Senmiao Technology(AIHS) - 2020 Q4 - Annual Report

PART I Item 1. Business Senmiao Technology focuses on automobile services for China's ride-hailing industry, discontinuing P2P lending in October 2019 - Senmiao Technology Limited is a U.S. holding company focused on automobile transaction and related services for the ride-hailing industry in China[17] - The company discontinued its online P2P lending services in October 2019 due to declining transaction volume and a tighter regulatory environment, reallocating resources to automobile services[19][20] Revenue from Automobile Transaction and Related Services (FY2020) | Service Type | Revenue (Millions USD) | | :----------------------------------------- | :--------------------- | | Automobile Transaction and Related Services | 15.6 | | Online Lending Services (Discontinued) | 0.11 | Overview The company facilitates automobile transactions and services in China's ride-hailing industry, ending P2P lending - Senmiao Technology Limited, a Nevada-incorporated U.S. holding company, facilitates automobile transaction and related services in China's ride-hailing industry through its subsidiaries Hunan Ruixi, Ruixi Leasing, and VIE Jinkailong[17] - The company's automobile services include auto financing and transaction facilitation, auto sales, automobile operating lease, and automobile financing[18] - Online P2P lending services were discontinued in October 2019 due to industry decline and regulatory tightening, with resources shifted to automobile services[19][20] Our Corporate History This section details the company's incorporation, key acquisitions, and establishment of subsidiaries since 2017 - Incorporated in Nevada on June 8, 2017, the company established Sichuan Senmiao Zecheng Business Consulting Co., Ltd. (Senmiao Consulting) in China in July 2017[21] - Acquired a P2P platform in September 2016 for RMB 69.69 million (approximately $10.1 million) through Sichuan Senmiao, which later sold its equity interest in an investment fund to focus on online lending[23][24] - Acquired 60% equity interest in Hunan Ruixi Financial Leasing Co., Ltd. in November 2018 for no consideration, with a commitment to contribute $6 million in cash, which was fully made[25] - Formed Yicheng Financial Leasing Co., Ltd. (Yicheng) in May 2019 with $50 million registered capital, commencing automobile sales in June 2019[28] Our Corporate Structure The company controls key subsidiaries through VIE agreements and voting arrangements, enabling financial consolidation - The company controls Sichuan Senmiao (a VIE) through a series of contractual arrangements (VIE Agreements) via its wholly-owned subsidiary Senmiao Consulting, allowing consolidation of Sichuan Senmiao's financial statements[22][29][36] - Hunan Ruixi owns 35% equity in Jinkailong and controls the remaining 65% through voting agreements with other shareholders, enabling consolidation of Jinkailong's financial statements[27][38][39] - Key VIE agreements include an Equity Interest Pledge Agreement, Exclusive Business Cooperation Agreement, Exclusive Option Agreement, and Powers of Attorney, ensuring operational control and economic benefits[30][32][33][34] Recent Developments Recent events include a public offering, COVID-19 impacts, and a significant investment agreement with performance targets - In June 2019, the company completed a registered direct public offering, issuing 1,781,361 shares of common stock and warrants for approximately $6 million in gross proceeds, used for general corporate purposes including automobile purchases and leasing services[40][42] - The COVID-19 pandemic significantly impacted business operations, leading to temporary office closures, reduced demand for ride-hailing services, adverse effects on revenue and collections, and increased bad debt expenses of $3,406,215[45][46][47][48] - In July 2020, Jinkailong entered into an investment agreement with Hongyi Industrial Group Co., Ltd., where Hongyi will subscribe for a 27.03% equity interest for RMB 50 million (approximately $7.0 million), with performance targets set for Jinkailong's annual revenue and net profit over three years[51][52][54] - The JKL Investment Agreement includes redemption rights for Hongyi if performance targets are not met or other adverse events occur, potentially requiring Hunan Ruixi to repurchase Hongyi's equity interest up to RMB 28.32 million (approximately $4.0 million)[55] Our Automobile Transaction and Related Services The company offers auto financing, sales, and leasing services, primarily to Didi drivers, with diverse revenue streams - As of March 31, 2020, the company facilitated financing for 1,626 automobiles ($23.2 million total value), sold 1,388 automobiles ($13.4 million total value), and delivered 557 operating leases and 97 financing leases[58] Revenue Contribution from Automobile Services (FY2020) | Service Type | % of Total Revenue from Automobile Services | | :------------------------------------------ | :------------------------------------------ | | Auto Sales | 73.7% | | Auto Financing and Transaction Facilitation | 12.3% | | Operating Leases | 8.3% | | Auto Financial Leasing | 1.1% | - The company's auto financing and transaction facilitation services, primarily for Didi drivers, include credit assessment, financing application assistance, vehicle registration, and guarantee services, with fees ranging from $89 to $3,600 per vehicle for purchase services and averaging $583 per automobile for management and guarantee services[60][61][62] - The company engages in auto sales by procuring new cars from dealerships and selling them to ride-hailing drivers, with most sales financed and a majority of the purchase price received from financing proceeds[71][72] - Auto leasing services, started in March 2019, involve leasing company-owned automobiles or subleasing vehicles from exiting ride-hailing drivers, generating $1,303,639 in rental income for FY2020 from approximately 559 automobiles[73] - Auto financing services, also started in March 2019, involve the company acting as a lessor, offering financing leases for 36 to 48 months with fixed interest rates from 5.5% to 16.0% per annum, and no down payment required[74][75] Customers The