Senmiao Technology(AIHS) - 2021 Q4 - Annual Report

PART I Business The company operates in the PRC with two main segments: Automobile Transaction and Related Services, and an Online Ride-hailing Platform Service, shifting focus to rentals due to COVID-19 - The company operates two main business lines: Automobile Transaction and Related Services and, since October 2020, an Online Ride-hailing Platform Service[15][16][17] - Automobile Transaction and Related Services include auto leasing, auto sales, auto financing and transaction facilitation, and auto financing[16] - The company launched its own online ride-hailing platform, Xixingtianxia, in October 2020 through the acquisition of a majority interest in XXTX, which holds a national online reservation taxi operating license[17][25][62] - The COVID-19 pandemic significantly impacted demand for ride-hailing, causing the company to shift its focus from auto sales and financing facilitation to automobile rentals[45][52] Online Ride-hailing Platform Performance (Oct 23, 2020 - Mar 31, 2021) | Metric | Value | | :--- | :--- | | Rides Completed | ~4.4 million | | Gross Fare | $12.4 million | | Average Monthly Active Drivers | >6,000 | | Revenue from Platform Services | $0.9 million (net of $1.8M driver incentives) | Corporate Structure and VIE Agreements The company operates in the PRC through wholly-owned subsidiaries and VIEs, controlling them via contractual arrangements and equity stakes - Senmiao Technology Limited is a U.S. holding company that conducts its PRC operations through subsidiaries and VIEs[15] - The company controls its VIE, Sichuan Senmiao, through a series of contractual arrangements including an Equity Interest Pledge Agreement, Exclusive Business Cooperation Agreement, and Exclusive Option Agreement[29][30][32] - The company controls its VIE, Jinkailong, through a 35% equity interest held by its subsidiary Hunan Ruixi and voting agreements with shareholders holding the remaining 65% equity[23][37] Recent Developments Recent developments include a $6.5 million equity offering, expansion of the ride-hailing platform through partnerships, and COVID-19 impact and recovery - In May 2021, the company raised approximately $6.5 million through a registered direct offering of 5,531,916 shares and accompanying warrants[40] - The company's ride-hailing platform, XXTX, has signed cooperation agreements with major aggregation platforms Gaode Map and Meituan, and a top online ride-hailing platform in China[42] - The COVID-19 pandemic materially and adversely affected operations, reducing demand for ride-hailing services and negatively impacting revenue in early 2020, with a gradual recovery starting in April 2020[44][45] Regulations The company's PRC operations are subject to complex regulations concerning online ride-hailing, financial leasing, and potential financing guarantee licenses - Operating an online ride-hailing business in China requires three key licenses: an online reservation taxi operating license for the platform, an automobile certificate for the vehicle, and a driver's license for the driver[81] - As of March 31, 2021, approximately 55% of the company's online ride-hailing drivers had not obtained the required driver's license, exposing the company to potential fines and penalties. The company has been fined approximately $36,000 for such violations in FY2021[84][85] - The company's financial leasing subsidiaries, Hunan Ruixi and Yicheng, are not fully compliant with the Financial Leasing Measures issued by the CBIRC and must rectify this within a transition period to continue their financial leasing business[92] - There is uncertainty as to whether the company's guarantee services in its auto financing facilitation business would be deemed as operating a financing guarantee business, which would require a specific license[96][97] Risk Factors The company faces significant business, structural, regulatory, and securities risks, including COVID-19 impact, VIE reliance, and internal control weaknesses - The COVID-19 pandemic has materially and adversely affected the company's business by reducing demand for ride-hailing services and may continue to pose a risk[184][186] - The company is exposed to significant credit risk in its auto financing businesses, with maximum contingent liabilities of approximately $12.8 million as of March 31, 2021[222] - Material weaknesses have been identified in the company's internal control over financial reporting, including insufficient personnel with U.S. GAAP knowledge and inadequate internal audit functions[285][286][288] - The company relies on contractual arrangements with its VIEs (Sichuan Senmiao and Jinkailong), which may not be as effective as direct ownership and could be subject to severe penalties if deemed non-compliant with PRC regulations[180][300][304] - The company has a significant number of outstanding