|
|
|
57,612
|
|
|
|
—
|
|
Prepayment for advertising
|
|
|
14,706
|
|
|
|
—
|
|
Down payment for fixed asset
|
|
|
—
|
|
|
|
7,200
|
|
Others
|
|
|
—
|
|
|
|
713
|
|
Prepayments
|
|
$
|
581,484
|
|
|
$
|
2,078,926
|
|
|
(i)
|
Prepaid
service fees include our prepayments 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. The prepayments
are refundable if the service providers fail to refer potential investors to us. As of
December 31, 2017 and 2016, the balance of prepaid service fee to Nami was $268,029 and
$ 2,069,573, respectively. For the years ended December 31, 2017 and 2016, the aggregated
referral fee paid to Nami amounted to $15,330,787 and $7,895,160, respectively.
|
Note
8 – Other receivables
The
following is a summary of other receivables as of December 31, 2017 and 2016:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
Security deposit
|
|
$
|
188,204
|
|
|
$
|
106,489
|
|
Business-related advances
|
|
|
518,127
|
|
|
|
649,303
|
|
VAT receivable
|
|
|
42,740
|
|
|
|
—
|
|
Other
receivables
|
|
$
|
749,071
|
|
|
$
|
755,792
|
|
Security
deposit represents various deposits made to vendors for lease, renovation and other services. Business-related advances are amounts
advanced or lent without interest to employees and vendors for out-of-pocket expenses and business transactions.
Note
9 – Property and equipment, net
The
following is a summary of property and equipment as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Office furniture
|
|
$
|
54,024
|
|
|
$
|
41,855
|
|
Electronic equipment
|
|
|
351,652
|
|
|
|
310,769
|
|
Automobile
|
|
|
705,219
|
|
|
|
—
|
|
Leasehold improvement
|
|
|
481,183
|
|
|
|
387,298
|
|
Subtotal
|
|
|
1,592,078
|
|
|
|
739,922
|
|
Less: accumulated depreciation
|
|
|
(758,250
|
)
|
|
|
(460,514
|
)
|
Property and equipment, net
|
|
$
|
833,828
|
|
|
$
|
279,408
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016 were $128,492 and $678,991, respectively.
Note
10 – 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 $2,935,121 (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 December 31, 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 14). The Company believes this investment could offer new opportunities for operational synergies
in the financial information service industry.
Note
11 – Taxes payable
The
following is a summary of taxes payable as of December 31, 2017 and 2016:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Value-added tax
|
|
$
|
44,400
|
|
|
$
|
194,178
|
|
Corporate income tax
|
|
|
3,213,110
|
|
|
|
996,274
|
|
Withholding tax
|
|
|
15,175
|
|
|
|
27,505
|
|
Business &
related taxes
|
|
|
53,789
|
|
|
|
67,203
|
|
Taxes
payable
|
|
$
|
3,326,474
|
|
|
$
|
1,285,160
|
|
Note
12 – 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 years ended December 31, 2017 and 2016.
The
following is a roll-forward of the private loan risk reserve fund for the years ended December 31, 2017 and 2016:
Private loan risk reserve
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
7,297,123
|
|
|
$
|
5,410,913
|
|
Increase for new loans
|
|
|
37,127,436
|
|
|
|
24,467,900
|
|
Refund for loan payoffs
|
|
|
(32,969,479
|
)
|
|
|
(22,228,665
|
)
|
Withdrawals for delinquent loans
|
|
|
—
|
|
|
|
—
|
|
Repayments for delinquent loans
|
|
|
—
|
|
|
|
—
|
|
Effect of exchange rate change
|
|
|
650,477
|
|
|
|
(353,025
|
)
|
Balance at end of period
|
|
$
|
12,105,557
|
|
|
$
|
7,297,123
|
|
In
December 2017, we have started to stop requiring new contributions from most of the borrowers and guarantors to the risk reserve
fund, and stopped advertising the establishment of risk reserve funds on the platform. Existing reserve funds are being returned
to borrowers and /or guarantors as loans mature and are repaid.
Note
13 – 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.
Note
13 – Convertible notes payable - continued
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 stockholder 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 years ended December 31, 2017, the financing expense amounted
to $551,087.
Note
14 – Related party transaction
The
following is a summary of related parties’ balances as of December 31, 2017 and 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
Due from related party
|
|
|
|
|
|
|
|
|
Shenzhen TouZhiJia Financial (i)
|
|
$
|
75,149
|
|
|
$
|
—
|
|
Due from related party
|
|
$
|
75,149
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
|
|
|
|
|
|
Mr. Bodang Liu, our chief executive officer and chairman
(ii)
|
|
$
|
214,571
|
|
|
$
|
194,313
|
|
Due to related party
|
|
$
|
214,571
|
|
|
$
|
194,313
|
|
|
(i)
|
On
September 1, 2017, the Company acquired 4.4538% of equity interests in Shenzhen TouZhiJia
Financial, who refers potential investors to our online platform through online channel
(Note 10). The Company incurred $353,782 referral service expense to Shenzhen TouzhiJia
Financial for the period from September 1 to December 31, 2017. As of December 31, 2017,
the balance of the referral service fee prepayment to Shenzhen TouZhiJia Financial was
$75,149.
|
|
(ii)
|
The
due to related party represents unreimbursed expense paid by related party on behalf
of the Company. The balance is non-interest bearing and due on demand.
|
Note
15 – 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.