majority of customers are Didi drivers, acquired through third-party sales, referrals, and direct marketing efforts - The significant majority of customers are Didi drivers, who affiliate with the company for simplified qualification processes and post-transaction management services[76] - Customer acquisition occurs through third-party sales teams, Didi referrals, and direct marketing efforts like online and billboard advertising, and trade shows[77] - Since the acquisition of Hunan Ruixi, the company has serviced approximately 3,200 customers, including about 3,100 Didi drivers[77] Risk Management Risk mitigation involves credit assessments, payment monitoring, and vehicle repossession for Didi drivers and lessees - Risk mitigation involves assessing prospective Didi drivers/lessees based on credit reports (PBOC, third-party), personal information, and in-person interviews, as the company does not maintain its own credit grading system[78][79][81] - Preliminary criteria for automobile buyers include age (22-60), mainland China residency, 3+ years driving history, no ongoing legal proceedings, no national delinquent debtor listing, and income matching vehicle value[79] - Applicants are rejected for illegal/criminal activities, involvement in pornography/gambling/drug dealing, usury lending, or providing fraudulent information[83] - Post-financing, the company monitors monthly payments, sends reminders, and if delinquency exceeds 15 days, seeks to repossess vehicles using installed GPS devices for storage and disposal[87] Competition China's automobile financing industry is highly competitive, with numerous companies vying for Didi driver relationships - The automobile financing industry in China is large and competitive, with approximately 120 companies in Chengdu and 80 in Changsha having business relationships with Didi as of June 2020[88] - Key competitors in Chengdu include Chengdu Jingtengjian Business Consulting Co., Ltd., FAW Huidi Automotive Technology Co., Ltd., and Chengdu Yudeng Automobile Service Co., Ltd[88] - Key competitors in Changsha include Hunan Zuxing Tianxia Automobile Leasing Co., Ltd. and Hunan Qiguang Automobile Service Co., Ltd[88] Regulations This section outlines various PRC regulations impacting ride-hailing, financial leasing, foreign investment, and data security Regulations Related to Ride-Hailing Services Ride-hailing services require specific licenses for platforms, vehicles, and drivers, with penalties for non-compliance - Interim Measures for the Administration of Online Taxi Booking Business Operations and Services (2016, amended 2019) legalize ride-hailing services but require platforms, vehicles, and drivers to obtain specific licenses[91] - In Chengdu and Changsha, three licenses are required: online reservation taxi operating license (platform), online reservation taxi transport certificate (automobile), and online reservation taxi driver's license (driver)[92][93] - Non-compliance can lead to suspension of services, confiscation of illegal income, and fines ranging from RMB 5,000 to RMB 30,000 per offense[94] Regulations Related to Financial Leasing Financial leasing is regulated by CBIRC, with new measures clarifying business scope and setting compliance transition periods - The Administration Measures of Supervision on Financing Lease Enterprises (2013) regulate financial leasing, prohibiting activities like accepting deposits or providing loans without approval[95] - Authority over financial leasing companies transferred from MOFCOM to CBIRC in April 2018[96] - Interim Measures for Supervision and Administration of Financial Leasing Companies (2020) clarified business scope, prohibited activities (e.g., illegal fundraising, lending), and set regulatory indicators for client financing concentration[97][98] - Existing financial leasing companies have a transition period, generally not exceeding three years, to comply with the new Interim Measures[99] Regulation Related to Financing Guarantee Companies Financing guarantee activities require approval, and the company's guarantee services may be subject to these rules - Regulations on the Administration of Financing Guarantee Companies (2017) define 'financing guarantee' and require approval for operating such businesses, with penalties for unapproved operations[100][101] - The company's guarantee services for automobile financing may be subject to interpretation under these rules, potentially requiring specific licenses[102] Regulations Related to Value-Added Telecommunication Business Certificates and Foreign Investment Restrictions Operating internet information services without certificates or exceeding foreign investment limits can incur sanctions - PRC regulations impose sanctions for operating commercial internet information services or online data processing and transaction processing (ODPTP) without required ICP or ODPTP certificates[104] - Foreign investment in value-added telecommunication businesses is restricted, generally not exceeding 50% equity, though Circular 196 (2015) permits up to 100% for E-commerce ODPTP[105] - Uncertainty exists whether the company's online lending website (now discontinued) would be classified as online data and deal processing, potentially affecting compliance[106] Regulations Related to Internet Advertising Internet advertisements must be distinguishable and not disrupt user experience, with fines for non-compliance - Interim Measures for Administration of Internet Advertising (2016) require internet advertisements to be distinguishable, clearly marked, and not disrupt user experience or induce clicks fraudulently[108] - Violations can result in fines up to RMB 100,000 for unmarked ads, and RMB 5,000-RMB 30,000 for failing to provide a 'CLOSE' button or fraudulent click inducement[108] Regulations Related to Information Security and Confidentiality of User Information PRC laws mandate protection of user information, data storage within China, and security assessments for cross-border transfers - PRC laws (e.g., Cyber Security Law, Administrative Measures on Internet Information Service) regulate internet activities, prohibit socially destabilizing content, and require protection of user