UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For fiscal year ended December 31, 2018
OR
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
☐ SHELL COMPANY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Date of
event requiring this shell company
report______________
For the
transition period from __________ to ___________
Commission
file number 001-34477
FINCERA INC.
(Exact
name of the Registrant as specified in its charter)
N/A
(Translation
of Registrant’s name into English)
Cayman Islands
(Jurisdiction
of incorporation or organization)
27/F, Kaiyuan Finance Center, No. 5, East Main Street
Shijiazhuang, Hebei
People’s Republic of China
Tel: +86 311 8382 7688
Fax: +86 311 8381 9636
(Address
of principal executive offices)
Yong Hui Li
27/F, Kaiyuan Finance Center, No. 5, East Main Street
Shijiazhuang, Hebei
People’s Republic of China
Tel: +86 311 8382 7688
Fax: +86 311 8381 9636
(Name,
Telephone, E-mail and/or Facsimile number and Address of Company
Contact Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title
of Each Class
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Name of
each exchange on which registered
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Ordinary
Shares, par value $0.001 per share
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OTC
QB
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act:
N/A
(Title
of Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title
of Class)
Indicate
the number of outstanding shares of each of the Issuer’s
classes of capital or ordinary shares as of the close of the period
covered by the annual report: 48,908,860 ordinary shares, par value
$0.001 per share, as of December 31, 2018.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
If this
report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☐ No
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. ☒ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). ☒ Yes ☐ No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer.
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☐ Large Accelerated filer
☐ Non-accelerated filer
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☒ Accelerated filer
☐ Emerging growth company
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If an
emerging growth company that prepares its financial statements in
accordance with U.S. GAAP, 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 13(a) of the Exchange Act. ☐
Indicate
by check mark which basis of accounting the registrant has used to
prepare the financial statements included in this
filing:
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☒ US GAAP
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☐ International Financial
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☐ Other
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Reporting
Standards as issued by
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the
International Accounting
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Standards
Board
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If
“Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow.
☐ Item 17 ☐ Item
18
If this
is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
☐ Yes ☒ No
Table
of Contents
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Page
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PART
I
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5
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ITEM
1.
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IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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5
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ITEM
2.
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OFFER
STATISTICS AND EXPECTED TIMETABLE
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5
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ITEM
3.
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KEY
INFORMATION
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5
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ITEM
4.
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INFORMATION
ON OUR COMPANY
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33
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ITEM
4A.
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UNRESOLVED
STAFF COMMENTS
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69
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ITEM
5.
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OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
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69
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ITEM
6.
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DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
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89
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ITEM
7.
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MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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100
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ITEM
8.
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FINANCIAL
INFORMATION
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101
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ITEM
9.
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THE
OFFER AND LISTING
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102
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ITEM
10.
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ADDITIONAL
INFORMATION
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103
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ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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112
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ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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112
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PART
II
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113
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ITEM
13.
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DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
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113
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ITEM
14.
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MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
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113
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ITEM
15.
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CONTROLS
AND PROCEDURES
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113
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ITEM
16.
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[RESERVED]
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115
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ITEM
16A.
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AUDIT
COMMITTEE FINANCIAL EXPERT
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115
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ITEM
16B.
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CODE OF
ETHICS
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115
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ITEM
16C.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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115
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ITEM
16D.
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EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
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116
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ITEM
16E.
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PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
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116
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ITEM
16F.
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CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT
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116
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ITEM
16G.
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CORPORATE
GOVERNANCE
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116
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ITEM
16H.
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MINE
SAFETY DISCLOSURE
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116
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PART
III
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ITEM
17.
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FINANCIAL
STATEMENTS
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117
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ITEM
18.
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FINANCIAL
STATEMENTS
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117
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ITEM
19.
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EXHIBITS
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117
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CERTAIN INFORMATION
Unless
otherwise indicated and except where the context otherwise
requires, in this Annual Report on Form 20-F references
to:
●
“Fincera”,
“we,” “us”, “our” or
“Company” refer to Fincera Inc., its subsidiaries and
its consolidated variable interest entities;
●
“ACG”
refers to AutoChina Group Inc. (together with its subsidiaries and
affiliated entities);
●
“Auto
Kaiyuan Companies” refers to Kaiyuan Auto Trade Co., Ltd.
(“Kaiyuan Auto Trade”) and Hebei Xuhua Trading Co.,
Ltd.;
●
“PRC”
or “China” refer to the People’s Republic of
China;
●
“dollars”
or “$” refer to the legal currency of the United
States; and
●
“Renminbi”
or “RMB” refer to the legal currency of
China.
FORWARD-LOOKING STATEMENTS
We
believe that some of the information in this Annual Report on Form
20-F constitutes forward-looking statements within the definition
of the Private Securities Litigation Reform Act of 1995. You can
identify these statements by forward-looking words such as
“may,” “expect,” “anticipate,”
“contemplate,” “believe,”
“estimate,” “intends,” and
“continue” or similar words. You should read statements
that contain these words carefully because they discuss future
expectations, contain projections of future results of operations
or financial condition or state other “forward-looking”
information.
We
believe it is important to communicate our expectations to our
security holders. However, there may be events in the future that
we are not able to predict accurately or over which we have no
control. The risk factors and cautionary language included in this
Annual Report on Form 20-F provide examples of risks, uncertainties
and events that may cause actual results to differ materially from
the expectations described by us in such forward-looking
statements, including, among other things:
●
changing
principles of generally accepted accounting
principles;
●
outcomes
of government reviews, inquiries, investigations and related
litigation;
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continued
compliance with government regulations;
●
legislation
or regulatory environments, requirements or changes adversely
affecting the financial industry in China;
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fluctuations
in customer demand;
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management
of rapid growth;
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general
economic conditions;
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changes
in government policy;
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the
fluctuations in sales of commercial vehicles in China;
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China’s
overall economic conditions and local market economic
conditions;
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our
business strategy and plans;
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our
ability to expand through strategic acquisitions, the establishment
of new locations, and the introduction of new products and
services;
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our
ability to successfully integrate recent acquisitions;
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credit
risk affecting our revenue and profitability, including our ability
to manage the default risk of customers;
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geopolitical
events.
You are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report.
All
forward-looking statements included herein attributable to us are
expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. Except to the extent
required by applicable laws and regulations, we do not undertake
any obligation to update these forward-looking statements to
reflect events or circumstances after the date of this Annual
Report or to reflect the occurrence of unanticipated
events.
This
Annual Report should be read in conjunction with our audited
financial statements and the accompanying notes thereto, which are
included in Item 18 of this Annual Report.
PART I
ITEM 1. IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
required.
ITEM 2. OFFER STATISTICS AND
EXPECTED TIMETABLE
Not
required.
ITEM 3. KEY
INFORMATION
A. Selected financial
data
The
following selected consolidated financial data as of December 31,
2018 and 2017 and for the years ended December 31, 2018, 2017 and
2016 have been derived from the audited consolidated financial
statements of Fincera included in this Annual Report beginning on
page F-1. The following summary consolidated financial data as of
December 31, 2016, 2015 and 2014, and for the years ended December
31, 2015 and 2014, have been derived from the audited consolidated
financial statements of Fincera. Such financial data is not
included in this Annual Report. This information is only a summary
and should be read together with the consolidated financial
statements, the related notes, the section entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations of Fincera” and other
financial information included in this Annual Report.
The
consolidated financial statements are prepared and presented in
accordance with generally accepted accounting principles in the
United States, or “U.S. GAAP.” The results of
operations of Fincera in any period may not necessarily be
indicative of the results that may be expected for any future
period. See “Risk Factors” included elsewhere in this
Annual Report.
FINCERA INC. AND SUBSIDIARIES
Selected Consolidated Financial Data
(in thousands, except per share amounts)
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As
of December 31,
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2018
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2018
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2017
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2016
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2015
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2014
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USD
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RMB
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RMB
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RMB
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RMB
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RMB
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Balance
Sheet Data –
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Cash and cash
equivalents
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144,902
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994,489
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1,123,296
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722,301
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469,241
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172,017
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Restricted
cash
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104
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714
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127,762
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42,517
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1,019
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6,046
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Total current
assets
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493,327
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3,385,799
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5,151,057
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5,535,890
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4,330,065
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2,907,859
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Total
assets
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720,401
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4,944,255
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6,753,504
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7,152,026
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6,002,830
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4,947,847
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Total current
liabilities
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593,838
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4,075,631
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6,046,590
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6,101,855
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3,571,732
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2,338,780
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Total
liabilities
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667,419
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4,580,631
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6,873,117
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6,994,973
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4,357,528
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3,296,109
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Total
stockholders’ equity (deficit)
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52,982
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363,624
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(119,613
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157,053
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1,645,302
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1,651,738
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Total shares
outstanding
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48,908,860
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48,908,860
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47,531,799
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47,123,898
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47,101,986
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47,099,288
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B. Capitalization and
Indebtedness
Not
required.
C. Reasons for the Offer and
Use of Proceeds
Not
required.
D. Risk
Factors
An investment in our securities involves risk. The discussion of
risks related to our business contained in this Annual Report on
Form 20-F comprises material risks of which we are aware. If any of
the events or developments described actually occurs, our business,
financial condition or results of operations would likely suffer.
The discussion of risks related to our business contained in this
Annual Report on Form 20-F also includes forward-looking
statements, and our actual results may differ substantially from
those discussed in these forward-looking statements. See
“Cautionary Note Regarding Forward-Looking
Statements.”
You should carefully consider the following risk factors, together
with all of the other information included in this Annual Report on
Form 20-F.
RISKS RELATED TO OUR BUSINESS
We have made significant changes to our business model, and our new
business model may not be successful.
We have
undergone a strategic shift which involves growing our new
internet-based businesses and ceasing our legacy commercial vehicle
sales, leasing and support business. Since then we have launched
three ecommerce platforms: TruShip in October 2015, AutoChekk in
March 2016 and PingPing in July 2016. In 2018, we restructured our
internet-based businesses by (i) transforming the CeraPay lending
platform into a back-end ecommerce trading platform, and (ii)
integrating the aforementioned three ecommerce platforms into a new
ecommerce services platform, the Kaiyuan Assistant Application, to
streamline our business channels. We also launched a new brokerage
business model in early 2018 to convert our distribution network
into a broker distribution network that is not owned, leased, or
staffed by the Company. This conversion was completed in August
2018. We are still in the process of developing and launching
additional internet-based businesses. There is no guarantee that
our new businesses will be successful or profitable, or that they
will provide an equal or greater return on investment as compared
to the businesses we are winding down. For more description of our
new business model, please see “Item 4. Information on our
Company – B. Business Overview.
We have a limited operating history in China’s internet-based
financial services industry, which is itself an emerging and
evolving industry, making it difficult to evaluate our future
prospects.
China’s
internet-based financial services industry is relatively new and
may not develop as expected. As a new industry, there is limited
public information about comparable companies available for
potential investors to review in making a decision about whether to
invest in our company. In addition, borrowers may not view online
peer-to-peer lending obligations facilitated on our platform as
having the same consequences of default as other credit obligations
arising under more traditional loans provided by banks or other
commercial financial institutions. Any default on borrowers'
payment obligations may adversely affect investors' confidence in
the loan products on our online marketplace, which may lead to less
available loan capital. If our market does not develop as we
expect, if we fail to educate potential customers and funding
sources about the value of our platforms and services, or if we
fail to address the needs of our target customers, our reputation,
business and results of operations will be materially and adversely
affected.