The
Company and its subsidiaries had operating losses and the Company recorded a full valuation allowance against those tax losses.
All the Company’s consolidated earnings are generated by the Company’ VIE in PRC.
United
States
The
ultimate holding company, Hui Ying Financial Holdings Corporation is an U.S. company and is subject to the U.S. income tax.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted in the United States. The 2017 Tax Act
significantly revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 34% to
21%, implementing a modified territorial tax system and imposing a tax on previously untaxed accumulated earnings and profits
(“E&P”) of foreign subsidiaries (the “Toll Charge”). The Toll Charge is based in part on the amount
of E&P held in cash and other specific assets as of December 31, 2017. The Toll Charge can be paid over an eight-year period,
starting in 2018, and will not accrue interest. The 2017 Tax Act also imposed a global intangible low-taxed income tax (“GILTI”),
which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017
(increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. As a fiscal-year
taxpayer, certain provisions of the 2017 Tax Act may impact the Company in fiscal 2018, including the Toll Charge, while other
provisions, including the GILTI, will be effective starting at the beginning of fiscal 2019.
On
December 22, 2017, the Securities and Exchange Commission Staff issued Accounting Bulletin No. 118, Income Tax Accounting Implications
of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Tax
Act. SAB 118 provides a measurement period that extends beyond one year from the 2017 Tax Act’s enactment date for registrants
to complete the accounting under ASC 740. In accordance with SAB 118, a registrant must reflect the income tax effects of those
aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a registrant’s accounting
for certain income tax effects of the 2017 Tax Act is incomplete, but the registrant is able to determine a reasonable estimate,
the registrant must record a provisional estimate to be included in its financial statements. If a registrant is unable to determine
a reasonable estimate and record a provisional estimate, the registrant should continue to apply ASC 740 on the basis of the provision
of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.
The
Company has determined that the Company’s main operating entity in PRC is a VIE owned through contractual agreements instead
of direct equity interest. A VIE does not qualify as a reportable controlled foreign corporation (“CFC”) in accordance
with its understanding of the Act and guidance available and as a result the Company assessed that it is not subject to the Toll
charge tax and GILTI tax under the newly enacted tax laws. .
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.
Note
15 – Income taxes - continued
China
The
Company’s subsidiary - Benefactum Shenzhen and VIE - 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%. Benefactum
Beijing obtained the qualification of High-tech Enterprise in the PRC and enjoys a reduced income tax rate of 15% for a three-year
period starting from the tax year of 2017. The qualification of High-tech Enterprise can be renewed upon expiration after the
re-evaluation by the PRC authority. Benefactum Beijing’s subsidiaries- Qianhai and Puhui are located in Xinjiang Khorgos
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 years ended December 31, 2017 and 2016:
|
|
For the years ended December
31,
|
|
Current:
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
—
|
|
|
$
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
2,563,684
|
|
|
|
1,058,097
|
|
Current provision
|
|
|
2,563,684
|
|
|
|
1,058,097
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
United States
|
|
|
—
|
|
|
|
—
|
|
Hong Kong
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
—
|
|
|
|
—
|
|
Deferred provision
|
|
|
—
|
|
|
|
—
|
|
Total provision for income taxes
|
|
$
|
2,563,684
|
|
|
$
|
1,058,097
|
|
The
following table reconciles the statutory rates to the Company’s effective tax rate for the years ended December 31, 2017
and 2016:
|
|
For the years ended
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Chinese statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-deductible expense per PRC tax code
|
|
|
1.2
|
%
|
|
|
5.1
|
%
|
Effect of tax holiday
|
|
|
(11.8
|
)%
|
|
|
|
|
Utilization of net operating loss
|
|
|
—
|
|
|
|
(6.6
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
14.4
|
%
|
|
|
23.5
|
%
|
For
the year ended December 31, 2017 and 2016, the tax holiday effect on basic and diluted net income per share were both $0.03 and
Nil per share, respectively. As of December 31, 2017 and 2016, the Company had deferred tax liability of Nil and $16,673, respectively.
Note
16 – Stockholders’ equity
(a)
Common stock
As
of December 31, 2017 and 2016, the Company had 598,000,000 shares authorized and
72,364,178
shares of common stock issued and outstanding.
(b)
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.