warrants, some with full-ratchet anti-dilution protection, which may cause significant dilution to stockholders and negatively impact the stock price[342][346] Properties The company leases all its properties, including executive offices, other offices, parking lots, and an exhibition hall, primarily in Chengdu and Changsha - The company's principal executive offices are located at 16F, Shihao Square, Middle Jiannan Blvd., High-Tech Zone, Chengdu, Sichuan, PRC[442] - All properties are leased, including offices in Chengdu, Changsha, and Guangzhou, with total monthly rent for all facilities amounting to approximately $30,500[442][443][444] Legal Proceedings The company is not currently involved in any material legal or administrative proceedings - As of the report date, the company is not involved in any material legal proceedings[445] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "AIHS", has never paid dividends, and maintains an equity incentive plan - The company's common stock is traded on the Nasdaq Capital Market under the symbol "AIHS"[447] - The company has never paid cash dividends and does not intend to in the foreseeable future, retaining earnings for business operations and growth[449] - Under the 2018 Equity Incentive Plan, 1,830,985 securities were available for future issuance as of March 31, 2021[451][452] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue decreased significantly in FY2021 due to lower auto sales and COVID-19, resulting in a higher net loss and a going concern warning from auditors Results of Continuing Operations (Fiscal Year Ended March 31) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $6,160,534 | $15,655,575 | -60.6% | | Gross Profit | $191,042 | $3,375,337 | -94.3% | | Loss from Operations | ($10,184,543) | ($5,596,938) | +82.0% | | Net Loss | ($12,600,663) | ($4,348,776) | +189.8% | - The significant revenue decrease was driven by a sharp decline in automobile sales, which fell from $11.5 million in FY2020 to $0.49 million in FY2021. This was partially offset by a rise in operating lease revenues from $1.3 million to $3.4 million, reflecting a strategic shift in business focus[511][512][517] - The new Online Ride-hailing Platform Services, launched in October 2020, generated $903,254 in revenue in FY2021[510][524] - Selling, general and administrative (SG&A) expenses increased by 87% to $10.3 million, primarily due to higher amortization of tendered vehicles, increased salary and benefits from a larger headcount, and higher professional service fees[528] - The company's auditors raised substantial doubt about its ability to continue as a going concern, citing recurring losses, a working capital deficit of $5.9 million, and net operating cash outflows[541][600][639] Liquidity and Capital Resources Cash and equivalents increased due to equity offerings, but recurring losses and a working capital deficit raise substantial doubt about going concern - Cash and cash equivalents increased to $4.4 million as of March 31, 2021, from $0.8 million as of March 31, 2020[537] - The company raised significant capital through three offerings: August 2020 ($6.1 million net), February 2021 ($5.7 million net), and May 2021 ($5.8 million net)[538][539] - Net cash used in operating activities was $3.9 million for FY2021, an improvement from $6.4 million in FY2020[544][545] - Management has determined there is substantial doubt about the company's ability to continue as a going concern and plans to seek additional financing to alleviate the risk[542][639] Critical Accounting Policies Critical accounting policies include revenue recognition (ASC 606), lease accounting (ASC 842), derivative liabilities for warrants, and annual goodwill impairment testing - Revenue is recognized under ASC 606. Auto sales revenue is recognized upon delivery, while service fees (management, guarantee) are recognized over the affiliation period. Online ride-hailing platform revenue is recognized upon completion of a ride on a net basis[570][574][579] - Leases are accounted for under ASC 842. The company acts as both a lessor (for automobile rentals) and a lessee (for offices and some vehicles)[581][588] - Certain warrants are classified as derivative liabilities because their USD-denominated exercise price differs from the company's RMB functional currency. They are re-measured to fair value each period, with changes impacting the income statement[569][688] - Goodwill is not amortized but is tested for impairment at least annually or when impairment indicators are present[566][684] Financial Statements and Supplementary Data This section presents audited consolidated financial statements and the auditor's report, which includes a going concern warning due to recurring losses - The independent auditor's report from Friedman LLP expresses an opinion that the financial statements are presented fairly, but includes a