We have
a limited operating history in the internet-based financial
services industry. It is difficult to effectively assess our future
prospects. There are many risks and challenges we are subject to
including, but not limited to:
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Transitioning
to new business models;
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Navigating
an evolving regulatory environment;
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Achieving
and maintaining profitability and margins;
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Attracting,
training and retaining qualified personnel;
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Broadening
our product offering;
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Maintaining
adequate control over our costs and expenses;
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Maintaining
the security of our platforms and the confidentiality of the
information provided and utilized across our
platforms;
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Managing
credit risk in our portfolio of loans; and
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Responding
to competitive and changing market conditions.
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If we
are unsuccessful in addressing any of the above risks, our business
may be materially and adversely affected.
Our new internet-based business may incur net losses in the
future.
Our
revenues of legacy commercial vehicle sales, leasing and support
business have declined as a result of our strategic shift towards
internet-based businesses. As we continue to grow and expand our
business, our operating expenses may increase in the future. Our
strategies include, among others, attracting new and potential
borrowers and investors, upgrading and developing our technologies,
enhancing our risk management system and launching new loan
products and services on our marketplace, each or all of which may
incur more expenses than we anticipate. Our revenue growth may be
insufficient to offset these expenses and therefore result in net
losses. We cannot assure you that our new internet-based businesses
will be able to generate sufficient revenues to generate net income
in the future.
We may not be able to maintain the growth rate we have experienced
in recent years and may not be able to manage our growth
effectively.
We may
not be able to maintain the growth that we have experienced since
2014, or continue to experience growth at all, in the volume of
loans facilitated on our online marketplace and the number of
users, including borrowers and investors. As we have a limited
operating history and our business has rapidly grown and changed in
recent years, our past financial performance may not be a sound
basis on which to evaluate our business prospects and future
financial performance. In addition, our new businesses are still in
the early stages of development, and we operate in a competitive
and uncertain environment with many risks, challenges,
unforeseeable expenses, difficulties, delays and complications,
including, among others, the PRC regulatory landscape. If we are
unsuccessful in addressing any of the following risks,
uncertainties and challenges, we may be unable to rapidly scale our
business and manage our growth:
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navigating
an opaque regulatory and competitive environment;
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attracting
new and retaining repeat borrowers and investors that use our
marketplace;
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increasing
the volume of loans through our marketplace and the associated
service fees that we receive;
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increasing
our market share and introducing new loan and investment products
and services;
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fostering
a healthy traffic of loan transactions by boosting and balancing
demand and supply on our marketplace;
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developing
and upgrading our credit assessment systems to enhance our risk
management capabilities and increase the effectiveness and
convenience of the system;
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maintaining
and scaling our online marketplace and updating our mobile
application system to enhance operational efficiency;
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enhancing
the infrastructure for our technology to support the growth of our
business;
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optimizing
use of human and technology resources;
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effectively
maintaining and scaling our financial and risk management controls
and procedures;
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managing
and controlling the expenses incurred by a growing publicly traded
company, including but not limited to legal, accounting and other
compliance costs;
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constantly
monitoring and upgrading the security of our systems and protecting
the confidential information we have gathered;
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minimizing
risks of litigation, regulatory and administrative proceedings,
claims of intellectual property infringement, privacy infringement
and other claims; and
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attracting,
utilizing and retaining qualified management members and
employees.
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If our online lending services are deemed to violate any PRC laws
or regulations governing the online lending industry in China, our
business, financial condition and results of operations would be
materially and adversely affected.
Due to
the relatively short history of the online lending 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 relied on general and basic laws and regulations for
governing the online lending industry, including the PRC Contract
Law and related judicial interpretations promulgated by the Supreme
People's Court.
Since
mid-2015, the PRC government and relevant regulatory authorities
have issued various laws and regulations governing the online
lending industry, including, among others, the Guidelines on Promoting the Healthy
Development of the Internet Finance Industry, or the
Internet Finance Guidelines, the Interim Measures for Administration of
Business Activities of Online Lending Information
Intermediaries, or the Interim Measures, the Guidelines on Administration of Record-filings
of Online Lending Information Intermediaries, or the
Record-filings Guidelines, the Guidelines on Online Lending Funds Custodian
Business, or the Custodian Guidelines, and the Guidelines on Information Disclosure of
Business Activities by Online Lending Information
Intermediaries, or the Disclosure Guidelines. See
"Regulation—Regulations Relating to Online Lending
Services."
According to the Interim Measures, the online lending information
intermediaries may not engage in certain activities, including,
among others, (i) fund-raising for the online lending information
intermediaries themselves, (ii) holding investors'
funds or setting up capital
pools with investors' fund, (iii) providing security or
guarantees to investors as
to the principals and returns of the investment, (iv) issuing or
selling any wealth management products, (v) splitting the terms of
any financing project, (vi) securitization, (vii) promoting its
financing project on physical premises, and (viii) equity
crowd-funding. The Interim Measures also imposed certain other
requirements on the online lending information intermediaries,
including, among others:
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Value-Added Telecommunications Business License. The Interim
Measures require the online lending information intermediaries to
apply for telecommunication business operating licenses pursuant to
the relevant provisions of the competent authorities of
communications. Our online lending platform, operated by Qingyi
Technology, a subsidiary of our consolidated variable interest
entities, may be deemed to be providing commercial internet
information services, which would require Qingyi Technology to
obtain an ICP License. An ICP License is a value-added
telecommunications business license required for provision of
commercial internet information services. Although Qingyi
Technology has obtained an ICP License as a commercial internet
information provider, there is uncertainty as to which type of
license is required for online lending information intermediaries
as the detailed provision for such telecommunication business
operating licenses has not been published. Furthermore, as we are
providing mobile applications to mobile device users, it is
uncertain if Qingyi Technology will be required to obtain a
separate operating license in addition to the ICP License. Although
we believe that not obtaining such separate license is in line with
the current market practice, there can be no assurance that we will
not be required to apply for an operating license for our mobile
applications in the future. See "Regulation—Regulations
Relating to Internet-based Services—Regulations on
Value-Added Telecommunication Services."
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Custody of Funds. The Interim Measures require the online
lending information intermediaries to set up custody accounts with
qualified banks to hold customer funds. We have entered into an
agreement with XWBank, under which the bank provides custodian
services for funds of borrowers and investors and we implemented
the custodian system on March 20, 2018. However, as we did not
implement the custody program for customer funds by the
rectification period deadline of August 2017, we may be deemed to
be noncompliant with the Custodian Guidelines. Though the Hebei
financial regulatory department has not penalized us or issued any
warning for failing to become fully compliant within the 6-month
rectification period of the Custodian Guidelines, we cannot assure
you that the relevant regulatory authorities will not impose
sanctions on us for failing to comply within the rectification
period. Moreover, the Notice on
Rectification and Inspection Acceptance of Risk of Online Lending
Information Intermediaries, or Circular 57, issued by the
Online Lending Rectification Office on December 8, 2017, requires
the online lending information intermediaries to set up custody
accounts with qualified banks that have passed certain testing and
evaluation procedures run by the Online Lending Rectification
Office. Though, XWBank has passed the testing and evaluation
procedures, if any new laws, regulations or rules impose additional
restrictions on our custody account arrangement with XWBank, we may
need to amend our arrangement with XWBank or seek an alternative
qualified custodian bank, which may materially and adversely affect
our business. See "Regulation—Regulations Relating to Online
Lending Services—Regulations on Custody of Funds of Online
Lending Information Intermediaries."
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●
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Discontinuation of Risk Reserve Fund. The Interim Measures prohibit the
online lending information intermediaries from providing any
security interest or guarantee to investors on the principal or
return of their investments, and Circular 57 requires the online
lending information intermediaries to discontinue to set aside
additional fund as risk reserve funds or originate new risk reserve
funds. In addition, the existing balance of risk reserve funds
shall be gradually reduced. Currently, we previously operated a
“security deposit program”, under which the
loans facilitated through
our online lending platform is guaranteed by the SMBs and 5.0 -
8.0% of the principal balance of the loan is remitted to us as a
security deposit, but we have ceased this program and replaced it
with other forms of guarantee, including vehicles or real estate
mortgaged by the borrowers or joint liability guaranty provided by
the guarantors. In addition, we currently require the borrowers for
our “Qingying” product (180-day loans) to pay
certain amount of “supervision fees” to a third-party
guarantor, which amount to 10% of the principal and will be
returned to the borrowers upon the full repayment of loans by the
borrowers. Though we
don’t consider our supervision fees program as a type of risk
reserve fund prohibited under Circular 57, if the relevant
regulatory departments think otherwise, we may have to discontinue
operating our supervision fees program. Also, in order to
provide liquidity for investors seeking to transfer their loans on
the secondary market, we may use our own capital to purchase loans
and act as a market maker when demand from other investors are
unable to meet the supply of secondary loan transfers. Though we
don’t consider this practice to be providing guarantees to
investors on principal and interest, if the relevant regulatory
departments think otherwise, we may have to discontinue our market
making practice. The
discontinuation of our supervision fees program or market making
activities may materially and adversely affect our
business.
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Prohibition of Physical Promotion Activities. The Interim Measures prohibit the
online lending information intermediaries from promoting
their financing
projects on physical
premises. We previously acquired our borrowers almost entirely from
our nationwide physical sales network, but to strictly comply with
the Interim Measures, as of January 2018, we have ceased all
promotion on
physical premises and are in the process of extending our marketing
channels including social media and traditional media, etc. Since
our target customers are mostly in smaller cities and rural areas
that are not easily reached through online advertising and our
other media channels, the discontinuation of our physical promotion
activities, which may have a material adverse effect on our
business.
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Limitations to Balance of Loans. The Interim Measures require that the
balance of loans borrowed by a natural person shall not exceed
RMB200,000 (US$29,141) on a single online lending information
intermediary and not exceed RMB1 million (US$145,705) in total on
all online lending information intermediaries in the PRC, while the
balance of loans borrowed by a legal person or organization shall
not exceed RMB1 million (US$145,705) on a single online lending
information intermediary and not exceed RMB5 million (US$728,523)
in total on all online lending information intermediaries in the
PRC. We currently do not offer loans to the same individual in an
aggregate amount exceeding RMB200,000 (US$29,141) nor do we offer
loans to the same company in an aggregate amount exceeding RMB1
million (US$145,705). However, we have outstanding loans totaling
to RMB1.8 million issued to three customers that exceed these
limits and will take some time to wind down or restructure in order
to be fully in compliance. Moreover, due to the lack of an
industry-wide information sharing arrangement, there can be no
assurance that the aggregate amount borrowed by a same natural
person or a same legal person/organization through our platform and
other online lending information intermediaries does not exceed the
RMB1 million (US$145,705) or RMB5 million (US$728,523) borrowing
limit set out by the Interim Measures,
respectively.