Note
17 – Earnings per share
The
following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2017 and
206:
|
|
For the years ended December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
Net income - basic
|
|
$
|
15,274,091
|
|
|
$
|
3,439,205
|
|
Reversal of financing expense on convertible note payable
|
|
|
551,087
|
|
|
|
—
|
|
Net income - diluted
|
|
$
|
15,825,178
|
|
|
$
|
3,439,205
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of shares - basic
|
|
$
|
72,364,178
|
|
|
$
|
68,540,156
|
|
Conversion of convertible note payable
|
|
|
3,333,525
|
|
|
|
—
|
|
Weighted average number of shares - diluted
|
|
|
75,697,703
|
|
|
|
68,540,156
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
Net income per share - diluted
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
Note
18 – Operating Leases
The
Company leases office space for its headquarters in Shanghai and branches in Beijing and Shandong province, and total operating
lease expense for the years ended December 31, 2017 and 2016 were $611,335 and $894,638, respectively, which were included in
selling, general, and administrative expenses. Future minimum lease payments under non-cancellable operating leases with a term
of one year or more consist of the following:
Year
|
|
|
Minimum lease payment
|
|
2018
|
|
|
$
|
816,698
|
|
2019
|
|
|
|
81,776
|
|
2020
|
|
|
|
—
|
|
Thereafter
|
|
|
|
—
|
|
Note
19 –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 $12,684,370 and $8,561,695 as of
December 31, 2017 and 2016, respectively, of which no deposits were covered by insurance. For the years ended December 31, 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 years ended December 31, 2017 and 2016.
90.2%
and 91.8% of the loans facilitated through our platform for the years ended December 31, 2017 and 2016 were referred through three
and two investor referral groups, respectively. Any loss of referrals from these referral groups may have a material impact on
the Company’s operation results.
Note
20 – Subsequent event
For
purpose of preparing these consolidated financial statements, the Company considered events through March 19, 2018, 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.
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
SCHEDULE
I- PARENT COMPANY BALANCE SHEETS
(UNAUDITED)
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(As Restated)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
$
|
28,949,898
|
|
|
$
|
11,110,303
|
|
Due from subsidiaries
|
|
|
13,189,164
|
|
|
|
—
|
|
Total assets
|
|
$
|
42,139,062
|
|
|
$
|
11,110,303
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liability
|
|
|
|
|
|
|
|
|
Interest payable
|
|
|
551,087
|
|
|
|
—
|
|
Total current liability
|
|
|
551,087
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
13,189,164
|
|
|
|
—
|
|
Total liabilities
|
|
|
13,740,251
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 598,000,000
shares authorized, 72,364,178 shares issued and outstanding as of December 31, 2017 and 2016, respectively
|
|
|
72,364
|
|
|
|
72,364
|
|
Additional paid-in capital
|
|
|
9,527,326
|
|
|
|
9,527,326
|
|
Retained earnings
|
|
|
17,449,837
|
|
|
|
2,175,746
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,349,284
|
|
|
|
(665,133
|
)
|
Total stockholders’ equity
|
|
|
28,398,811
|
|
|
|
11,110,303
|
|
Total liabilities and stockholders’ equity
|
|
$
|
42,139,062
|
|
|
$
|
11,110,303
|
|
The
accompanying notes are integral part of Schedule I
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
SCHEDULE
I - STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
For The Year Ended
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(As Restated)
|
|
|
|
|
|
|
|
|
Equity in profit of subsidiaries
|
|
$
|
15,825,178
|
|
|
$
|
3,439,205
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
551,087
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
15,274,091
|
|
|
|
3,439,205
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
|
15,274,091
|
|
|
|
3,439,205
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
2,014,417
|
|
|
|
(635,929
|
)
|
Total comprehensive income
|
|
$
|
17,288,508
|
|
|
$
|
2,803,276
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are integral part of Schedule I
HUI
YING FINANCIAL HOLDINGS CORPORATION
(f/k/a
SINO FORTUNE HOLDING CORPORATION AND SUBSIDIARIES)
SCHEDULE
I - STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(As Restated)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,274,091
|
|
|
$
|
3,439,205
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Equity in profit of subsidiary
|
|
|
(15,825,178
|
)
|
|
|
(3,439,205
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Due from subsidiaries
|
|
|
(13,189,164
|
)
|
|
|
|
|
Interest payable
|
|
|
551,087
|
|
|
|
—
|
|
Net cash used in operating activities
|
|
$
|
(13,189,164
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes
|
|
|
13,189,164
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
13,189,164
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
—
|
|
|
|
—
|
|
Cash, beginning of year
|
|
|
—
|
|
|
|
—
|
|
Cash, end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
The
accompanying notes are integral part of Schedule I
NOTES
TO SCHEDULE I
NOTE
1. BASIS OF PRESENTATION
Certain
information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted. The Company’s investment in subsidiary and variable interest entity
(“VIE”) is stated at cost plus equity in undistributed earnings of subsidiaries.