information[109][110][112][114] - Network operators of key information infrastructure must store personal information and important data collected within the PRC[114] - Measures for the Security Assessment of Personal Information and Important Data to be Transmitted Abroad (draft) require security assessments and user consent for cross-border data transfers, especially for large volumes or sensitive information[115] - Notice on Measures for Determining the Illegal Collection and Use of Personal Information through Mobile Applications (2019) specifies behaviors constituting illegal data collection, such as failing to publish rules or collecting data without consent[116] Regulations Related to Company Establishment and Foreign Investment PRC laws govern corporate entities and foreign investments, with national treatment except for negative list industries - PRC Company Law governs corporate entities, requiring limited liability or joint stock structures, and foreign-invested enterprises (FIEs) must set aside 10% of after-tax profits to statutory reserves until 50% of registered capital is reached[117] - The PRC Foreign Investment Law (effective Jan 1, 2020) grants national treatment to FIEs except for those in 'restricted' or 'prohibited' industries on a 'negative list', requiring market entry clearance and approvals[122][123] - The company's Automobile Transaction and Related Services are not listed in the 2018, 2019, or 2020 Negative Lists, indicating it is a permitted foreign investment project[121] - The Foreign Investment Law also establishes an information reporting system and a security review system for foreign investments affecting national security[125][130] Regulations Related to Labor and Social Security Employers must adhere to labor laws, including written agreements and contributions to social security funds - PRC Labor Law and Labor Contract Law require written employment agreements, minimum wage adherence, and employer contributions to social security funds (pension, medical, unemployment, injury, maternity, housing)[131][133] - Interim Provisions on Labor Dispatch (2014) limit dispatched workers to 10% of total employees and restrict them to temporary, auxiliary, or substitute work[132] Anti-money Laundering Regulation Financial institutions must adopt anti-money laundering measures, including client identification and transaction reporting - The PRC Anti-money Laundering Law (2007) mandates financial and certain non-financial institutions to adopt precautionary measures, establish client identification systems, retain records, and report large/suspicious transactions[134] Regulations on Intellectual Property PRC legislation protects copyrights, trademarks, and patents, with specific terms and registration requirements - PRC legislation protects copyrights (including internet activities and software), trademarks (10-year term, renewable), and patents (invention, utility model, design with 10 or 20-year duration)[136][137][138][139][140] - Software copyrights are automatically protected upon development, with voluntary registration available through the China Copyright Protection Center[138] Regulations Related to Foreign Exchange Foreign exchange regulations govern currency conversion, requiring approval for capital account items and restricting RMB use - Foreign Exchange Administration Regulations (amended 2008) govern currency exchange, allowing current account items (profits, trade) in foreign currencies without prior SAFE approval, but requiring approval/registration for capital expenses[141] - SAFE Circular 19 (2015) and Circular 16 (2016) regulate the conversion and use of RMB capital from foreign currency-denominated registered capital, prohibiting its use for certain purposes like entrusted loans to non-associated enterprises[142] - SAFE Circular 3 (2017) imposes capital control measures on outbound profit remittances, requiring banks to check board resolutions, tax filings, and audited financial statements, and mandating detailed explanations for capital sources and utilization for outbound investments[144] Regulations Relating to Offshore Special Purpose Companies Held by PRC Residents PRC residents must register offshore investment entities with SAFE, with non-compliance leading to severe restrictions - SAFE Circular 37 (2014) requires PRC residents or entities to register with SAFE (or qualified banks per SAFE Circular 13, 2015) for establishing or controlling offshore entities for overseas investment/financing[145][146] - Failure to comply with SAFE registration can lead to prohibitions on profit distribution from PRC subsidiaries to offshore parents, restrictions on cross-border foreign exchange activities, and potential liability for evasion of foreign exchange controls[146] SAFE Regulations Relating to Employee Stock Incentive Plans PRC residents in overseas stock incentive plans must register with SAFE through a qualified agent to avoid penalties - Stock Option Rules (2012) require PRC residents participating in overseas publicly listed company stock incentive plans to register with SAFE through a qualified PRC agent and use an overseas entrusted institution for transactions[147] - Non-compliance can result in fines and sanctions for participants or the company, and may limit capital contributions to PRC subsidiaries or dividend distributions[147] Regulations Related to Tax PRC tax laws impose enterprise income tax on worldwide income for resident enterprises and scrutinize indirect transfers - PRC Enterprise Income Tax Law (EIT Law) subjects enterprises with 'de facto management bodies' in the PRC to a 25% enterprise income tax on worldwide income, with specific criteria for determination outlined in SAT Circular 82 (2009)[148][149] - SAT Circular 7 (2015) tightens scrutiny on indirect transfers of PRC taxable properties by non-PRC resident enterprises, potentially re-characterizing them as direct transfers subject to up to 10% withholding tax if lacking a reasonable commercial purpose[152] - SAT 2019 Circular 2 (2019) provides preferential income tax reduction policies for small and low-profit enterprises, with reduced tax rates for annual income up to RMB 3 million[154] Regulations Related to PRC Value-Added Tax VAT