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Anti-Money Laundering. The Interim Measures require the
online lending information intermediaries 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. We have adopted various policies and procedures, such as
internal controls and "know-your-customer" procedures, for
anti-money laundering purposes. We cannot assure you that the
anti-money laundering policies and procedures we have adopted will
be effective in protecting our marketplace from being exploited for
money laundering purposes or will be deemed to be in compliance
with applicable anti-money laundering implementing rules if and
when adopted. In addition, we rely on third-party service
providers, in particular our custody bank and third party payment
providers that handle the transfer of funds between borrowers and
lenders, to have their own appropriate anti-money laundering
policies and procedures. Custody banks and third party payment
providers are subject to anti-money laundering obligations under
applicable anti-money laundering laws and regulations and are
regulated in that respect by the PBOC. If any of our third-party
service provides fail to comply with applicable anti-money
laundering laws and regulations, our reputation could suffer and we
could become subject to regulatory intervention, which could have a
material adverse effect on our business, financial condition and
results of operations.
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To comply with existing laws, regulations, rules and governmental
policies relating to the online lending industry, we have
implemented and will continue to implement various policies and
procedures to conduct our business and operations, including, among
others:
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we do
not use capital from Qingyi Technology, the operator of our online
lending platform, to invest in loans facilitated through our online
marketplace;
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we do
not commit to provide guarantees to investors under any agreement
for the full return of loan principal and interest;
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we have
entered into an agreement with XWBank, under which the bank
provides custodian services for funds of borrowers and investors,
and we implemented the custodian system on March 20,
2018;
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we have obtained the ICP license for www.qingyidai.com from the relevant local counterpart for
operating telecommunication services;
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we
disclose on our website, to the best of our ability, all relevant
information to investors and borrowers, such as disclosure to
borrowers regarding interest rates, payment schedule, service fees,
and other charges and penalties; and
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we are
making a concerted effort to maintain the security of our platform
and the confidentiality of the information provided and utilized
across our platform.
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We do
not own any physical stores for loan facilitation business after
the conversion into new broker business model completed in August
2018.
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we have obtained the Certification of Record of Information
System Security Graded Protection (qualified as grade three)
from local Public
Security Authority;
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Due to the lack of detailed rules from regulatory authorities and
the fact that the rules, laws and regulations are expected to
continue to evolve in this newly emerging industry, we cannot be
certain that our existing practices would not be deemed to violate
any existing or future rules, laws and regulations. In particular,
we cannot rule out the possibility that some of the services we
provide to investors, such as portfolio investment, might be viewed
as not being in full compliance. As of the date of this Annual
Report, we have never been subject to any material fines or other
penalties under any PRC laws or regulations, including those
governing the online lending industry in China. However, to the
extent that we are not able to fully comply with any existing or
new regulations when they are promulgated, our business, financial
condition and results of operations may be materially and adversely
affected.
If our online lending services are considered by PRC regulatory
authorities as providing direct loans to the borrowers, we may have
to obtain the relevant approval for such lending business, and the
failure to obtain such approval may have a material adverse effect
on our business.
In
December 2017, the Internet Finance Rectification Office and the
Online Lending Rectification Office in the PRC jointly issued the
Notice on Regulating and
Rectifying "Cash Loan" Business, or the Circular 141,
outlining general requirements on the "cash loan" business
conducted by online microcredit companies, banking financial
institutions and online lending information intermediaries.
Circular 141 specifies that no organizations or individuals may
conduct the lending business without obtaining approvals for the
lending business.
Our
CeraVest product is an online lending information intermediary and
does not conduct the direct lending business, and also an online
credit transaction platform and has features similar to traditional
credit cards, which allows its users to make purchases at
participating merchants on credit. If our CeraVest platform is
considered to be a direct lending business, we may have to obtain a
necessary permit for such business. Also, our subsidiaries that
participate in market making loan purchases on the CeraVest
platform might also be considered to be a direct lending business
and would require a permit.
If we
are required to obtain a “microcredit approval” and
establish an online microcredit company just like many other
industry peers have done for their direct online lending
businesses, we may encounter substantial obstacles, as Circular 141
requires the relevant regulatory authorities to suspend the
approval of the establishment of online microcredit companies and
the approval of any microcredit business conducted across
provincial jurisdictions. The failure to obtain such approval or
permit may have a material adverse effect on our business as we
believe the CeraVest is our primary profit driver. See
"Regulation—Regulations Relating to Online Lending
Services—Regulations on Cash Loans" and
"Regulation—Regulations Relating to Online Lending
Services—Regulations on Microcredit Companies."
Limited liquidity for the loans on our marketplace may adversely
affect the appeal of our marketplace to investors.
The
loan products we facilitate on our marketplace are designed
specifically for our marketplace. Transactions for our loan
products are only permitted on our marketplace. We operate a
secondary loan market on our platform where investors can transfer
the loans they hold to other investors before the loans reach
maturity. To facilitate the assignment of the loans, the template
loan agreement applicable to the lenders and borrowers on our
platform 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. However, Notice 57 only
permits low-frequency debt transfers between the lender and the
borrower. Though there is no clear explanation of low-frequency
debt transfers, our secondary loan market may consider our
secondary loan products to be non-compliant, which may cause us to
modify our products, which may have a material adverse effect on
our financial condition and results of operations.
In
addition, in order to provide flexible liquidity for investors
seeking to transfer their loans on the secondary market, we may use
our own capital under a separate subsidiary to provide liquidity
and act as a market maker when demand from other investors are
unable to meet the supply of secondary loan transfers. We may not
always have enough capital to provide liquidity to investors
seeking to transfer. Such action as a market maker may be deemed
non-compliant with online lending regulations and we may be ordered
to stop these market-making activities by financial
regulators.
If
investors cannot transfer their loans or exit with as much
flexibility as they desire, they may lose interest in our online
marketplace and may not invest as much on our platform, or at
all.
The transaction fees we charge borrowers and merchants may decline
in the future and any material decrease in such fees could have a
material adverse effect on our business, financial condition and
results of operations.
We
generate a substantial majority of our total revenues from
facilitation fees we charge borrowers and the service charges we
charge merchants. In the year ended December 31, 2018, transaction
fees comprised 46.6% of our total revenues. Any material decrease
in our transaction fees would have a substantial impact on our
margin. In the event that the amount of transaction fees we charge
for loan facilitation and credit transactions decrease
significantly in the future and we are not able to reduce our cost
of capital for funds from our marketplace investors or to adopt any
cost control initiatives, our business, financial condition and
results of operations will be harmed.
To
compete effectively, the transaction fees we charge borrowers and
merchants could be affected by a variety of factors, including the
creditworthiness and ability to repay of the borrowers, the
competitive landscape of our industry, and our access to capital
and regulatory requirements. Our transaction fees may also be
affected by a change over time in the mix of the types of products
we offer and a change to our borrower engagement initiatives. Our
competitors may also offer more attractive fees, which may require
us to reduce our fees to compete effectively. Certain financing
solutions offered by traditional financial institutions may provide
lower fees than our transaction fees. Although we do not believe
there are many financing solutions that currently compete with our
products or target the same unserved or underserved borrowers in
China, such traditional financial institutions may decide to do so
in the future, which may have a material adverse effect as to the
financing service fees that we will be able to charge. Furthermore,
as our borrowers establish their credit profile over time, they may
qualify for and seek out other competing financing solutions with
lower fees, including those offered by traditional financial
institutions offline, and we may need to adjust our transaction
fees to retain such borrowers.
In
addition, our transaction fees are sensitive to many macroeconomic
factors beyond our control, such as inflation, recession, the state
of the credit markets, changes in market interest rates, global
economic disruptions, unemployment and fiscal and monetary
policies. Our transaction fees, to the extent they are fully or
partially deemed as interest, may also be subject to the
restrictions on interest rate as specified in applicable rules on
private lending. Our online lending platforms are required by
applicable law to comply with the 36% limit on annualized interest
rate set forth in the Private Lending Judicial Interpretations.
Loans funded under arrangements involving licensed financial
institutions, such as banks, the consumer finance company and the
trust companies, are not private lending transactions within the
meaning of the Private Lending Judicial Interpretations. Moreover,
Circular 141 requires that (i) the aggregated borrowing costs of
borrowers charged by institutions in the forms of interest and
various fees should be annualized and subject to the limit on
interest rate of private lending set forth in the Private Lending
Judicial Interpretations; and (ii) the online lending information
intermediaries are not permitted to deduct interest, handling fee,
management fee or deposit from the principal of loans provided to
the borrowers in advance.
The
effective annual percentage rate for our term loans currently
ranges from 8.62% to 21.63%, which comprises a nominal interest
rate and a loan facilitation fee we charge borrowers and also takes
into account late fees and penalty fess. Moreover, our standard
form of loan agreements stipulate that if the annual percentage
rate exceed the mandatory limit for loan interest rates, the
effective annual percentage rate should be set as the mandatory
limit. In
addition, we currently deduct the loan facilitation fee and certain
supervision fees (such supervision fees are only applicable to our
“Qingqing” product”) in advance from the
principal, which is not in compliance with such requirements
imposed by Circular 141. We will re-examine our fee policies and
make the necessary changes as required by the local financial
regulators. As transaction fees historically accounted for a
substantial majority of our revenue, any material reduction in the
amount of transaction fees we charge borrowers could have a
material adverse effect on our business, financial condition and
results of operations.
Our business depends on our ability to collect payment on and
service the loans we facilitate.
Our
collection process is divided into distinct stages based on the
severity of delinquency, which dictates the level of collection
steps taken. For example, automatic reminders through text are sent
to a delinquent borrower as soon as the account becomes overdue.
Our collection team will also make phone calls to borrowers or
conduct in-person visits following missed payments and periodically
thereafter. During fiscal years 2016, 2017 and 2018, we recovered
RMB7.4 million (US$1.1 million), RMB7.8 million (US$1.2 million)
and RMB61.0 million (US$8.9 million), respectively, of principal
and penalty fees of loans that were more than 90 calendar days past
due.
Despite
our servicing and collection efforts, we cannot assure you that we
will be able to collect payments on the loans we facilitate as
expected. If borrowers default on their payment obligations,
investors that purchased these loans from our marketplace may
suffer losses and thus result in damage to our brand and
reputation. Therefore, our failure to collect payment on the loans
will have a material adverse effect on our business operations and
financial positions. In addition, we aim to control bad debts by
utilizing and enhancing our credit assessment system rather than
relying on collection efforts to maintain healthy credit
performances. As such, our collection team may not possess adequate
resources and manpower to collect payment on and service the loans
we facilitated. As the amount of loans facilitated by us increases
in the future, we may devote additional resources into our
collection efforts. However, there can be no assurance that we
would be able to utilize such additional resources in a
cost-efficient manner.
Moreover,
the current regulatory regime for debt collection in the PRC
remains unclear. Although we aim to ensure our collection efforts
comply with the relevant laws and regulations in the PRC and we
have established strict internal policies that our collections
personnel do not engage in overly aggressive practices, we cannot
assure you that such personnel will not engage in any misconduct as
part of their collection efforts. Any such misconduct by our
collection personnel or the perception that our collection
practices are considered to be overly aggressive and not in
compliance with the relevant laws and regulations in the PRC may
result in (i) harm to our reputation and business, which could
further reduce our ability to collect payments from borrowers, (ii)
a decrease in the willingness of prospective borrowers to apply for
and utilize our credit or (iii) fines and penalties imposed by the
relevant regulatory authorities, any of which may have a material
adverse effect on our results of operations.
If we are unable to maintain or increase the volume of loan
transactions facilitated on our marketplace or if we are unable to
attract new borrowers or investors, or retain existing borrowers or
investors, our business and results of operations will be adversely
affected.