NOTE
2. RESTRICTED ASSETS
The
Company’s PRC VIE and subsidiary are restricted in their ability to transfer a portion of their net assets to the Company.
The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in
the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards
and regulations in China. The Company’s subsidiaries and its VIEs are also required to set aside at least 10% of its after-tax
profit based on PRC accounting standards each year to its statutory reserves account until the accumulative amount of such reserves
reaches 50% of its respective registered capital. The aforementioned reserves can only be used for specific purposes and are not
distributable as cash dividends.
In
addition, the Company’s operations and revenues are conducted and generated in China, all of the Company’s revenues
being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulation in China,
and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations
that restrict the Company’s ability to convert RMB into US Dollars.
Schedule
I of Article 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted
net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed
fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the
registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of
the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances
or cash dividends without the consent of a third party. The condensed parent company financial statements have been prepared in
accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiary and
VIE exceed 25% of the consolidated net assets of the Company.
NOTE
3. COMMITMENTS
The
Company did not have any significant commitments as at December 31, 2017 and 2016.
[●] shares of common stock
HUI YING FINANCIAL HOLDINGS CORPORATION
PROSPECTUS
, 2018
The Benchmark Company, LLC
|
Cuttone & Co., LLC
|
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses
of Issuance and Distribution
The following table sets
forth the various expenses, all of which will be borne by the registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for
the SEC registration fee and the FINRA filing fee.
SEC registration fee
|
|
$
|
4,867.80
|
|
FINRA filing fee
|
|
$
|
*
|
|
Accounting fees and expenses
|
|
$
|
115,200
|
|
Legal fees and expenses
|
|
$
|
376,836
|
|
Printing and Engraving
|
|
$
|
59,201
|
|
Transfer agent and registrar fees
|
|
$
|
*
|
|
Miscellaneous
|
|
$
|
*
|
|
* To be provided by amendment.
Item 14.
Indemnification
of Directors and Officers.
Pursuant to Section 78.7502
of the Nevada Revised Statutes, we have the power to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the Company, by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action,
suit or proceeding if the person acted in good faith and in a manner which he or she reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe
the conduct was unlawful. Our Articles of Incorporation and Bylaws provide that the registrant shall indemnify its directors and
officers to the fullest extent permitted by the Nevada law.
With regard to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director,
officer or controlling person of the Corporation in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the common shares being registered, we will, unless in the opinion
of our counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question
of whether such indemnification by us is against public policy as expressed in the Securities Act of 1933, as amended, and will
be governed by the final adjudication of such case.
Item 15.
Recent Sales
of Unregistered Securities.
The information below
lists all of the securities sold by us during the past three years which were not registered under the Securities Act:
On October 18, 2016,
we sold 18,860,246 (or 3,772,178 after considering the effect of 1-for-5 reverse stock split approved in June 2017) shares of
common stock to non-US persons for total gross proceeds of RMB 51,252,322 (approximately, $7,878,670). The sales price of the
shares ranged from $0.40 to $0.425.
The above issuances were
made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act and/or Regulation S promulgated
under the Securities Act as a transaction by an issuer not involving a public offering.
Item 16.
Exhibits and
Financial Statement Schedules.
(a)
The
following exhibits are filed as part of this Registration Statement:
Number
|
|
Description
|
|
|
|
1.1
|
|
Form of Underwriting Agreement **
|
|
|
|
2.1
|
|
Agreement
and Plan of Merger dated June 5, 2017. *
|
|
|
|
3.1
|
|
Certificate of Incorporation of Sino Fortune Holding Corporation(Incorporated herein by reference
to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Commission on December 18, 2014)
|
|
|
|
3.2
|
|
Bylaws of Sino Fortune Holding Corporation(Incorporated herein by reference to Exhibit 3.2
to the Company’s Registration Statement on Form S-1 filed with the Commission on December 18, 2014)
|
|
|
|
3.3
|
|
Certificate of Amendment filed with the Nevada Secretary of State on April 4, 2016 (Incorporated
by reference to Exhibit 3.1 to our current report on Form 8-K filed with the SEC on April 8, 2016.)
|
|
|
|
3.4
|
|
Certificate
of Change filed with the Secretary of State of the State of Nevada on June 20, 2017 (Incorporated by reference to Exhibit
3.1 to our current report on Form 8-K filed with the Commission on June 26, 2017.)
|
|
|
|
3.5
|
|
Articles of Merger filed with the Secretary of State of the State of Nevada on September 27, 2017 (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed with the Commission on October 2, 2017.)
|
|
|
|
3.6
|
|
Certificate of Correction filed with Secretary of State of the State of Nevada on September 29, 2017 (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed with the Commission on October 2, 2017.)