is imposed on services and automobile sales, with rates adjusted over time and input VAT offset against output VAT - VAT is generally imposed in lieu of business tax in modern service industries, with rates adjusted over time (e.g., 17% to 16% to 13% for taxable goods)[155][156] - The company pays VAT at 6% for services and 13% for automobile sales, operating lease, and financial leasing, with input VAT offset against output VAT[157] Regulations Related to Mergers and Acquisitions M&A rules require CSRC approval for offshore listings and MOFCOM notification for foreign investor change-of-control transactions - The M&A Rules (2006, amended 2009) require CSRC approval for offshore special purpose vehicles formed for overseas listing through acquisitions of PRC domestic companies controlled by PRC entities/individuals[158] - MOFCOM notification is required for change-of-control transactions by foreign investors in important industries or those impacting national economic security, and security reviews are mandated for national defense/security concerns[159] Employees The company employs 179 staff in China, participating in statutory benefit plans despite inadequate contributions Employee Breakdown by Function (as of Report Date) | Function | Number of Employees | | :----------------------------------- | :------------------ | | Management | 4 | | Legal & Risk Management | 21 | | Operations | 7 | | Marketing | 59 | | Drivers & Automobile Management and Services | 39 | | Technology | 14 | | Human Resources & Administration | 17 | | Finance and Accounting | 17 | | Internal Audit | 1 | | Total | 179 | - All employees are based in Chengdu and Changsha, China[162] - The company participates in various government statutory employee benefit plans (social insurance, housing provident fund) but has not made adequate contributions, potentially incurring late fees and fines[164] Seasonality The company experiences a seasonal decrease in facilitated new automobiles during the third fiscal quarter due to holidays - The company observes a seasonal decrease in facilitated new automobiles during the three months ended December 31 (third fiscal quarter) due to the PRC National Holiday and year-end[165] Research and Development The company is developing an integrated information system for automobile services, with modules currently being tested and upgraded - The company is developing an integrated information system for its Automobile Transaction and Related Services, comprising modules for procurement, qualification assessment, delivery, and post-transaction management[167] - Certain functions of the system, such as information entry and delivery, have been developed and are being tested, with the system launched in March 2020 and plans for future upgrades[167] Intellectual Property The company owns 15 software copyrights and eleven trademarks, protected through PRC law and confidentiality agreements - The company owns 15 software copyrights and eleven trademarks, with three trademark applications pending[168] - Proprietary rights are protected through PRC trademark and trade secret law, and confidentiality/non-compete agreements with employees[168] Insurance Mandatory accident and commercial liability insurance is obtained for automobiles, but other business risks remain uninsured - The company obtains mandatory accident and commercial liability insurance for all automobiles purchased for sales or financing, passing costs to customers[171] - Social security insurance is provided for employees, but the company does not maintain property, business interruption, general third-party liability, product liability, or key-man insurance[171] Item 1A. Risk Factors The company faces significant risks from P2P liabilities, competition, COVID-19, VIE structure, and internal control weaknesses - The company voluntarily assumed $5.6 million in outstanding P2P loans after discontinuing its online lending services, facing potential liquidity issues if cash flow is insufficient for repayment[177][179][180] - Intense competition in the automobile transaction and financing industry, coupled with reliance on a non-exclusive relationship with Didi, poses risks of market share loss, reduced revenue, and business disruption[181][182][183][184] - The COVID-19 pandemic has materially and adversely affected business operations, leading to temporary office closures, reduced demand for ride-hailing services, and increased bad debt expenses of $3,406,215 for the year ended March 31, 2020[190][191][192] - The JKL Investment Agreement includes redemption rights for Hongyi if Jinkailong fails to meet performance targets or go public, potentially requiring Hunan Ruixi to repurchase equity up to $4.0 million, which the company may not have funds for[187][188] - The company is exposed to credit risk in its auto financing facilitation and auto financing businesses, with maximum contingent liabilities of approximately $18.6 million as of March 31, 2020, assuming all automobile purchasers default[212][213] - Material weaknesses in internal control over financial reporting were identified, including insufficient accounting personnel, inadequate internal audit policies, lack of backup/restoration plans, and insufficient security monitoring, which could affect financial reporting accuracy[279][280] - Reliance on contractual arrangements with VIEs (Sichuan Senmiao, Jinkailong) for business operations may not be as effective as direct ownership, posing risks if equity holders breach agreements or if PRC government deems arrangements non-compliant with foreign investment restrictions[317][318][323][324] Risks Related to Our Business and Industry Business risks include P2P liabilities, intense competition, Didi reliance, COVID-19 impacts, and credit risk from defaults - The company voluntarily assumed $5.6 million in outstanding P2P loans, with plans to repay 90% by December 31, 2021, but faces risks if cash flow is insufficient[177][179][180] - Intense competition in the automobile transaction and financing industry may lead to loss of market share, reduced service fees, increased expenses, and employee departures[181][182] - The non-exclusive relationship with Didi is crucial, and its termination