We have
experienced considerable growth in the volume of loan transactions
facilitated on our marketplace. To continue to grow our business,
we must continue to increase the volume of loan transactions on our
marketplace by retaining existing borrowers and attracting a large
number of new borrowers who meet our qualifications, along with and
new and existing investors willing to invest in these
loans.
Furthermore,
if there are insufficient qualified loan requests, investors may be
unable to deploy their capital in a timely or efficient manner and
may seek other investment opportunities. If there are insufficient
investor commitments, borrowers may be unable to obtain capital
through our marketplace and may turn to other sources for their
borrowing needs and investors who wish to transfer their
investments prior to maturity may not be able to do so in a timely
manner.
Our
overall transaction volume may be affected by several factors,
including our brand recognition and reputation, the interest rates
offered to borrowers and investors relative to market rates, the
effectiveness of our risk control, the repayment rate of borrowers
on our marketplace, the efficiency of our platform, the
macroeconomic environment and other factors. In connection with the
introduction of new products or in response to general economic
conditions, we may also impose more stringent borrower
qualifications to ensure the quality of loans on our platform,
which may negatively affect the growth of loan volume. If any of
our current user acquisition channels becomes less effective, if we
are unable to continue to use any of these channels or if we are
not successful in using new channels, we may not be able to attract
new borrowers and investors in a cost-effective manner or convert
potential borrowers and investors into active borrowers and
investors, and may even lose our existing borrowers and investors
to our competitors. If we are unable to attract qualified borrowers
and sufficient investor commitments or if borrowers and investors
do not continue to participate in our marketplace at the current
rates, we might be unable to increase our loan transaction volume
and revenues as we expect, and our business and results of
operations may be adversely affected.
We may not be able to completely prevent fraudulent activity on our
marketplace, which may have a material adverse effect on our brand,
reputation, business and results of operations.
Fraudulent
activity on our online marketplace, including organized fraud
schemes and criminals fraudulently inducing investors to lend
capital, could lead to regulatory intervention, cause material
damage to our brand, reputation and market share, and require us to
take extra anti-fraud measures. The occurrence of fraudulent
activity will cause us to incur costs and divert management
attention, affecting our business and results of operations. We
cannot assure you that we will not experience any fraudulent
activities in the future that may cause harm to our business or
reputation. We believe our risk management system has stringent
controls and checks in place to minimize the incidence of fraud on
our marketplace. However, we have limited resources and our
technology and our risk management system may not be able to
completely prevent and detect all potential fraudulent
activities.
If we fail to promote and maintain our brand in an effective and
cost-efficient way, our ability to grow our business may be
impaired.
We
believe that developing and maintaining awareness of our brand
effectively is critical to attracting new and retaining existing
borrowers and investors to our marketplace. Factors that are vital
to this objective include but are not limited to our ability
to:
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maintain
the quality and reliability of our platforms;
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provide
borrowers and investors with a superior experience in our
marketplace;
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enhance
and improve our credit assessment and decision-making
models;
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effectively
manage and resolve borrower and investor complaints;
and
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effectively
protect personal information and privacy of borrowers and
investors.
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Successful
promotion of our brand and our ability to attract qualified
borrowers and sufficient investors depend largely on the
effectiveness of our marketing efforts and the success of the
channels we use to promote our marketplace. 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.
Any harm to our brand or reputation or any damage to the reputation
of the online lending industry may materially and adversely affect
our business and results of operations.
Any
malicious or innocent negative allegation made by the media or
other parties about our company, including but not limited to our
management, business, compliance with law, financial conditions or
prospects, whether with merit or not, could severely hurt our
reputation and harm our business and operating
results.
As the
market for online lending in China is new and the regulatory
framework for this market is also evolving, negative publicity
about this industry has and may arise from time to time. Negative
publicity about China’s online lending industry in general
may also have a negative impact on our reputation, regardless of
whether we have engaged in any inappropriate
activities.
Furthermore,
certain factors that may adversely affect our reputation are beyond
our control, including the risk of misconduct and errors by our
employees and third-party service providers. Our business depends
on our employees and third-party service providers to interact with
potential borrowers and investors, process large numbers of
transactions and support the loan collection process, 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 investors through our
internet-based finance platforms is governed by various PRC laws.
It is not always possible to identify and deter misconduct or
errors by 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 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.
We may not be able to attract sufficient loan capital from our
investors to meet the demands of the borrowers on our
marketplace.
Our
online lending business involves the matching of borrowers and
investors through our marketplace. The growth and success of our
future operations depend on the availability of adequate lending
capital to meet borrower demand for loans on our marketplace. In
order to maintain the requisite level of funding for the loans
facilitated on our marketplace to meet borrower demand, we may need
to optimize the investor composition of our marketplace to include
more investors generally and also a certain number of institutional
investors, which usually invest larger amounts compared to
individual investors. To the extent there are an insufficient
number of investors willing to accept the risk of default posed by
potential borrowers, our marketplace will be unable to fulfil all
of the loan requests. If adequate funds are not available to meet
borrowers' demand for loans when they arise, the volume of loans
facilitated on our marketplace may be significantly impacted. To
the extent that it is necessary to obtain additional lending
capital from investors, such lending capital may not be available
to our marketplace on acceptable terms, or at all. If our
marketplace is unable to provide potential borrowers with loans or
fund the loans on a timely basis due to insufficient lending
capital on our marketplace, we may experience a loss of market
share or slower than expected growth, which would harm our
business, financial condition and results of
operations.
Fluctuations in interest rates could negatively affect our
business.
The
profitability of our business depends on the interest rates at
which our customers are willing to borrow. If we fail to respond to
the fluctuations in market interest rates in a timely manner and
reprice our loan products, our loan products may become less
attractive to our customers. For example, in a falling interest
rate environment, potential customers may seek lower priced loans
from other channels if we do not lower the interest rates on our
loan products. Similarly, if we fail to respond to fluctuations in
market interest rates in a timely manner and reprice our investment
products, our investment products may lose competitiveness. For
example, in a rising interest rate environment, potential investors
may seek higher return investments from other channels if we do not
increase the return on our investment products. Moreover, if we are
unable to reprice our loan products and investment products
correspondingly, the spreads between the interest rates on our loan
products and the interest rates on our investment products may be
reduced, and our profitability may be adversely
affected.
If the loan and investment products and services in our present
portfolio and future pipeline are insufficiently attractive to our
customers, become obsolete or they fail to satisfy the demands of
borrowers or investors, our business and results of operations will
be materially affected.
We
intend to expand our product offering to borrowers to cater to
their different financing needs. We also intend to expand our
investor service offerings to meet the different needs of investors
and offer different risk-based returns. Loan and investment
products and services require significant expense and resources to
develop, acquire, and market. They also may not receive sufficient
market acceptance for a variety of reasons:
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(i)
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our
estimate of market demand may not be accurate, such that we may not
be able to launch products and services to align with and meet
specific market demands, or there may not be sufficient market
demand for the loan products and services;
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(ii)
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changes
on our marketplace, including the introduction of new platform
services and mobile application functions, may not be favorable to
existing users;
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(iii)
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defects,
errors or failures on our marketplace;
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(iv)
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any
negative publicity or news about our loan or investment products on
our marketplace;
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(v)
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delays
in launching the new loan or investment products or services;
and
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(vi)
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competing
loan or investment products and services by our
competitors.
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If the
products in our present portfolio and future pipeline do not attain
sufficient market acceptance, become obsolete or otherwise fail to
satisfy the demands of borrowers and investors, we may be unable to
compete in the intense online lending industry and our target
market. Our market share may decline and negatively affect our
business and results of operations.
Our risk management system comprising our policy framework, credit
assessment and fraud detection technology and protocols may not be
adequate and may adversely affect the reliability of our
marketplace, and in turn damage our reputation, business and
results of operations.
The
success of our online marketplace relies heavily on our ability to
detect, assess and control credit risk, and therefore to prevent
fraud. We have stringent risk management protocols in place to
effectively assess borrower applicants' credit risk to prevent
fraud and minimize the risk of non-payment. After we receive a loan
or credit line application we request for the borrower applicant's
personal information supported by documentation, and we verify the
information against public information and data provided by
third-party suppliers. In order to prevent fraud and assess the
creditworthiness of each borrower, we conduct physical interviews
that are recorded and enhanced due diligence procedures, as needed,
to verify the borrower applicant's information and his or her
intent. Any suspicious applications would be denied for a loan and
blacklisted in our databases.
The
information and data we use may not be sufficient to allow us to
adequately capture a borrower applicant's credit risk. Such
information and data include, among others, demographic
information, credit history with us and with other financial
institutions, and employment information and blacklists maintained
by other forums and organizations. We constantly update and
optimize our risk management system but the system may have
loopholes or defects which may prevent us from effectively
identifying risks, or the data provided may be inaccurate or stale
or insufficient, such that we may misjudge the risk and misalign
the risk profile and loan price. The information may also not be
sufficient for prediction of future non-payment. Such risks and
errors may erode investor confidence in our marketplace and
therefore harm our reputation and adversely affect our business and
results of operations.
Since
we sometimes act as a market maker on our lending platforms, we are
therefore subject to the credit risk of our customers when we
purchase loans from the secondary market. We use various methods to
screen potential customers and establish appropriate credit limits,
but these methods cannot eliminate all potential credit risks and
may not always prevent us from approving customer applications that
are not credit worthy or are fraudulently completed. Changes in our
industry and customer demand may result in periodic increases to
customer credit limits and spending and, as a result, could lead to
increased credit losses. We may also fail to detect changes to the
credit risk of customers over time. Further, during a declining
economic environment, we experience increased customer defaults and
preference claims by bankrupt customers. If we fail to adequately
manage our credit risks, our bad debt expense could be
significantly higher than historic levels and adversely affect our
business, operating results and financial condition. If a
significant number of customers fail to make payments when due, we
may not be able to fully recover the outstanding principal of loans
we make, which could significantly affect our profitability. In
addition, under such a scenario, if we are unable to purchase
defaulting loans from investors and investors suffer losses, he or
she may lose confidence in our online marketplace. As a result, our
reputation may be harmed and we may not be able to attract and
retain investors to participate in our marketplace.
If any of the primary information provided by borrowers and data
obtained from third-party external sources we use for credit and
risk assessment is inaccurate or fraudulently provided, our
assessment may not sufficiently capture the credit risk of the
loan.
Borrowers
supply a variety of information that is included in the listings of
loans on our marketplace. We do not verify all the information we
receive from borrowers, and such information may be inaccurate or
incomplete. For example, we often do not verify a borrower's home
ownership status or intended use of loan proceeds. Although we do
take steps to ensure a borrower uses loan proceeds for specified
purposes, it is possible that we are unable to detect all instances
where a borrower may use loan proceeds for other purposes that may
involve increased risk than as originally provided. Moreover,
investors do not, and will not, have access to detailed financial
information about borrowers. If investors invest in loans through
our marketplace based on information supplied by borrowers that is
inaccurate, misleading or incomplete, those investors may not
receive their expected returns and our reputation may be harmed.
Moreover, inaccurate, misleading or incomplete borrower information
could also potentially subject us to liability as an intermediary
under the PRC Contract Law.
See "Regulation—Regulations Relating to Online Lending
Services—Regulations on Private Loans.