|
|
|
|
4.1
|
|
Specimen Stock Certificate of Common Stock **
|
|
|
|
4.2
|
|
Form of Note (7).
|
|
|
|
5.1
|
|
Legal opinion of Loeb & Loeb LLP **
|
|
|
|
10.1
|
|
Share Exchange Agreement by and among Sino Fortune Holding Corporation, Benefactum Alliance
Holdings Company Limited, and the shareholders of Benefactum Alliance Holdings Company Limited dated May 13, 2016. (Incorporated
by reference to Exhibit 10.1 to our current report on Form 8-K filed with the SEC on May 13, 2016.)
|
|
|
|
10.2
|
|
Amendment to Share Exchange Agreement by and among Sino Fortune Holding Corporation, Benefactum
Alliance Holdings Company Limited, and the shareholders of Benefactum Alliance Holdings Company Limited dated September 14,
2016. (Incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed with the SEC on September 14, 2016.)
|
|
|
|
10.3
|
|
Share Transfer Agreement between Benefactum Alliance Business Consultant (Beijing) Co., Ltd.
and Bodang Liu dated January 9, 2016. (Incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed with
the SEC on September 30, 2016)
|
|
|
|
10.4
|
|
Acquisition Agreement between Benefactum Alliance Business Consultant (Beijing) Co., Ltd.
and Ningsheng Financial Information Service (Shanghai) Ltd. dated December 5, 2015 (Incorporated by reference to Exhibit 10.4
to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.5
|
|
Lease Agreement between Benefactum Alliance Business Consultant (Beijing) Co., Ltd. and Guan
Ailing dated March 28, 2016. (Incorporated by reference to Exhibit 10.5 to our current report on Form 8-K filed with the SEC
on September 30, 2016)
|
|
|
|
10.6
|
|
Lease Agreement between Benefactum Alliance Business Consultant (Beijing) Co., Ltd. and Qingdao
Ya Mai Real Estate Development Limited Company dated September 30, 2014. (Incorporated by reference to Exhibit 10.6 to our
current report on Form 8-K filed with the SEC on September 30, 2016)
|
10.7
|
|
Lease Agreement between Ningsheng Financial Information Service (Shanghai) Ltd.
and Shanghai World Trade Mall Limited Company dated October 29, 2015 (Incorporated by reference to Exhibit 10.7 to our current
report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.8
|
|
Lease Agreement between Ningsheng Financial Information Service (Shanghai) Ltd. and Shanghai
World Trade Mall Limited Company dated October 29, 2015 (Incorporated by reference to Exhibit 10.8 to our current report on
Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.9
|
|
Lease Agreement between Benefactum Alliance Business Consultant (Beijing) Co., Ltd. and Shanghai
World Trade Mall Limited Company dated on March 15, 2016 (Incorporated by reference to Exhibit 10.9 to our current report
on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.10
|
|
Supplemental Agreement to Lease Agreement between Benefactum Alliance Business Consultant
(Beijing) Co., Ltd. and Shanghai World Trade Mall Limited Company dated April 29, 2016. (Incorporated by reference to Exhibit
10.10 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.11
|
|
Modification Agreement to the Lease Agreement among Benefactum Alliance Business Consultant
(Beijing) Co., Ltd., Ningsheng Financial Information Service (Shanghai) Ltd. and Shanghai World Trade Mall Limited Company
dated March 11, 2016 (Incorporated by reference to Exhibit 10.11 to our current report on Form 8-K filed with the SEC on September
30, 2016)
|
|
|
|
10.12
|
|
Employment Agreements between Sino Fortune Holding Corporation and Bodang Liu dated September
29, 2016 (Incorporated by reference to Exhibit 10.12 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.13
|
|
Employment Agreements between Sino Fortune Holding Corporation and Wei Zheng dated September
29, 2016 (Incorporated by reference to Exhibit 10.13 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.14
|
|
Assets Purchase Agreement with Shanghai Nami Financial Consulting Co., Ltd. dated April 30,
2016 (Incorporated by reference to Exhibit 10.14 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.15
|
|
Strategic Cooperation Agreement and Supplementary Agreement with Shanghai Nami Financial Consulting
Co., Ltd. dated April 1, 2016 (Incorporated by reference to Exhibit 10.15 to our current report on Form 8-K filed with the
SEC on September 30, 2016)
|
|
|
|
10.16
|
|
Cooperation Agreement with Shangrao City Yi Lu Tong Limited Company dated May 15, 2016 (Incorporated
by reference to Exhibit 10.16 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.17
|
|
Cooperation Agreement Beijing Quan Shi Tian Di Online Internet Information (Beijing Daily
Online Network Information) Co., Ltd dated May 10, 2016 (Incorporated by reference to Exhibit 10.17 to our current report
on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.18
|
|
Agency Agreement regarding Trademark with Beijing Wei Ben Intellectual Property Management
Limited Company dated May 5, 2016 (Incorporated by reference to Exhibit 10.18 to our current report on Form 8-K filed with
the SEC on September 30, 2016)
|
|
|
|
10.19
|
|
Cooperation Agreement with China Construction Bank Corporation Limited Shanghai Second Branch