could materially and adversely affect customer acquisition and business operations[183][184] - The JKL Investment Agreement includes redemption rights for Hongyi if Jinkailong fails performance targets or IPO/merger conditions, potentially requiring Hunan Ruixi to repurchase equity up to $4.0 million[187][188] - The COVID-19 pandemic has severely impacted operations, causing temporary closures, reduced demand for ride-hailing services, and increased bad debt expenses of $3,406,215[190][191][192] - Lack of written agreements with certain financing partners creates risk of funding limitations, adversely impacting business and operations[194][195] - Approximately 5% of affiliated automobiles lack certificates and 68% of drivers lack licenses, exposing the company to potential penalties and operational restrictions[197] - Advancing payments for over 90% of automobile purchases (approximately $1.7 million as of March 31, 2020) creates liquidity risk, requiring additional capital that may not be available on acceptable terms[198][199][200] - Subleasing/selling defaulted drivers' automobiles without prior financial institution consent may lead to penalties or demands to return vehicles[202] - Reliance on related party bank accounts for Jinkailong's daily operations poses risks if authorization is revoked or accounts are frozen[203][204] - Exposure to credit risk in auto financing facilitation and auto financing businesses, with maximum contingent liabilities of $18.6 million, and potential for material adverse effects if unable to repossess collateral or collect payments[212][213][215][216] - Lack of formal agreements with automobile purchasers for purchase services may hinder enforcement of rights in legal disputes[218] - Uncertainty regarding classification of guarantee services as 'financing guarantee business' or advance payments as 'private lending' may require new licenses or incur penalties[220][221][224][225] - Failure to sell purchased automobiles due to changing demand, pricing strategies, or inventory risks could adversely affect financial condition[227] - Inaccurate, incomplete, or fraudulent data from customers or third-party sources could compromise credit assessment accuracy and harm reputation[231][233][234] - Potential product liability claims from defective vehicles purchased through the company, without third-party or product liability insurance, could result in substantial costs[236] - Misconduct or dangerous activity by ride-hailing drivers could harm reputation, attract new customers, and lead to significant liabilities not covered by insurance[237][239][240] - Government policies on automobile purchases and ownership (e.g., purchase taxes, license plate restrictions) could adversely affect demand and business growth[241][243] - The ride-hailing service market's growth may be slower than expected or fail to grow as large as anticipated, impacting business[244][245] - Industry-wide and macroeconomic risks in China's automobile leasing and financing sector, including economic conditions and energy costs, could reduce demand for services[246] - Fraudulent activity by users or third parties could negatively impact operating results, brand, and reputation, increasing costs and potentially leading to regulatory intervention[248][249] - The company incurred net losses of $9,935,802 and $4,542,525 in FY2020 and FY2019, respectively, and may continue to incur losses, impacting profitability[250] - Fluctuations in interest rates could negatively affect results by reducing customer willingness to finance or impacting financial institutions' margins[253] - Quarterly results may fluctuate significantly due to various factors, including customer acquisition, financing partner relationships, and operating expenses, making period-to-period comparisons difficult[254] - Failure to effectively and cost-efficiently promote and maintain brands could harm business and results of operations[256][257] - Harm to brands or reputation from negative publicity, misconduct by partners, or industry-wide issues could materially and adversely affect business[258][259][260] - Inaccurate, misleading, or incomplete information supplied by customers could harm reputation and potentially subject the company to liability as an intermediary[262] - Dependence on China's internet infrastructure and fixed telecommunications networks, with limited alternatives, poses risks of disruptions, failures, or increased costs[263][264] - Significant disruptions in IT systems (outages, data loss, security breaches) could prevent service offerings, reduce attractiveness, and result in loss of customers and financial institutions[265][266][267] - Misconduct, errors, or failure to function by employees and third-party service providers could harm business and reputation, leading to liabilities or regulatory actions[268][269][270][272] - A severe or prolonged downturn in the Chinese or global economy could negatively impact demand for services and financial institutions' willingness to provide financing[273][274] - Cyber-attacks, computer viruses, or physical/electronic break-ins could compromise confidential customer information, leading to liability, litigation, and negative publicity[276][277] - Material weaknesses in internal control over financial reporting, including insufficient accounting personnel and inadequate internal audit, could lead to inaccurate financial reporting or fraud[278][279][280][283] - Inability to prevent unauthorized use of intellectual property (trademarks, software copyrights) could harm business and competitive position, with enforcement in China being difficult and costly[284][285] - Exposure to intellectual property infringement claims from third parties, which may be expensive to defend and disrupt business operations[286][288] - Use of open source software in digital operations carries risks if license terms are construed to impose unanticipated conditions or require public release of proprietary code[289][290] - Strategic investments or acquisitions, if pursued, could require significant management attention, disrupt business, and may not yield expected benefits or could introduce new risks[291][292][293][295] - Dependence on senior management, with