Due to
the lack of a nationwide centralized credit reporting system in
China, we have had to rely on our own data collection efforts to
gather as much relevant credit information about borrower
applicants as possible. We collect third-party data from and
cross-check information gathered against the People's Bank of
China, or the PBOC credit reporting platforms, credit bureaus, data
vendors, and big data analytics companies. If the data points used
in our credit assessment are inaccurate, incomplete or outdated, as
we do not have the means to verify the third party data we obtain,
the outcome may not accurately reflect the credit risk of the
borrower. This could 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.
We rely on our information technology, billing and credit control
systems, and any problems with these systems could interrupt our
operations, resulting in reduced cash flow.
Our
business cannot be managed effectively without our integrated
information technology system. Accordingly, we run various
“real time” integrated information technology
management systems for our financing business.
In
addition, sophisticated billing and credit control systems are
critical to our ability to increase revenue streams, avoid revenue
loss and potential credit problems, and bill customers in a proper
and timely manner. If adequate billing and credit control systems
and programs are unavailable, or if upgrades are delayed or not
introduced in a timely manner, or if we are unable to integrate
such systems and software programs into our billing and credit
systems, we may experience delayed billing, which may negatively
affect our cash flow and the results of operations.
In case
of a failure of our data storage system, we may lose critical
operational or billing data or important email correspondence with
our customers and suppliers. Any such data stored in the core data
center may be lost if there is a lapse or failure of the disaster
recovery system in backing up these data, or if the periodic
offline backup is insufficient in frequency or scope, which may
result in reduced cash flow and reduced revenues.
Any significant disruption in service on our platform or in our
computer systems, including events beyond our control, could
prevent us from processing payments or posting loans on our
marketplace, reduce the attractiveness of our online products and
result in a loss of users.
In the
event of an outage affecting our internet-based businesses and
physical data loss, our ability to perform our servicing
obligations, process payments, process applications or make loans
available to investors would be materially and adversely affected.
The satisfactory performance, reliability and availability of our
platforms and our underlying network infrastructure are critical to
our operations, customer service, reputation and our ability to
retain existing and attract new borrowers and investors. Although
all of our customer-facing services are hosted on Microsoft Azure
cloud servers and we periodically make backups to servers located
at our offices in Beijing and Shijiazhuang, some internal systems
are hosted on servers at our headquarters in Shijiazhuang, and an
outage there would disrupt our operations. Our operations depend on
our ability and our service provider’s ability to protect our
systems against damage or interruption from natural disasters,
power or telecommunications failures, air quality issues,
environmental conditions, computer viruses or attempts to harm our
systems, criminal acts and similar events. If there is a lapse in
service or damage to the Microsoft Azure cloud infrastructure or
our offices in Shijiazhuang and Beijing, we could experience
interruptions in our service as well as delays and additional
expense in arranging new facilities.
Any
interruptions or delays in our service, whether as a result of
third-party error, our error, natural disasters or security
breaches, whether accidental or willful, could harm our
relationships with our borrowers and investors and our reputation.
Additionally, in the event of damage or interruption, our insurance
policies may not adequately compensate us for any losses that we
may incur. Our disaster recovery plan has not been tested under
actual disaster conditions, and we may not have sufficient capacity
to recover all data and services in the event of an outage. These
factors could prevent us from processing or posting payments on
loans, damage our brand and reputation, divert our employees’
attention, subject us to liability and cause borrowers and
investors to abandon our marketplace, any of which could adversely
affect our business, financial condition and results of
operations.
Our internet-based businesses and internal systems rely on software
that is highly technical and requires maintenance and constant
updates, and if it contains undetected errors or bugs, our business
could be adversely affected.
Our
internet-based businesses and internal systems rely on software
that is highly technical and complex. For example, our lending
platforms and internal systems depend on the ability of such
software to store, retrieve, process and manage immense amounts of
data. The software on which we rely has contained, and may now or
in the future contain, undetected errors or bugs. Some errors may
only be discovered after the code has been released for external or
internal use. Errors or other design defects within the software on
which we rely may result in a negative experience for our
customers, delay introductions of new features or enhancements,
result in errors or compromise our ability to protect customer data
or our intellectual property. Any errors, bugs or defects
discovered in the software on which we rely could result in harm to
our reputation, loss of customers or liability for damages, any of
which could adversely affect our business, financial condition and
results of operations.
A security breach or malicious attack by way of hacking,
cyber-attacks, infiltration of computer viruses, or physical or
e-sabotage, could damage our reputation, expose us to the risks of
litigation and liability, disrupt our business or otherwise harm
our results of operations.
We are
an attractive target for cyber-attacks by criminals seeking to gain
access to our confidential and valuable information collected from
borrowers and investors. We and our third-party system security
service providers take measures to prevent such attacks and protect
our databases of confidential information, but these measures may
be breached accidentally or maliciously by unauthorized access. For
example, we have experienced Distributed Denial of Service (DDoS)
attacks in the past that have temporarily caused us to suspend the
service of our websites while we defend against attacks. If
confidential information about our users and our offline
cooperation partner were stolen and used for criminal purposes, we
could be exposed to liability for loss of information and be
subject to time-consuming and expensive litigation and negative
publicity. In addition, the Administrative Measures for the Security of
the International Network of Computer Information Network,
effective on December 30, 1997 and amended on January 8, 2011,
requires us to report any data or security breaches to the local
offices of the PRC Ministry of Public Security within 24 hours of
any such breach. The Cybersecurity Law requires that when we
discover that our network products or services are subject to risks
such as security defects or bugs, we shall take remedial measures
immediately, including but not limited to, informing users of the
specific risks and reporting such risks to the relevant competent
departments. Technologies employed by hackers constantly evolve, so
that the security measures and our third-party system security
service providers may not be able to fully anticipate attacks and
implement necessary prevention measures, or do so in sufficient
time. Any security breach, whether actual or perceived, would harm
our reputation, and could cause us to lose borrowers, investors and
our offline cooperation partner and adversely affect our business
and results of operations. Our relationships with our users and our
offline cooperation partner may be harmed, negatively affecting our
business and credibility of our marketplace.
We do not prohibit borrowers from incurring other debt or impose
financial covenants on borrowers during the term of their loans,
which could increase the risk of non-payment on these
loans.
Subsequent
to our credit assessment, a borrower applicant may (i) become
delinquent in payment obligations; (ii) default on a pre-existing
debt obligation; (iii) commit to further indebtedness; and/or (iv)
experience events bringing about adverse financial
effects.
We do
not prohibit our borrowers from incurring additional indebtedness,
nor do we impose any financial covenants on the borrowers during
the terms of their loans. Further, we have no means to
independently determine whether a borrower applicant has
outstanding loans on other online lending marketplaces. We are
faced with the risk that borrowers borrow money from our platform
to pay off loans on other lending marketplaces, creating a snowball
effect of debt. Any additional indebtedness may impair the
borrower's ability to observe his or her payment obligations on the
loan product we facilitated, and therefore adversely affect the
relevant investor's returns. If a borrower becomes insolvent or
bankrupt or otherwise run into financial distress, any unsecured
loan (including those obtained through our marketplace) will rank
pari passu to each other,
leaving delinquent borrowers to prioritize among creditors at his
or her discretion, and our investors may suffer losses as a result.
For secured loans, the ability of other secured investors to
exercise remedies against the assets of the borrower may impair the
borrower's ability to repay the loan to our investor. As a result,
investors may lose their confidence in us and our reputation and
business may be adversely affected.
Our borrowers acquired from referrals may take legal action against
us based on representations made by our brokers under the recently
adopted “brokerage program” or other third parties,
which may result in costly claims and disrupt our
business.
Some
borrowers and investors may be attracted to our marketplace after
reviewing information provided by our brokers under the recently
adopted “brokerage program” or other third parties. We
do not review or approve any information provided by our brokers or
other third parties and, while we do not believe we would have
liability for such information, it is possible that an unsatisfied
borrower or investor could bring claims against us based on any
inaccurate information or representations made by our brokers or
other third parties. Such claims could be costly and time-consuming
to defend and would distract management's attention and create
negative publicity, which could adversely affect our reputation and
business operations.
If we cannot continue to maintain relationships with third-party
service providers, or if increases in fees are incurred by
third-party service providers, our profitability could be adversely
affected.
Our
relationships with various third parties are integral to the smooth
operation of our business and marketplace. Most of our agreements
with third-party service providers are non-exclusive and do not
prohibit third-party service providers from working with our
competitors or from offering competing services. If our
relationships with third-party service providers deteriorate or
third-party service providers decide to terminate our respective
business relationships for any reason, such as to work with our
competitors on more exclusive or more favorable terms, or if any of
our service providers become our competitors, our operations may be
disrupted. In addition, our third-party service providers may not
uphold the standard we expected under our agreements, or
disagreements or disputes may arise between us and our third-party
service providers. If these third-party service providers were to
increase the fees that they charge us, our profitability could be
adversely affected. Furthermore, we may not be able to offset any
increase in expenses incurred. We could also incur additional
expenses to find other suitable third-party service
providers.
We rely
on commercial banks and other third-party payment providers to
manage investor funds, originate and service loans, collect service
fees and ensure compliance with the relevant PRC laws and
regulations that may be relevant to our business. Third-party
payment agents in China are subject to oversight by the PBOC and
must comply with complex rules and regulations, licensing and
examination requirements, including, but not limited to: minimum
registered capital, maintenance of payment business licenses,
anti-money laundering regulations and management personnel
requirements. Some third-party payment providers have been required
by the PBOC to suspend their credit card pre-authorization and
payment services in certain areas of China. If our third-party
payment providers were to suspend, limit or cease their operations,
or if our relationships with our third-party payment providers were
to deteriorate or terminate, we would need to arrange substantially
similar arrangements with other third-party payment agents.
Negative publicity about our third-party payment providers or the
industry in general may also adversely affect investors' or
borrowers' confidence and trust in the use of third-party payment
providers to carry out the payment and custodian functions in
connection with the origination of loans on our marketplace. If any
of these were to happen, the operation of our platform could be
materially impaired and our results of operations would
suffer.
We may be subject to liabilities imposed by relevant governmental
regulations due to the personal data and other confidential
information of borrowers and investors that we access or
collect.
There
are numerous laws regarding privacy and the storing, sharing, use,
disclosure and protection of personally identifiable information
and user data. We receive, transmit and store a large volume of
personally identifiable information and other confidential data
from borrowers and investors. Specifically, personally identifiable
and other confidential information is increasingly subject to
legislation and regulations in numerous domestic and international
jurisdictions, the intent of which is to protect the privacy of
personal information that is collected, processed and transmitted
in or from the governing jurisdiction. This regulatory framework
for privacy issues in China and worldwide is currently evolving and
is likely to remain uncertain for the foreseeable future. In
addition, there may be limits on the cross-border transmission of
user data even to the extent that such transmission is within our
company. We could be adversely affected if legislation or
regulations are expanded to require changes in business practices
or privacy policies, or if governing jurisdictions interpret or
implement their legislation or regulations in ways that negatively
affect our business, financial condition and results of operations.
In November 2016, the Standing Committee of the National
People’s Congress released the Cybersecurity Law of the PRC, or the
Cybersecurity Law, which took effect in June 2017. The
Cybersecurity Law requires network operators to perform certain
functions related to internet security protection and the
strengthening of network information management. For instance,
under the Cybersecurity 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 the PRC. We plan to further
strengthen our information management and privacy protection of the
user data stored in our system. However, we cannot assure you that
the measures we have taken or will take are adequate under the
Cybersecurity Law. If further changes in our business practices are
required under China's evolving regulatory framework for privacy
protection, our business, financial condition and results of
operations may be adversely affected. Further, we use certain data
collected from external data sources to make credit assessment. In
the event that the data collection and provision by any of our
external data sources is considered in violation of the
Cybersecurity Law, we may not be able to use relevant data for our
credit assessment and our business may be materially and adversely
affected.