paragraph expressing substantial doubt about the company's ability to continue as a going concern[596][600] Consolidated Balance Sheet Highlights (As of March 31) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $22,303,279 | $15,630,718 | | Total Current Assets | $10,893,006 | $6,606,139 | | Total Liabilities | $19,730,709 | $14,158,361 | | Total Current Liabilities | $16,778,944 | $11,132,530 | | Total Equity | $2,572,570 | $1,472,357 | Consolidated Statement of Operations Highlights (Year Ended March 31) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Revenues | $6,160,534 | $15,655,575 | | Gross Profit | $191,042 | $3,375,337 | | Loss from Operations | ($10,184,543) | ($5,596,938) | | Net Loss from Continuing Operations | ($12,600,663) | ($4,348,776) | | Net Loss from Discontinued Operations | ($61,976) | ($5,587,027) | | Total Net Loss | ($12,662,639) | ($9,935,803) | Controls and Procedures Management concluded that disclosure controls were ineffective due to material weaknesses in internal control, including insufficient U.S. GAAP expertise and inadequate IT security - Management concluded that disclosure controls and procedures were not effective as of March 31, 2021[863] - Several material weaknesses in internal control over financial reporting were identified[864] - Key weaknesses include: insufficient U.S. GAAP accounting expertise, lack of an adequate internal audit function, and inadequate IT and data security controls[864] - Remediation plans include hiring more qualified accounting staff, improving the internal audit function, and enhancing system security protocols[866] PART III Directors, Executive Officers and Corporate Governance The company's leadership includes key executives and a board with three independent directors, overseeing Audit, Compensation, and Nominating committees - The key executive officers are Xi Wen (CEO), Xiaoyuan Zhang (CFO), Chunhai Li (CTO), and Haitao Liu (COO)[871] - The Board has three independent directors: Xiaojuan Lin, Trent D. Davis, and Sichun Wang[876][877][879] - The company maintains an Audit, Compensation, and Nominating and Corporate Governance Committee, each composed of independent directors[882][884][885] Executive Compensation Executive compensation for FY2021 is detailed, with employment agreements in place and independent directors receiving retainers and RSUs Executive Compensation for Fiscal Year 2021 | Name and Principal Position | Total Compensation ($) | | :--- | :--- | | Xi Wen, CEO | 238,787 | | Xiaoyuan Zhang, CFO | 83,613 | | Chunhai Li, CTO | 56,388 | | Haitao Liu, COO | 82,209 | - Employment agreements are in place for key executives, specifying salary, benefits, and severance terms for termination with or without cause[894][899] - Independent directors receive annual cash retainers and were granted Restricted Stock Units (RSUs) in October 2020, which vest in quarterly installments[914][915] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Senmiao International Investment Group Limited is the largest beneficial owner at 19.1%, with all directors and executive officers owning 2.4% collectively - Senmiao International Investment Group Limited is the largest shareholder, beneficially owning 10,575,000 shares, or 19.1% of the company[919] - All directors and executive officers as a group beneficially own 1,348,356 shares, representing 2.4% of the outstanding common stock[919] Certain Relationships and Related Transactions, and Director Independence The company engages in related party transactions, including loans and leases, and has three independent directors as per Nasdaq rules - The company has non-interest bearing loan agreements with two stockholders for its VIE, Sichuan Senmiao[922] - The company leases office space from a shareholder of Sichuan Senmiao and from a company affiliated with an independent director[923] - The Board of Directors has determined that Trent Davis, Xiaojuan Lin, and Sichun Wang are independent directors[925] Principal Accountant Fees and Services The company paid $349,965 in total fees to its independent accounting firm for audit, audit-related, and tax services in FY2021 Accountant Fees (Fiscal Year Ended March 31) | Fee Category | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $261,000 | $261,755 | | Audit-Related Fees | $82,000 | $50,000 | | Tax Fees | $6,965 | $22,400 | | All Other Fees | $0 | $0 | PART IV Exhibits, Financial Statement Schedules This section provides an index of exhibits and financial statements filed with the Form 10-K, including corporate documents and various agreements - This section contains the financial statements and a comprehensive index of all exhibits filed with the report[930] - Key exhibits filed include VIE agreements (10.1-10.5), various financing and warrant agreements (4.1-4.8, 10.24, 10.34-10.39), and certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2)[931][934][936]