potential for severe business disruption if key executives are unable or unwilling to continue[296][297] - Intense competition for qualified and skilled employees, potentially leading to difficulties in attraction and retention, and increased labor costs in China[298][299][300][301] - Reliance on third-party data and information, which may not be independently verified and could be inaccurate or incomplete[303][304] - Difficulty in maintaining corporate culture during growth, potentially leading to loss of innovation and collaboration[305][306] - Limited business insurance coverage in China, exposing the company to substantial costs from uninsured business disruptions[307] - Vulnerability to natural disasters, health epidemics (like COVID-19), and other outbreaks, which could significantly disrupt operations and adversely affect the Chinese economy[308][309] Risks Related to Our Corporate Structure Corporate structure risks involve uncertainties with the Foreign Investment Law, VIE agreement enforceability, and potential conflicts of interest - The newly enacted PRC Foreign Investment Law (effective Jan 1, 2020) introduces uncertainties regarding the classification of VIEs controlled through contractual arrangements as foreign-invested enterprises[310] - If VIE arrangements are deemed foreign investment in 'restricted' or 'prohibited' industries, the company could face severe penalties, invalidation of contractual arrangements, or forced business restructuring[311][312] - Reliance on the Voting Agreement with Jinkailong's other shareholders (65% equity) carries risks of breach or actions contrary to the company's interests, potentially impacting control and financial statement consolidation[313][314][315][316] - Uncertainties in the interpretation and enforcement of PRC laws regarding VIE structures could lead to severe penalties, operational restrictions, or inability to consolidate VIE results[317][319][322] - Contractual arrangements with VIEs may not be as effective as direct ownership in providing operational control, and equity holders could breach obligations, requiring reliance on potentially uncertain PRC legal remedies[323][324][325] - Potential conflicts of interest with VIE equity holders, who may not act in the company's best interests, could materially and adversely affect business and financial condition[329][330][331] - Contractual arrangements may be scrutinized by PRC tax authorities, potentially leading to additional taxes or transfer pricing adjustments for the company or Sichuan Senmiao[333][334] - Loss of ability to use and enjoy assets held by VIEs if they go bankrupt or undergo liquidation proceedings, as third-party creditors may claim rights[335] Risks Related to Doing Business in China Operating in China entails risks from regulatory changes, currency controls, dividend limitations, and M&A complexities - The company may be required to obtain a value-added telecommunication business certificate and is subject to foreign investment restrictions, with potential sanctions for non-compliance[337][338][339][342] - Changes in China's economic, political, or social conditions or government policies could materially and adversely affect business and results of operations[343][344][345] - Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit legal protections, making it difficult to evaluate outcomes of administrative and court proceedings[346][347] - Complexity, uncertainties, and changes in PRC internet-related business regulations, including foreign ownership and licensing requirements, could lead to new regulatory agencies or sanctions for non-compliance[349][350][351][352][353][355] - Reliance on dividends from PRC subsidiaries for cash and financing requirements, which may be limited by PRC laws on profit distribution, statutory reserve funds, and debt covenants[356][357][359] - PRC regulation of loans and direct investment by offshore holding companies, along with governmental control of currency conversion, may delay or prevent the use of public offering proceeds to fund PRC subsidiaries[359][360][361][362][364] - Fluctuations in exchange rates between the U.S. dollar and RMB could materially and adversely affect results of operations and investment value, with limited hedging options available[365][366][367][368] - Governmental control of currency conversion may limit the ability to utilize net revenues effectively and affect investment value, as the PRC government imposes controls on RMB convertibility[370][371] - Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject the company to penalties[372][373] - Complex procedures under the M&A Rules and other PRC regulations for foreign investors acquiring PRC companies could make future growth through acquisitions more difficult and time-consuming[374][375] - PRC regulations (SAFE Circular 37, SAFE Circular 13) require PRC residents/entities to register offshore investment activities, and non-compliance could limit PRC subsidiaries' ability to increase capital or distribute profits[377][378][379][381] - Risks associated with company chops (seals) of PRC subsidiaries and VIEs, where misuse or theft could severely compromise corporate governance and bind entities to unauthorized documents[382][383] - Failure to comply with PRC regulations regarding employee stock incentive plan registration requirements may subject PRC plan participants or the company to fines and sanctions[384][385] - Classification as a PRC resident enterprise for income tax purposes could result in a 25% tax rate on worldwide income and potential PRC tax on gains from securities sales for non-PRC stockholders[386][387][388] - Enhanced scrutiny over acquisition transactions by PRC tax authorities (e.g., SAT Circular 7) may negatively impact future acquisitions by imposing withholding taxes on indirect transfers of PRC taxable properties[389][390][393][395][396] Risks Related to Our Securities Securities risks include delisting, stock price volatility, dilution from warrants, and enforceability of U.S. judgments in China - Failure to meet Nasdaq's minimum bid price requirement ($1.00 per share) by December 11, 2020, could result in delisting, impairing liquidity and future financing