In
addition to laws, regulations and other applicable rules regarding
privacy and privacy advocacy, industry groups or other private
parties may propose new and different privacy standards. Because
the interpretation and application of privacy and data protection
laws and privacy standards are still uncertain, it is possible that
these laws or privacy standards may be interpreted and applied in a
manner that is inconsistent with our practices. Any inability to
adequately address privacy concerns, even if unfounded, or to
comply with applicable privacy or data protection laws, regulations
and privacy standards, could result in additional cost and
liability for us, damage our reputation, inhibit the use of our
platform and harm our business. See "Regulation—Regulations
Relating to Internet-based Services—Regulations on
Cybersecurity" and "Regulation—Regulations Relating to
Internet-based Services—Regulations on Privacy
Protection."
The future development of money laundering and anti-terrorism
regulations in the PRC may increase our obligations to supervise
and report transactions between borrowers and investors on our
marketplace, thereby increasing our costs and exposing us to the
risk of criminal or administrative sanctions.
PRC
laws and regulations relating to money laundering and
anti-terrorism have undergone considerable development over recent
years. The Internet Finance Guidelines and the Interim Measures
require us to take effective measures to verify customer
identities, monitor and report suspicious transactions and keep
client information and transaction records safe. We are also
required to assist in investigations by judicial authorities and
the public security bureau. We currently rely primarily on the
depository bank and third-party payment companies transferring
funds on our marketplace to carry out anti-money laundering due
diligence of our customers. Current PRC laws stipulate specific
obligations and steps that the banks and third-party payment
companies should follow for anti-money laundering due diligence. In
October 2018, the PBOC, the CBIRC and the CSRC jointly issued the
Administrative Measures on
Anti-Money Laundering and Anti-Terrorism Financing of Internet
Financial Institutions (Trial), or the Trial Measures, which
would become effective on January 1, 2019. The Trial Measures
clearly defines the scope of internet finance institutions and
requires deeper compliance requirements for internet finance
institutions, including but not limited to online payment, online
lending, online lending information intermediaries, etc. It also
stipulates five basic obligations of internet finance
practitioners: establishing and improving internal control
mechanisms for anti-money laundering and anti-terrorism financing,
effectively identifying customers, submitting large and suspicious
transaction reports, conducting monitoring of terrorism lists, and
storing customer identity information and transactions records. The
above new requirements could have the effect of increasing our
costs, and may expose us to potential criminal or administrative
sanctions if we fail to comply.
The loss of any key members of the management team may impair our
ability to identify and secure new contracts with customers or
otherwise manage our business effectively.
Our
success depends on the continued services and contributions of our
senior management, particularly Mr. Yong Hui Li, the Chief
Executive Officer, and other executive officers named in this
Annual Report. In addition, the relationships and reputation that
members of our management team have established and maintained with
our customers contribute to our ability to maintain good customer
relations, which is important to the direct selling strategy that
we adopt. Employment contracts entered into between us and our
senior management cannot prevent our senior management from
terminating their employment, and the death, disability or
resignation of Mr. Yong Hui Li or any other member of our senior
management team may impair our ability to maintain business growth
and identify and develop new business opportunities or otherwise to
manage our business effectively.
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.
Our operations depend on the performance and stability of the
internet infrastructure and fixed telecommunications networks in
China.
Almost
all access to the internet in China is maintained through
state-owned telecommunication operators under the administrative
control and regulatory supervision of the Ministry of Industry and
Information Technology, or the MIIT. We heavily rely on the
internet infrastructure and telecommunications network in China for
our operations and the smooth running of our online marketplace. A
significant event or disaster, natural or man-made, including among
others, fires, power outages, floods, strikes, terrorist attacks,
coups d'etat or other catastrophic events or problems, may
adversely affect our online services and our offices. Our business
may be disrupted and we may lose critical data or experience
interruptions, delays and compromising of our business operations
and services. Our third party data suppliers and service providers,
including in particular our third-party payment providers, may also
be similarly affected and may not be able to provide our users and
us with the support needed. In particular, if our disaster recovery
plans prove to be ineffective or inadequate, the aforementioned
risks will be further worsened. We have limited access to
alternative networks or services in the event of disruptions,
failures or other problems with China’s internet
infrastructure or the fixed telecommunications networks provided by
telecommunication service providers. With the expansion of our
business, we may be required to upgrade our technology and
infrastructure to keep up with the increasing traffic on our
platform. We cannot assure you that the internet infrastructure and
the fixed telecommunications networks in China will be able to
support the demands associated with the continued growth in
internet usage.
In
addition, we have no control over the costs of the services
provided by telecommunication service providers. If the prices we
pay for telecommunications and internet services rise
significantly, our results of operations may be adversely affected.
Furthermore, if internet access fees or other charges to internet
users increase, our user traffic may decline and our business may
be harmed.
A downturn in the Chinese or global economy could reduce the demand
for consumer loans and investments, which could materially and
adversely affect our business and financial condition.
The
global financial markets experienced significant disruptions
between 2008 and 2009 and the United States, Europe and other
economies have experienced periods of recessions as a result. The
recovery from the economic downturns of 2008 and 2009 has been
uneven and is facing new challenges, including the announcement of
Brexit, which creates additional global economic uncertainty, and
the slowdown of Chinese economic growth since 2012. It is unclear
whether the Chinese economy will resume its high growth rate. 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 over unrest in the Middle East and Africa, which have
resulted in volatility in financial and other markets. There have
also been concerns about the economic effect of the tensions in the
relationship between China and surrounding Asian countries.
Economic conditions in China are sensitive to global economic
conditions. Any prolonged slowdown in the global or Chinese economy
may reduce the demand for consumer loans and investments and have a
negative impact on our business, results of operations and
financial condition. Additionally, continued turbulence in the
international markets may adversely affect our ability to access
the capital markets to meet liquidity needs.
The internet-based finance industry in China is becoming
increasingly competitive and such increasing competition may limit
our growth.
The
internet-based finance industry in China is intensely competitive
and evolving rapidly. Although we primarily focus on the
transportation industry vertical, in which we have many years of
operating experience, there are a large number of broader
internet-based financial product offerings and e-commerce platforms
that may compete with our products and may be provided by
competitors that are larger and more established than us. With
respect to lending competition, we primarily compete with offline
boutique financing providers and in some cases internet-based
financing providers. 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. The competitors may also
attempt to copy or replicate our business model. If we are unable
to compete effectively, our business and results of operations
could be harmed. In addition, if we begin lending to other
industries, we will face more competition in those markets from
more established lenders, and new competition may also reduce our
growth prospects or level of profitability, which in turn could
have an adverse effect on our business, financial condition or
results of operation.
Uncertainties relating to the growth of the retail industry in
China in general, and the online retail industry in particular,
could adversely affect revenues from our cash and merchandise
credit products and our business prospects.
We
generate our revenue from the provision of both cash and
merchandise credit products which we believe are mainly used for
day-to-day discretionary consumption purposes. As a result, our
cash and merchandise credit products businesses are affected by the
development of the retail industry, and in particular the online
retail industry, in China. The long-term viability and prospects of
various online retail business models in China remain relatively
untested. As such, demand for our credit products and our future
results of operation will depend on numerous factors affecting the
development of the online retail industry in China, which may be
beyond our control. These factors include:
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the
growth of internet, broadband, personal computer and mobile
penetration and usage in China, and the rate of any such
growth;
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the
trust and confidence level of online retail and mobile commerce
consumers, including our users, in China, as well as changes in
borrower demographics and consumer tastes and
preferences;
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the
selection, price and popularity of merchandise that we and our
competitors offer online;
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whether
alternative retail channels or business models that better address
the needs of consumers emerge in China; and
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the
development of fulfillment, payment and other ancillary services
associated with retail and mobile commerce purchases
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A
decline in the popularity of online shopping in general, especially
through the use of credit products, or any failure by us to adapt
our marketplace and improve the online shopping experience of our
users in response to trends and user requirements, may adversely
affect our prospects and results of operation.
Uncertainties relating to the growth of the truck logistics
industry in China could adversely affect revenues from our
trucking-related credit products and our business
prospects.
Currently,
our target customers are small and medium-sized business and
individual consumers. We primarily target customers in the trucking
transportation industry because of our experience operating in that
sector (for more details about our business model, please refer to
“Item 4. Information on our Company – B. Business
Overview – Our Business Model). The trucking transportation
industry in China faces many uncertainties and regulatory headwinds
and these factors may hinder any future growth. For example,
tougher emission standards and road safety regulations have
increased operation costs for truck owners in recent years. In
addition, as recent development has increased the wealth of rural
communities, fewer workers from these communities are entering the
trucking profession as drivers. Thus, driver wages are also
increasing and contributing to the decline in profitability of
trucking businesses. With the rise of large logistics companies
tailored to serve the ecommerce industry, the trucking industry
also faces the pressure of consolidation from these larger firms.
Our current business model is to serve SMBs within the trucking
industry; therefore, any consolidation in the industry by larger
firms may materially and adversely affect our prospects and results
of operation.
Seasonality with the trucking industry and online retail industry
could affect our interim results.
Truck
sales typically experiences peak volumes from September through
November and season lows from December until the Chinese New Year
holiday ends in February. Seasonality in truck transportation
activities vary across regions depending on the type of goods and
materials commonly transported in the region. We also experience
seasonality associated with the retail industry. For example, we
would expect less user traffic and purchase orders during national
holidays in China, particularly during the Chinese New Year holiday
season in the first quarter of each year. Furthermore, e-commerce
companies in China hold special promotional campaigns on November
11 each year, which could improve our results for that quarter.
Although seasonality related to our businesses may vary from year
to year given industry wide and regulatory influences, our
quarterly operating results could be affected by such seasonality.
Therefore, our quarterly results of operations, including our
operating revenue, expenses, net loss or income and other key
metrics, may vary significantly in the future, and period-to-period
comparisons of our operating results may not be meaningful.
Accordingly, the results for any single quarter are not necessarily
an indication of future performance.
Stringent regulations on the trucking industry and the
proliferation of electric vehicles as transportation tools may have
a material adverse effect on our trucking related
businesses.
The
Ministry of Environmental Protection and the Ministry of Industry
and Information Technology have jointly issued new emission
standards with various classes of trucks and automobiles that must
be met prior to the sale and operation of trucks. Tougher emission
standards may increase the sale price of new trucks that meet the
standards and restrict the operating activities and age of current
trucks in operations that do not meet the standards. Operating
costs to maintain emission standards may also increase. Regulators
and law enforcement have also introduced rules to more tightly
regulate the safety standards of truck operators such as
regulations on cargo weight and trailer sizes. All of these factors
would reduce the profitability of trucking business and may affect
our customers in the industry. If our customers are affected by
such emission regulations, we may see a decrease in our loan
volumes and an increase in defaults. Furthermore, as electric
vehicles become more commonplace and trucking companies begin to
operate more electric trucks, our financing services for fuel
purchases would be adversely affected. All of the above could
adversely and materially affect our operating results. See
"Regulation—Regulations Relating to the Trucking
Industry."
