Senmiao Technology(AIHS) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Unaudited condensed consolidated financial statements for Senmiao Technology Limited reflect significant revenue growth from the new automobile transaction business Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2019 | March 31, 2019 | | :--- | :--- | :--- | | Total Assets | $17,854,623 | $12,314,135 | | Cash and cash equivalents | $5,438,125 | $5,020,510 | | Accounts receivable, net | $1,849,418 | $326,181 | | Inventories | $2,536,026 | $1,508,244 | | Total Liabilities | $9,074,163 | $3,931,393 | | Derivative liabilities | $4,156,147 | $0 | | Total Equity | $8,780,460 | $8,382,742 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Account | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--- | :--- | :--- | | Revenues | $5,094,440 | $125,026 | | Cost of revenues | ($4,022,312) | $0 | | Gross Profit | $1,072,128 | $125,026 | | Total operating expenses | ($1,468,226) | ($1,058,566) | | Net Loss | ($505,432) | ($930,364) | | Net loss attributable to stockholders | ($578,360) | ($930,364) | | Loss per share (Basic and diluted) | ($0.02) | ($0.04) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($3,761,808) | ($917,870) | | Net Cash Used in Investing Activities | ($695,077) | ($33,869) | | Net Cash Provided by Financing Activities | $4,940,913 | $104,272 | | Net increase (decrease) in cash | $417,615 | ($889,879) | Organization and Principal Activities Senmiao Technology operates two main business segments in China: online lending and automobile transaction services, utilizing VIE agreements for control - The company operates in two segments: (i) online lending services via its VIE, Sichuan Senmiao, and (ii) automobile transaction and related services for the ride-hailing industry via its subsidiary Hunan Ruixi and VIE Jinkailong[18] - In November 2018, the company acquired a 60% equity interest in Hunan Ruixi, which holds automobile sales and financial leasing licenses, and made a full cash contribution of $6 million by June 30, 2019[21] - The company controls Sichuan Senmiao and Jinkailong through VIE agreements, allowing consolidation of their financial statements, with total assets of approximately $8.0 million and liabilities of $9.6 million as of June 30, 2019[30][33][34] Summary of Significant Accounting Policies The company adopted ASC 606 and ASC 842, recognizing ROU assets and lease liabilities, and details fair value measurements for derivative liabilities - Adopted ASC 606 (Revenue from Contracts with Customers) on April 1, 2019, with no material impact on the timing and pattern of revenue recognition[70][71] - Adopted ASC 842 (Leases) on April 1, 2019, recognizing approximately $384,000 in Right-of-Use assets and $378,000 in lease liabilities for operating leases[99][100] - Warrants from a June 2019 offering are classified as derivative liabilities and measured at fair value on a recurring basis using Level 3 inputs (Black-Scholes model), with a fair value of $4,156,147 as of June 30, 2019[48][49][50] Commitments and Contingencies The company has significant off-balance sheet commitments, including $4.9 million in automobile purchase contracts and $14.5 million in contingent guarantee liabilities - As of June 30, 2019, the company had outstanding purchase contracts for 433 automobiles with an aggregate price of approximately $4.9 million[177] - The company is exposed to a maximum contingent liability of approximately $14.5 million from its guarantee services on automobile financing if all purchasers were to default, with estimated collateral (automobiles) fair market value of about $12.4 million[181] Segment Information The company reports two segments, with the automobile business generating most revenue and profit, while online lending incurred a significant loss Segment Performance for Three Months Ended June 30, 2019 | Segment | Revenues | Income / (Loss) from Operations | | :--- | :--- | :--- | | Automobile Transaction and Related Services | $5,012,563 | $415,602 | | Online Lending Services | $81,877 | ($472,345) | | Unallocated | $0 | ($339,355) | | Consolidated Total | $5,094,440 | ($396,098) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to automobile services as the primary revenue source, de-emphasizing online lending due to regulatory changes - The company is now primarily a provider of automobile transaction and related services for the ride-hailing industry in China, having de-emphasized its online lending platform business[189][190] - The automobile business, started in late 2018, generated $5.0 million in revenue for the quarter ended June 30, 2019, accounting for 98.4% of total revenue[234][235] - The online lending business is facing significant regulatory headwinds in China, including requirements to reduce business scale, which has led to a decrease in revenue and a strategic shift away from this segment[216][217][219] - A registered direct offering in June 2019 raised approximately $5.1 million in net proceeds, which will be used to expand the automobile transaction business[266] Results of Operations Revenues surged to $5.1 million, driven by the new automobile segment's gross profit of $0.99 million, leading to a reduced net loss of $0.51 million Comparison of Operations (Three Months Ended June 30) | Account | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenues | $5,094,440 | $125,026 | $4,969,414 | | Gross Profit | $1,072,128 | $125,026 | $947,102 | | Loss from operations | ($396,098) | ($933,540) | $537,442 | | Net Loss | ($505,432) | ($930,364) | $424,932 | - The $5.0 million revenue from the new automobile segment was the sole driver of growth, while revenue from online lending services decreased by $43,149[234] - Selling, general and administrative (SG&A) expenses increased by $480,805, primarily due to $573,692 in SG&A from the new automobile business[251] Liquidity and Capital Resources Liquidity is supported by public offering proceeds, with $5.4 million in cash and $3.8 million net cash used in operations, deemed sufficient for 12 months - Cash and cash equivalents were $5,438,125 as of June 30, 2019[262] - Closed a registered direct offering on June 21, 2019, with net proceeds of approximately $5.1 million to fund the expansion of the automobile business[266] Cash Flow Summary (Three Months Ended June 30, 2019) | Activity | Amount | | :--- | :--- | | Net Cash Used in Operating Activities | ($3,761,808) | | Net Cash Used in Investing Activities | ($695,077) | | Net Cash Provided by Financing Activities | $4,940,913 | Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Senmiao Technology Limited is not required to provide market risk disclosures - The company states this section is not applicable[312] Controls and Procedures Disclosure controls and procedures were ineffective due to material weaknesses in internal control, with remediation plans including hiring staff and improving functions - Disclosure controls and procedures were deemed not effective as of June 30, 2019[312] - Identified material weaknesses include: insufficient U.S. GAAP expertise, lack of a comprehensive accounting manual, improper procedures for related-party transactions, and ineffective entity-level controls[312] - Remediation plans include hiring additional accounting staff, improving internal audit functions, and investing in technology infrastructure[312] PART II – OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - None[315] Risk Factors As a smaller reporting company, Senmiao Technology Limited is not required to provide risk factor information - Not required to provide information as a smaller reporting company[315] Other Information Key events include the acquisition of a 49% stake in an automobile leasing company and the issuance of common stock from warrant exercises - On July 5, 2019, the company's subsidiary agreed to acquire a 49% stake in Mashang Chuxing, an automobile leasing company, and will make a capital contribution of approximately RMB 4.9 million (~$731,000)[316] - On August 13, 2019, the company issued 500,470 shares of common stock upon the exercise of Series B warrants related to the June 2019 public offering[317] Exhibits This section lists exhibits filed with the Form 10-Q, including various agreements and officer certifications - Lists various agreements such as the Intercity Carpool Business Cooperation Agreement and Securities Purchase Agreement[318] - Includes certifications from the Principal Executive Officer and Principal Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act[319]