ability[397][398][399] - The market price for common stock may be volatile due to broad market factors, performance of other Chinese companies, regulatory developments, and company-specific announcements[400][402] - Sales of a substantial number of shares by existing holders, especially those restricted from immediate resale, could significantly reduce the market price[403] - Outstanding warrants, some with full-ratchet anti-dilution protection and reset provisions, may cause significant dilution to stockholders and negatively impact the market price, making future equity offerings more difficult[404][405][406][407][408][409][410] - Raising additional capital through equity or debt may cause dilution, increase fixed payment obligations, or require relinquishing rights to technologies[411][412] - Judgments obtained against the company by U.S. stockholders may not be enforceable in China due to the location of operations and assets[414] - Certain provisions in articles of incorporation and by-laws could deter changes in management or acquisitions, potentially not aligning with stockholder interests[415][416] - As an 'emerging growth company,' the company may take advantage of reduced reporting requirements, potentially limiting information available to investors[417][418][419] - Operating as a smaller reporting public company incurs increased costs and requires substantial management time for compliance initiatives, including Section 404 of Sarbanes-Oxley[421][422][424] - Lack of research or inaccurate/unfavorable research by securities analysts could cause the market price and trading volume of common stock to decline[425][426] - No expected dividend payments in the foreseeable future means investors must rely solely on price appreciation for investment returns[427][429] - The exercise of 1,519,602 outstanding warrants (weighted average exercise price $1.76) would cause additional dilution to existing common stockholders[430][431] - Restrictions from the June 2019 Offering, such as prohibitions on variable rate transactions and issuing securities for 90 days, could severely limit future financing options[432][433] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[434] Item 2. Properties The company leases offices, parking lots, and an exhibition hall in Chengdu and Changsha, deemed adequate for operations - Principal executive offices are located in Chengdu, Sichuan, China, comprising 964 square meters under a lease expiring March 2021, with a monthly cost of $9,263[435] - Four offices for automobile services are maintained in Chengdu (2,907 sq. meters, $6,700/month rent) and Changsha (680 sq. meters, $3,800/month rent), with leases expiring between 2021 and 2024[436] - Three parking lots in Chengdu and an exhibition hall in Changsha are leased for approximately $5,750 and $6,160 per month, respectively[437] Item 3. Legal Proceedings The company is not a party to any material legal or administrative proceedings, though ordinary course claims may arise - The company is not currently a party to any material legal or administrative proceedings[439] - Litigation or other legal/administrative proceedings, regardless of outcome, could result in substantial costs and diversion of resources[439] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[440] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq, with no cash dividends planned, and equity incentive plans in place for employees and directors - Common stock trades on The Nasdaq Capital Market under the symbol 'AIHS'[442] Common Stock Information (as of July 6, 2020) | Metric | Value | | :--------------------- | :----------- | | Closing Price | $0.87 | | Shares Outstanding | 28,839,803 | | Stockholders of Record | ~18 | - The company has never declared or paid cash dividends and does not plan to in the foreseeable future, intending to retain funds for business development and growth[427][444] - The 2018 Equity Incentive Plan reserved 2,000,000 shares for issuance to employees, officers, directors, and consultants, with 169,015 Restricted Stock Units (RSUs) issued as of the report date[446][447] - No equity securities were purchased by the issuer, and no recent sales of unregistered securities occurred[448] Market Information The company's common stock trades on the Nasdaq Capital Market under the symbol 'AIHS' - The company's common stock trades on the Nasdaq Capital Market under the symbol 'AIHS'[442] - As of July 6, 2020, the closing price of the common stock was $0.87[442] Holders As of July 6, 2020, the company had approximately 18 stockholders of record - As of July 6, 2020, the company had approximately 18 stockholders of record[443] Dividends The company has never paid cash dividends and plans to retain earnings for business development - The company has never declared or paid cash dividends on its shares and does not plan to in the foreseeable future, intending to retain available funds and future earnings for business development[444] - Dividend distributions from PRC subsidiaries are subject to PRC accounting standards, requiring 10% of after-tax profits to be set aside for statutory reserve funds until 50% of registered capital is reached[445] Equity Compensation Plan Information The 2018 Equity Incentive Plan reserved 2,000,000 shares, with 169,015 RSUs issued as of March 31, 2020 - The 2018 Equity Incentive Plan, approved in September 2018, reserved a maximum of 2,000,000 shares of common stock for issuance to employees, officers, directors, and consultants[446] - As of March 31, 2020, an aggregate of 169,015 Restricted Stock Units (RSUs) were issued under the plan[446] Equity Incentive Plan Summary (as of March 31, 2020) | Metric | Value | | :------------------------------------------------------------------ | :---------- | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | - | | Weighted-average exercise price of outstanding options, warrants and rights | - | | Number of securities remaining available for future issuance under equity compensation plans | 1,830,985 | Purchases of Our Equity Securities The company made no purchases of its equity securities - The company made no purchases of its equity securities[448] Recent Sales of Unregistered Securities There were no recent