Fluctuations in supply and demand for natural resources within
China may have an adverse and material effect on our trucking
related businesses.
The
trucking transportation industry is sensitive to fluctuation in
natural resources such as petroleum and natural gas because these
resources are the most common type of fuel for trucks. Large
temporary or longer term increases in diesel, LNG, or CNG prices
could cause trucking businesses to be unprofitable and truck owners
may choose to cease operations until fuel prices fall to a
reasonable range to ensure profitability. If any of our trucking
customers cease operations or cease to operate at a profit, we
could see our loan volumes fall and loan defaults rise. In
addition, as certain regions in China are producers and exporters
of natural resources such as coal and commodities, any reductions
in production or demand could adversely affect trucking operators
in the region that rely on transporting these materials. In such a
scenario, we may experience a fall in loan volume and a rise in
default rates from customers in these regions. All of such
fluctuations in supply and demand for natural resources could thus
adversely and materially affect our operating results.
We may not be able to prevent others from unauthorized use of our
intellectual property, which could harm our business and
competitive position.
We
regard our trademarks, domain names, know-how, proprietary
technologies and similar intellectual property as critical to our
success, and we rely on a combination of intellectual property laws
and contractual arrangements, including confidentiality, invention
assignment and non-compete agreements with our employees and others
to protect our proprietary rights.
It is
often difficult to register, maintain and enforce intellectual
property rights in China. Statutory laws and regulations are
subject to judicial interpretation and enforcement and may not be
applied consistently due to the lack of clear guidance on statutory
interpretation. Confidentiality, invention assignment and
non-compete agreements may be breached by counterparties, and there
may not be adequate remedies available to us for any such breach.
Accordingly, we may not be able to effectively protect our
intellectual property rights or to enforce our contractual rights
in China. Preventing any unauthorized use of our intellectual
property is difficult and costly and the steps we take may be
inadequate to prevent the misappropriation of our intellectual
property. In the event that we resort to litigation to enforce our
intellectual property rights, such litigation could result in
substantial costs and a diversion of our managerial and financial
resources. We can provide no assurance that we will prevail in such
litigation. In addition, our trade secrets may be leaked or
otherwise become available to, or be independently discovered by,
our competitors. To the extent that our employees or consultants
use intellectual property owned by others in their work for us or
use any unauthorized pirated software at work, disputes may arise
as to the rights in related know-how and inventions. Any failure in
protecting or enforcing our intellectual property rights could have
a material adverse effect on our business, financial condition and
results of operations.
We may be subject to intellectual property infringement claims,
which may be expensive to defend and may disrupt our business and
operations.
We
cannot be certain that our operations or any aspects of our
business do not or will not infringe upon or otherwise violate
trademarks, patents, copyrights, know-how or other intellectual
property rights held by third parties. We may be from time to time
in the future subject to legal proceedings and claims relating to
the intellectual property rights of others. In addition, there may
be third-party trademarks, patents, copyrights, know-how or other
intellectual property rights that are infringed by our products,
services or other aspects of our business without our awareness.
Holders of such intellectual property rights may seek to enforce
such intellectual property rights against us in China, the United
States or other jurisdictions. If any third-party infringement
claims are brought against us, we may be forced to divert
management’s time and other resources from our business and
operations to defend against these claims, regardless of their
merits.
Additionally,
the application and interpretation of China’s intellectual
property right laws and the procedures and standards for granting
trademarks, patents, copyrights, know-how or other intellectual
property rights in China are still evolving and are uncertain, and
we cannot assure you that PRC courts or regulatory authorities
would agree with our analysis. If we were found to have violated
the intellectual property rights of others, we may be subject to
liability for our infringement activities or may be prohibited from
using such intellectual property, and we may incur licensing fees
or be forced to develop alternatives of our own. As a result, our
business and results of operations may be materially and adversely
affected.
Content displayed on our ecommerce websites by merchants may be
found objectionable by PRC regulatory authorities and may subject
us to penalties and other administrative actions.
The PRC
government has adopted regulations governing internet access and
the distribution of information over the internet. Under these
regulations, internet content providers and internet publishers are
prohibited from posting or displaying over the internet any content
that, among other things, violates PRC laws and regulations,
impairs the national dignity of China or the public interest, or is
obscene, superstitious, fraudulent or defamatory. Failure to comply
with these requirements may result in the revocation of licenses to
provide internet content or other licenses, the closure of the
concerned websites and reputational harm. The website operator may
also be held liable for the content displayed on or linked to its
website that is subject to censorship. If we are unable to control
and screen out inappropriate content posted by merchants on our
ecommerce sites, then our ecommerce sites may be subject to
penalties and other administrative actions.
We may be held liable for information or content displayed on,
retrieved from or linked to our mobile applications, which may
materially and adversely affect our business and operating
results.
In
addition to our website, we also offer online lending products on
our mobile applications, which are regulated by the Administrative Provisions on Mobile Internet
Applications Information Services, or the APP Provisions,
promulgated by the Cyberspace Administration of China, or the CAC,
in June 2016 and effective in August 2016. According to the APP
Provisions, the providers of mobile applications shall not create,
copy, publish or distribute information and content that is
prohibited by laws and regulations. We have implemented internal
control procedures screening the information and content on our
mobile applications to ensure their compliance with the APP
Provisions. However, we cannot assure that all the information or
content displayed on, retrieved from or linked to our mobile
applications complies with the requirements of the APP Provisions
at all times. If our mobile applications were found to be violating
the APP Provisions, we may be subject to relevant penalties,
including warning, service suspension or removal of our mobile
applications from the relevant mobile application store, which may
materially and adversely affect our business and operating results.
See "Regulation—Regulations Relating to Internet-based
Businesses—Regulations on Mobile Internet Applications
Information Services."
We could be subject to allegations and lawsuits claiming that items
listed on our ecommerce websites by merchants are pirated,
counterfeit or illegal.
Goods
and services made available for sale by merchants on our ecommerce
platforms could be subject to allegations that they infringe
third-party copyrights, trademarks, patents or other intellectual
property rights. If we are unable to prevent counterfeiting and
infringement of intellectual property, we could be subject to
penalties, administrative actions and could face claims that we
should be held liable. If any material claim occurs in the future,
irrespective of the validity of such claims, we may incur
significant costs and efforts in either defending against or
settling such claims. If there is a successful claim against us, we
might be required to pay substantial damages or refrain from
further sale of the relevant merchandise. Potential liability under
PRC law if we negligently participated or assisted in infringement
activities associated with counterfeit goods includes injunctions
to cease infringing activities, rectification, compensation,
administrative penalties and even criminal liability. Moreover,
such claims or administrative penalties could result in negative
publicity and our reputation could be severely damaged. Any of
these events could have a material adverse effect on our business,
financial condition and results of operations.
We may be subject to claims under consumer protection laws,
including health and safety claims and product liability claims, if
property or people are harmed by the merchandise and services
offered on our marketplace.
Our
marketplace allows consumers to buy merchandise from third-party
merchandise suppliers, some of which may be defectively designed or
manufactured. Operators of online marketplaces in the PRC are
subject to certain provisions of consumer protection laws even
where the operator is not the supplier of the product or service
purchased by the consumer. As a result, sales of defective
merchandise could expose us to product liability claims relating to
personal injury or property damage or other actions. In addition,
if we do not take appropriate remedial action against merchandise
suppliers for actions they engage in that we know, or should have
known, would infringe upon the rights and interests of consumers,
we may be held jointly liable with the merchandise suppliers for
such infringement. Moreover, applicable consumer protection laws in
China provide that trading platforms will be held liable for
failing to meet any undertakings that the platforms make to
consumers with regard to merchandise listed on their websites or
mobile apps. Furthermore, we are required to report to the State
Administration of Industry and Commerce, or the SAIC, or its local
branches, any violation of applicable laws, regulations or SAIC
rules by merchandise suppliers or service providers, such as sales
of goods without proper license or authorization, and to take
appropriate remedial measures, including ceasing to provide
services to the relevant merchandise suppliers. We may also be held
jointly liable with merchandise suppliers who do not possess the
proper licenses or authorizations to sell goods or sell goods that
do not meet product standards. In addition, we may face activist
litigation in China by plaintiffs claiming damages based on
consumer protection laws, which may result in increased costs in
defending such suits and damages should we not prevail, which could
materially and adversely affect our reputation and brands and our
results of operations. We do not maintain product liability
insurance for merchandise offered on our marketplace, and our
rights of indemnity from our merchandise suppliers may not
adequately cover us for any liability we may incur. Even
unsuccessful claims could result in the expenditure of funds and
management time and resources and could materially reduce our net
income and profitability. See "Regulation—Regulations
Relating to Consumer Rights Protection."
Our interim period financial results can vary significantly due to
a host of variables and may not accurately reflect the underlying
performance of our business.
Our
interim period results of operations, including operating revenue,
expenses, the number of loans and other key performance indicators,
may fluctuate significantly such that comparisons of our operating
results period-on-period may not be meaningful. Results of any
interim period cannot accurately indicate future performance.
Fluctuations may be due to any number of variables, including some
beyond our control, such as:
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our
ability to grow our users base by attracting new and retaining
repeat borrowers and investors;
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the
volume, quality, and mix of loans and the acquisition of borrowers
and investors;
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the
level of operating expenses in the acquisition of borrowers and
investors, the growth and maintenance of our business, operations
and infrastructure;
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disruptions
to telecommunications networks or security breaches;
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general
macroeconomic and socio-political factors affecting the market and
industry, particularly with respect to interest rates, consumer
spending and levels of disposable income;
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seasonality
of our loan products, which are generally lower in the first
quarter due to the Chinese New Year national holiday;
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our
strategy with a focus on long-term growth instead of immediate
profitability; and
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the
incurring of expenses related to acquisitions activities of
businesses or technologies and potential future charges for
impairment of goodwill, if any.
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Fluctuations
in our interim period results may affect the price of our stock in
an adverse manner.
Our use of investor cash incentives may result in substantial
reductions in our revenues.
We
provide investors with certain cash incentives to encourage greater
participation in the loan products we facilitate on our online
marketplace. We provide cash incentives to new investors under our
referral incentive program, as well as promotional cash incentives
to existing investors from time to time. Upon the satisfaction of
the terms and conditions under our referral incentive program or
promotional incentive programs, investors can redeem their cash
incentives for credit to be used on our online marketplace. We have
experienced rapid growth in the number of investors, repeat
investment and high transaction volume, partly attributable to our
investor cash incentive program. The investor cash incentive
program was intended to be a marketing tool to attract investors to
commit to loan products and help us increase the number of loan
product transactions so as to allow us to benefit from increased
transaction and service fees. In the future, we may offer similar
cash incentives to consumers on our ecommerce marketplaces.
However, such cash incentives are accounted for as reduction of
revenue and are paid to the investor before we are able to recoup
the costs associated with the investor cash incentives. Our
revenues may be reduced in periods where we have to issue an
increasing amount of investor cash incentives, which may result in
us incurring net losses and preventing us from achieving or
maintaining profitability on a quarterly or annual
basis.
If our internal controls over financial reporting are insufficient
or ineffective, we may not be able to accurately report our
financial results or prevent fraud.