dated February, 2016 (Incorporated by reference to Exhibit 10.19 to our current report on Form 8-K filed with the SEC on September
30, 2016)
|
10.20
|
|
Electronic Stamp Product Contract with China Financial Certification Authority
dated August 4, 2014 (Incorporated by reference to Exhibit 10.20 to our current report on Form 8-K filed with the SEC on September
30, 2016)
|
|
|
|
10.21
|
|
Cooperation Structure Agreement with Weihai Hui Yin Pawnshop Limited Company dated April 6, 2016 (Incorporated by reference to Exhibit 10.21 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.22
|
|
Confidential Agreement with Weihai Hui Yin Pawnshop Limited Company dated April 6, 2016 (Incorporated
by reference to Exhibit 10.22 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.23
|
|
Cooperation Structure Agreement with Shandong Yin Qiao Guarantee Limited Company dated May
30, 2016 (Incorporated by reference to Exhibit 10.23 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.24
|
|
Confidential Agreement with Shandong Yin Qiao Guarantee Limited Company dated May 30, 2016
(Incorporated by reference to Exhibit 10.24 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.25
|
|
Advertisement Cooperation Agreement with TouZhiJia Financial Information Service Limited Company
dated March 28, 2016 (Incorporated by reference to Exhibit 10.25 to our current report on Form 8-K filed with the SEC on September
30, 2016)
|
|
|
|
10.26
|
|
Cooperation Agreement with Qing Dao Zhong Ying Asset Management Limited Company dated February
3, 2016. (Incorporated by reference to Exhibit 10.26 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.27
|
|
Confidential Agreement with Qing Dao Zhong Ying Asset Management Limited Company dated February
3, 2016. (Incorporated by reference to Exhibit 10.27 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.28
|
|
Supplemental Agreement to the Cooperation Structure Agreement with Inner Mongolia Jinfengyuan
Financing Guarantee Co., Ltd. dated February 23, 2016 (Incorporated by reference to Exhibit 10.28 to our current report on
Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.29
|
|
Cooperation Structure Agreement with Inner Mongolia Jinfengyuan Financing Guarantee Co., Ltd.
dated October 30, 2015. (Incorporated by reference to Exhibit 10.29 to our current report on Form 8-K filed with the SEC on
September 30, 2016)
|
|
|
|
10.30
|
|
Insurance Contract with Sunshine Insurance Group Limited Company dated November 4, 2015. (Incorporated
by reference to Exhibit 10.30 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.31
|
|
Member Service Agreement with Beijing Allwin Credit Co., Ltd. dated July 3, 2015. (Incorporated
by reference to Exhibit 10.31 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.32
|
|
Cooperation Agreement with Jilin Longsheng Pawnshop Co., Ltd. dated November 26, 2015 (Incorporated
by reference to Exhibit 10.32 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.33
|
|
Confidential Agreement with Jilin Longsheng Pawnshop Limited Company dated November 26, 2015
(Incorporated by reference to Exhibit 10.33 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
10.34
|
|
Cooperation Agreement with HaodaiTianxia Information Technology (Beijing) Limited
Company dated November 18, 2015 (Incorporated by reference to Exhibit 10.34 to our current report on Form 8-K filed with the
SEC on September 30, 2016)
|
|
|
|
10.35
|
|
Confidential Agreement with HaodaiTianxia Information Technology (Beijing) Limited Company
dated November 18, 2015 (Incorporated by reference to Exhibit 10.35 to our current report on Form 8-K filed with the SEC on
September 30, 2016)
|
|
|
|
10.36
|
|
Project Cooperation Agreement among Benefactum Beijing, Huang Zhi Ying, Shenzhen Qianhai Da
Fei Financial Service Limited Company, Gong Yun Hong, Cao Cheng, Qinhuangdao Rong Tai Guarantee limited Company dated November
16, 2015 (Incorporated by reference to Exhibit 10.36 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.37
|
|
Cooperation Agreement with Weifang Run Ze Pawnshop Limited Company dated October 19, 2015(Incorporated
by reference to Exhibit 10.37 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.38
|
|
Cooperation Agreement with Yantai Hai Zhi Zhou Pawnshop Limited Company dated August 3, 2015
(Incorporated by reference to Exhibit 10.38 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.39
|
|
Advertisement Cooperation Agreement with Wang Dai Zhi Jia Limited Company dated July 20, 2016
(Incorporated by reference to Exhibit 10.39 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.40
|
|
Cooperation Agreement with Weifang City Zifang District Yin Xin Small Loan Limited Company
dated October 30, 2015 (Incorporated by reference to Exhibit 10.40 to our current report on Form 8-K filed with the SEC on
September 30, 2016)
|
|
|
|
10.41
|
|
Supplemental Agreement to the Cooperation Agreement with Weifang City Zifang District Yin
Xin Small Loan Limited Company dated February 23, 2016 (Incorporated by reference to Exhibit 10.41 to our current report on
Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.42
|
|