sales of unregistered securities - There were no recent sales of unregistered securities[448] Use of Proceeds This section is not applicable - This section is not applicable[448] Item 6. Selected Financial Data This item is not required for smaller reporting companies - Selected Financial Data is not required for smaller reporting companies[448] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial performance for FY2020 saw revenue growth from automobile services but a net loss due to bad debt and COVID-19 impacts - The company's primary business is automobile transaction and related services, with the online lending platform discontinued in October 2019[450][451] - Revenues from continuing operations (automobile services) increased by $13,104,468 (514%) to $15,655,575 for the year ended March 31, 2020, compared to the prior period[494][495] - Net loss for the year ended March 31, 2020, was $9,935,802, including $4,348,776 from continuing operations and $5,587,027 from discontinued operations[494][518][520][526] - The COVID-19 pandemic significantly impacted demand for ride-hailing services, leading to a decrease in revenue for Q4 FY2020, adverse collection ability, and $3,406,215 in bad debt expenses from continuing operations[469][470] - The company faces substantial doubt about its ability to continue as a going concern due to recurring losses, an accumulated deficit of $23.7 million, and negative operating cash flows[532][632] Overview The company provides automobile services, primarily to Didi drivers, having discontinued its online P2P lending platform - Senmiao Technology Limited provides automobile transaction and related services, primarily to Didi drivers, through Yicheng, Hunan Ruixi, and Jinkailong in China[450] - The online P2P lending platform, operated through Sichuan Senmiao, was discontinued in October 2019 to focus on automobile services[451] Our Automobile Transactions and Related Services Services include auto financing, sales, and leasing, with significant transaction volumes and revenue contributions - Services include auto financing and transaction facilitation, auto sales, automobile operating lease, and auto financing, with operations starting between November 2018 and March 2019[452] Automobile Services Metrics (as of March 31, 2020) | Metric | Value | | :----------------------------------------- | :-------------- | | Automobiles with facilitated financing | 1,626 | | Total value of facilitated financing | $23.2 million | | Automobiles sold | 1,388 | | Total value of automobiles sold | $13.4 million | | Automobiles under operating leases | 557 | | Automobiles under financing leases | 97 | Revenue Contribution from Automobile Services (FY2020) | Service Type | % of Total Revenue from Automobile Services | | :------------------------------------------ | :------------------------------------------ | | Auto Sales | 73.7% | | Auto Financing and Transaction Facilitation | 12.3% | | Operating Leases | 8.3% | | Auto Financial Leasing | 1.1% | Key Factors and Risks Affecting Results of Operations of Our Automobile Transactions and Related Services Revenue growth depends on customer base expansion, effective lease management, competitive pricing, and financial institution relationships - Revenue growth is driven by expanding the automobile purchaser and lessee base through third-party sales teams, Didi referrals, and direct marketing efforts[454] - Effective management and maintenance of leased automobiles are crucial for income growth from rental services, with an average utilization rate of approximately 64% for operating lease automobiles in FY2020[456] - Service offerings and pricing, including competitive interest rates from financial institutions and efficient cost management, are key to attracting customers and improving profit margins[457] - The ability to retain existing and engage new financial institutions is critical for business growth, ensuring stable and sufficient funding for automobile transactions[458] - Advancing purchase prices and expenses for automobiles (approximately $1.7 million as of March 31, 2020) creates liquidity risk, requiring ongoing financing to support operations[459][460] - Credit risk from automobile purchaser defaults is managed through credit checks, payment monitoring, and vehicle repossession via GPS, with $3,406,215 in bad debt expenses recognized in FY2020 due to drivers exiting the business[462][463][464][465] - The COVID-19 pandemic severely impacted demand for ride-hailing services, leading to reduced revenue, delayed installment payments, and increased bad debt, with potential for continued adverse effects if recovery is slower than anticipated[467][469][470][471][473][474] - Effective competition relies on service quality, competitive pricing, and continuous introduction of new or enhanced solutions, especially against competitors with greater resources[475] - The ride-hailing market in China, while growing, faces increasing competition and regulatory changes (e.g., license requirements, Didi's limitations on non-compliant drivers), which can affect driver income and increase default risks[476][477][479][480][481][482][483] Our Discontinued Online P2P Lending Services The P2P lending business was discontinued in October 2019 due to declining volume and regulatory tightening, incurring bad debt - The online P2P lending business, acquired in September 2016, generated revenue from transaction fees charged to borrowers and service fees charged to investors[484][485] - The business was discontinued in October 2019 due to a continuous decline in transaction volume and an increasingly tighter regulatory environment in China, including official requirements to exit the industry in several provinces[487][488][489] - Upon discontinuation, the company ceased loan facilitation and assumed $5.6 million in outstanding loans from investors, recognizing $4,048,210 in bad debt expenses for uncollectible receivables from borrowers[490] - The discontinuation is expected to improve operating cash flow by lowering operating expenses and allowing focus on automobile services, with minimal impact on total revenue (0.7% of total revenue in FY2020)[489][492] [Results of Continuing Operations f