Cooperation Agreement with Qingdao Shungeng Pawnshop Limited Company dated October 30, 2015
(Incorporated by reference to Exhibit 10.42 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.43
|
|
Cooperation Agreement With Qingdao Miguo Software Technology Limited Company dated December
21, 2015 (Incorporated by reference to Exhibit 10.43 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.44
|
|
Hui Fu Tian Xia Escrow Account Service Agreement with Shanghai Hui Fu (ChinaPnR) Data Service
Limited Company dated December 31, 2014 (Incorporated by reference to Exhibit 10.44 to our current report on Form 8-K filed
with the SEC on September 30, 2016)
|
|
|
|
10.45
|
|
Supplemental Agreement to Hui Fu Tian Xia Escrow Account Service Agreement with Shanghai Hui
Fu (ChinaPnR) Data Service Limited Company dated December 31, 2014 (Incorporated by reference to Exhibit 10.45 to our current
report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.46
|
|
Supplemental Agreement regarding Fast Recharge Function with Shanghai Hui Fu (ChinaPnR) Data
Service Limited Company dated December 31, 2014 (Incorporated by reference to Exhibit 10.46 to our current report on Form
8-K filed with the SEC on September 30, 2016)
|
10.47
|
|
Cooperation Agreement with Guo Zhao Financing and Leasing Limited Company dated
April 6, 2016 (Incorporated by reference to Exhibit 10.47 to our current report on Form 8-K filed with the SEC on September
30, 2016)
|
|
|
|
10.48
|
|
Supplementary Agreement to the Cooperation Agreement with Guo Zhao Financing and Leasing Co.,
Ltd. dated April 5, 2016 (Incorporated by reference to Exhibit 10.48 to our current report on Form 8-K filed with the SEC
on September 30, 2016)
|
|
|
|
10.49
|
|
Cooperation Agreement with Qingdao Zhong Yi Pai Mai (Qingdao China Arts Auction) Co., Ltd.
dated November 12, 2013 (Incorporated by reference to Exhibit 10.49 to our current report on Form 8-K filed with the SEC on
September 30, 2016)
|
|
|
|
10.50
|
|
Cooperation Agreement with China Ruidong Sports Technology Limited Company dated March 30,
2016 (Incorporated by reference to Exhibit 10.50 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.51
|
|
Confidential Agreement with China Ruidong Sports Technology Limited Company dated March 30,
2016(Incorporated by reference to Exhibit 10.51 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.52
|
|
Cooperation Agreement with Hangzhou Wu Yun Internet Technology Limited Company dated January
19, 2016 (Incorporated by reference to Exhibit 10.52 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.53
|
|
Cooperation Agreement with Hangzhou Wu Yun Internet Technology Limited Company dated June
15, 2016 (Incorporated by reference to Exhibit 10.53 to our current report on Form 8-K filed with the SEC on September 30,
2016)
|
|
|
|
10.54
|
|
Cooperation Agreement with Inner Mongolia Zhong Xin Tong Investment Co., Ltd. and Inner Mongolia
Jinfengyuan dated June 1, 2016 (Incorporated by reference to Exhibit 10.54 to our current report on Form 8-K filed with the
SEC on September 30, 2016)
|
|
|
|
10.55
|
|
Cooperation Agreement with Qingdao Rongshun Pawn Co., Ltd. dated October 30, 2015 (Incorporated
by reference to Exhibit 10.55 to our current report on Form 8-K filed with the SEC on September 30, 2016)
|
|
|
|
10.56
|
|
Form of Subscription Agreement (Incorporated by reference to Exhibit 10.1 to our current report
on Form 8-K filed with the SEC on October 10, 2016)
|
|
|
|
10.57
|
|
Form of Escrow Agreement (Incorporated by reference to Exhibit 10.2 to our current report
on Form 8-K filed with the SEC on October 10, 2016)
|
|
|
|
10.58
|
|
Short-Term Entrusted Financial Management Contract (Incorporated by reference to Exhibit 10.1
to our current report on Form 8-K filed with the SEC on November 10, 2016)
|
|
|
|
10.59
|
|
Trademarks, Technologies & Management and Consulting Service Agreement, dated April 28,
2016, by and between Benefactum Alliance (Shenzhen) Investment Consulting Co., Ltd. and Benefactum Alliance Business Consulting
(Beijing) Co., Ltd. (5)
|
|
|
|
10.60
|
|
Exclusive Right and Option to Purchase Agreement, dated April 28, 2016, by and among Benefactum
Alliance (Shenzhen) Investment Consulting Co., Ltd., Bodang Liu, Wei Li, and Benefactum Alliance Business Consulting (Beijing)
Co., Ltd. (5)
|
|
|
|
10.61
|
|
The Equity Interest Pledge Agreement, dated April 28, 2016, by and among Benefactum Alliance
(Shenzhen) Investment Consulting Co., Ltd., Bodang Liu, Wei Li, and Benefactum Alliance Business Consulting (Beijing) Co.,
Ltd. (5)
|
10.62
|
|
Equity
Interest Holders’ Voting Rights Proxy Agreement, dated April 28, 2016, by and among Bodang Liu, Wei Li and Benefactum
Alliance (Shenzhen) Investment Consulting Co., Ltd. (5)
|
|
|
|
10.63
|
|
Amendment No. 1
to the Employment Agreement, dated April 11, 2017, by and between the Company and Wei Zheng (5)
|
|
|
|
10.64
|
|
Cooperation Agreement
on Payment and Settlement Services of Fund Depository Business, dated March 20, 2017, by and between Benefactum Alliance Business
Consulting (Beijing) Co., Ltd. and Jiangxi Bank (5)
|
|
|
|
10.65
|
|
Share Transfer Framework
Agreement dated June 14, 2017 among the Company, Shenzhen TouZhiJia Financial Information Service Co., Ltd. and the shareholders
named therein. (6)
|
|
|
|
10.66
|
|
Form of Securities
Purchase Agreement (7).
|
|
|
|
10.67
|
|
Form of Stock Pledge
Agreement (7).
|
|
|
|
10.68
|
|
Form of Entrusted
Loan Contract (7).
|
|
|
|
10.69
|
|
Form of Entrusted
Loan Guarantee Contract (7).
|
|
|
|
10.70
|
|
Lease Agreement between Guan Ailing and Benefactum Alliance Business Consultant (Beijing) Co., Ltd., dated March 1, 2018
|
|
|
|
10.71
|
|
Lease
Agreement between Shanghai Mart Co., Ltd. and Benefactum Alliance Business Consultant (Beijing) Co., Ltd. ShangHai Branch,
dated June 15, 2017
|
|
|
|
14.1
|
|
Code of Ethics Applicable To Directors, Officers And Employees *
|
|
|
|
21.1
|
|
List
of Subsidiaries
|
|
|
|
23.1
|
|
Consent
of Friedman LLP
|
|
|
|
23.2
|
|
Consent of Loeb
& Loeb LLP (included in Exhibit 5.1)**
|
|
|
|
24.1
|
|
Power of Attorney
(included on signature page of this Part II)*
|
|
|
|
99.1
|
|
Legal Opinion of AllBright Law Offices. *
|
|
**
|
To be filed by amendment
|
(1) Incorporated herein by reference to the
exhibit to the Company’s Registration Statement on Form S-1 filed with the Commission on December 18, 2014.
(2) Incorporated by reference to the exhibit
to our current report on Form 8-K filed with the SEC on April 8, 2016.
(3) Incorporated by reference to the exhibit
to our current report on Form 8-K filed with the SEC on May 13, 2016.
(4) Incorporated by reference to the exhibit to our current report
on Form 8-K filed with the SEC on September 14, 2016.
(5) Incorporated by reference to the exhibit to our annual report
on Form 10-K filed with the SEC on April 13, 2017.
(6) Incorporated by reference to the exhibit to our current report
on Form 8-K filed with the SEC on June 20, 2017.
(7) Incorporated by reference to the exhibit to our current report
on Form 8-K filed with the SEC on July 7, 2017.
Item 17.
Undertakings.
The undersigned registrant
hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
The undersigned registrant
hereby undertakes that:
(1)
For
purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2)
For
the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) to reflect in the
prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) to include any material
information with respect to the plan of distribution not previously disclosed in the registration statement or any material change
to such information in the registration statement.
(4) That,
for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(5) To
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at
the termination of the offering.
(6) That,
each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included
in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in
a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to
a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date
of first use.
(7) That,
for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution
of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the method used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) any preliminary prospectus
or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) the portion of any
other free writing prospectus relating to the offering containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(iv) any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1/A and has duly caused this registration statement or amendment thereto to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Shanghai, China, on March 26, 2018.
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HUI YING FINANCIAL HOLDINGS CORPORATION
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By:
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/s/ Bodang Liu
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Name:
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Bodang Liu
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Title:
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Chief Executive Officer (Principal Executive Officer)
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SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature
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Title
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Date
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/s/
Bodang Liu
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Chief Executive
Officer,
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March
26, 2018
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Bodang Liu
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(Principal Executive
Officer)
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/s/
Wei Zheng
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Chief Financial
Officer
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March
26, 2018
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Wei Zheng
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(Principal Accounting
and Financial Officer)
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