Our
internal controls and procedures, especially over financial
reporting, may not be able to sufficiently identify any material
weaknesses and control deficiencies that could lead to inaccuracies
in our financial statements. As such, our ability to comply with
applicable financial reporting requirements and regulatory filings
in a timely manner may be impaired.
We are
listed in the United States and therefore subject to the
Sarbanes-Oxley Act of 2002. Section 404 of this Act requires that
we include a report of management on our internal control over
financial reporting in our annual report on Form 20-F. If we are
not able to comply with the requirements of Section 404 in a timely
manner or if we or our independent registered public accounting
firm identifies deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, we could be
subject to sanctions or investigations by the Securities and
Exchange Commission (SEC) or other regulatory authorities, which
would require additional financial and management resources. Any
failure to maintain effective disclosure controls and procedures or
internal control over financial reporting could have a material
adverse effect on our business and operating results, and cause a
decline in the price of our ordinary shares.
The facilitation of loans through our marketplace could give rise
to liabilities under PRC laws and regulations that prohibit illegal
fundraising.
PRC
laws and regulations prohibit persons and companies from raising
funds through advertising to the public a promise to repay premium
or interest payments over time through payments in cash or in kind
except with the prior approval of the applicable government
authorities. Failure to comply with these laws and regulations may
result in penalties imposed by the PBOC, the Administration for
Industry and Commerce, or AIC, and other governmental authorities,
and can lead to civil or criminal lawsuits.
To
date, our marketplace has not been subject to any fines or other
penalties under any PRC laws and regulations that prohibit illegal
fundraising. Our marketplace acts only as a service provider in the
facilitation of loans between borrowers and investors, and in this
capacity, we do not raise funds or promise repayment of premium or
interest obligations. Nevertheless, considerable uncertainties
exist with respect to the PBOC, AIC and other governmental
authorities' interpretations of the fundraising-related laws and
regulations in the PRC. While our agreements with investors require
investors to guarantee the legality of all funds from investors, we
do not verify the source of investors' funds separately, and
therefore, to the extent that investors' funds are obtained through
illegal fundraising, we may be negligently liable as a facilitator
of illegal fundraising. In addition, while our loan agreements
contain provisions that require borrowers to use the proceeds for
purposes listed in their loan applications, we cannot monitor and
verify all borrowers' use of funds and therefore, to the extent
that borrowers use proceeds from the loans for illegal activities,
we may be negligently liable as a facilitator of an illegal use.
Although we have designed and implemented procedures to identify
and eliminate instances of fraudulent conduct on our marketplace,
as the number of borrowers and investors on our platform increases,
we may not be able to identify all fraudulent conduct that may
violate illegal fundraising laws and regulations. See
"Regulation—Regulations Relating to Online Lending
Services—Regulations on Illegal Fund-Raising."
The facilitation of loans through our marketplace could give rise
to liabilities under PRC laws and regulations that prohibit
unauthorized public offerings.
The PRC
Securities Law stipulates that no organization or individual is
permitted to issue securities for public offering without obtaining
prior approval in accordance with the provisions of the law. The
following offerings are deemed to be public offerings under the PRC
Securities Law: (i) offering of securities to non- specific
targets; (ii) offering of securities to more than 200 specific
targets; and (iii) other offerings provided by the laws and
administrative regulations. Additionally, private offerings of
securities shall not be carried out through advertising, open
solicitation and disguised publicity campaigns. If any transaction
between one borrower and multiple investors on our marketplace is
identified as a public offering by PRC government authorities, we
may be subject to sanctions under PRC laws and our business may be
adversely affected. See "Regulation—Regulations Relating to
Online Lending Services—Regulations on Unauthorized Public
Offerings."
Adverse economic conditions in Shijiazhuang, China, that negatively
impact the demand for office space and hotel accommodations may
result in lower occupancy and rental rates for our property lease
and management business, which would adversely affect our results
of operations.
Generally
speaking, economic growth and employment levels in a local market
are important factors in determining the success of a local
property lease and management business. Since we only lease office
space and manage hotel operations in one building that is located
in Shijiazhuang, China, the economic conditions of this city are
likely to be important factors in determining the occupancy levels
and rental rates that our property lease and management business is
able to achieve. Therefore, any deterioration in the economic
conditions of Shijiazhuang may adversely affect the results of
operations of our property lease and management
business.
We face considerable competition in the leasing market and may be
unable to renew existing leases or re-let space on terms similar to
the existing leases, or we may spend significant capital in our
efforts to renew and re-let space, which may adversely affect our
results of operations.
In
addition to seeking to increase our average occupancy by leasing
current vacant space, we also concentrate our leasing efforts on
renewing existing leases. Because we compete with a number of other
developers, owners and operators of office and office-oriented,
mixed-use properties, we may be unable to renew leases with our
existing customers and, if our current customers do not renew their
leases, we may be unable to re-let the space to new customers. To
the extent that we are able to renew existing leases or re-let such
space to new customers, heightened competition resulting from
adverse market conditions may require us to utilize rent
concessions and tenant improvements to a greater extent than we
have historically. Further, changes in space utilization by our
customers due to technology, economic conditions and business
culture also affect the occupancy of our properties. As a result,
customers may seek to downsize by leasing less space from us upon
any renewal.
If our
competitors offer space at rental rates below current market rates
or below the rental rates we currently charge our customers, we may
lose existing and potential customers, and we may be pressured to
reduce our rental rates below those we currently charge in order to
retain customers upon expiration of their existing leases. Even if
our customers renew their leases or we are able to re-let the
space, the terms and other costs of renewal or re-letting,
including the cost of required renovations, increased tenant
improvement allowances, leasing commissions, reduced rental rates
and other potential concessions, may be less favorable than the
terms of our current leases and could require significant capital
expenditures. From time to time, we may also agree to modify the
terms of existing leases to incentivize customers to renew their
leases. If we are unable to renew leases or re-let space in a
reasonable time, or if our rental rates decline or our tenant
improvement costs, leasing commissions or other costs increase, our
financial condition and results of operations of the property lease
and management business could be materially and adversely
affected.
Bankruptcy or insolvency of tenants may decrease our revenue, net
income and available cash.
The
bankruptcy or insolvency of a major tenant could cause us to suffer
lower revenues and operational difficulties, including leasing the
remainder of the property. As a result, the bankruptcy or
insolvency of a major tenant could result in decreased revenue, net
income and funds available to pay our indebtedness.
We may not be successful in integrating or operating our acquired
hotel business.
In
August 2016 we entered into the hotel business with our acquisition
of Eastern Eagle. The profitability of this business depends on our
ability to effectively manage and integrate the acquired business
into our existing operations. In addition, the performance of the
hotel business may be affected by local economic conditions and
competition, among other factors, which may have adverse effects on
occupancy rates and on our ability to generate income from hotel
operations.
Our profitability will be adversely affected if we are unable to
successfully collect receivables from our commercial vehicle sales,
leasing and support business, which have been classified as
discontinued operations.
We have
discontinued our legacy truck leasing business by exiting the
leasing industry and still have some expired leases with
outstanding amounts due to us by the end of 2018. If we are unable
to effectively and efficiently collect these amounts, the
profitability of this discontinued business segment will be
reduced, which in turn will adversely affect our
profitability.
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
credit products and better serve borrowers and enhance our
competitive position. 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,
which may result in investment losses.
A significant portion of our working capital is funded through
loans from related parties of our Chairman and CEO, Mr. Yong Hui
Li, some of which may be called by the lenders at any time, which
could materially and adversely affect our liquidity and our ability
to fund and expand our business.
As of
December 31, 2018, we had outstanding borrowings from related
parties, including our Chairman and Chief Executive officer, Mr.
Yong Hui Li, of approximately RMB43.5 million. These borrowings are
interest bearing and carry various terms, and some are callable at
any time by the lenders. The lenders have not indicated to us if
there is a maximum amount they are willing to lend to us or that
they will not call the loans for repayment. In the event such
lenders determine to call these loans, we will have to repay the
loans from our cash reserves or financing provided by third-party
financial institutions. There can be no assurance that we will have
sufficient cash reserves or that we could secure additional
financing from third parties on favorable terms or at all. If cash
reserves or suitable financing were not available, we would have to
divert working capital from our core business to repay the loans,
and we would not be able to expand our core business as quickly as
expected.
We may need additional capital to pursue business objectives and
respond to business opportunities, challenges or unforeseen
circumstances, and financing may not be available on terms
acceptable to us, or at all.
Since
inception, we have issued equity securities to support the growth
of our business. As we intend to continue to make investments to
support the growth of our business, we may require additional
capital to pursue our business objectives and respond to business
opportunities, challenges or unforeseen circumstances, including
developing new products and services, increasing the amount of
transactions, further enhancing our risk management capabilities,
increasing our marketing expenditures to improve brand awareness
and diversifying our borrower engagement channels by collaborating
with other leading internet companies, enhancing our operating
infrastructure and acquiring complementary businesses and
technologies. Accordingly, we may need to engage in equity or debt
financings to secure additional funds. However, additional funds
may not be available when we need them, on terms that are
acceptable to us, or at all. Repayment of the debts may divert a
substantial portion of cash flow to pay principal and interest on
such debt, which would reduce the funds available for expenses,
capital expenditures, acquisitions and other general corporate
purposes; and we may suffer default and foreclosure on our assets
if our operating cash flow is insufficient to repay debt
obligations, which could in turn result in acceleration of
obligations to repay the indebtedness and limit our sources of
financing.
Volatility
in the credit markets may also have an adverse effect on our
ability to obtain debt financing. If we raise additional funds
through further issuances of equity or convertible debt securities,
our existing stockholders could suffer significant dilution, and
any new equity securities we issue could have rights, preferences
and privileges superior to those of holders of our ordinary shares.
If we are unable to obtain adequate financing or financing on terms
satisfactory to us when we require it, our ability to continue to
pursue our business objectives and to respond to business
opportunities, challenges or unforeseen circumstances could be
significantly limited, and our business, operating results,
financial condition and prospects could be adversely
affected.
We do not have any business insurance coverage for our
internet-based businesses.
Insurance
companies in China currently do not offer as extensive an array of
insurance products as insurance companies in more developed
economies. Currently, we carry certain insurance, such as business
interruption and property insurance, for our office leasing and
hotel businesses, but we do not have any business liability or
disruption insurance to cover our internet-based business
operations. We have determined that the costs of insuring for these
risks and the difficulties associated with acquiring such insurance
on commercially reasonable terms make it impractical for us to have
such insurance. Any uninsured business disruptions may result in
our incurring substantial costs and the diversion of resources,
which could have an adverse effect on our results of operations and
financial condition.
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 continue to develop the
infrastructure of a public company and continue to grow and change,
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.
RISKS RELATED TO OUR CORPORATE STRUCTURE
Contractual arrangements in respect of certain companies in the PRC
may be subject to challenge by the relevant governmental
authorities and may affect our investment and control over these
companies and their operations.
Foreign
ownership of internet-based businesses, such as distribution of
online information, is subject to restrictions under current PRC
laws and regulations. For example, foreign investors are not
allowed to own more than 50% of the equity interests in a
value-added telecommunication service provider (except e-commerce)
and any such foreign investor must have experience in providing
value-added telecommunications services overseas and maintain a
good track record in accordance with the Guidance Catalog of Industries for Foreign
Investment (2017 Revision) and Special Management Measures for the Access of
Foreign Investment (Negative List) (2018 version) issued
jointly by the National Development and Reform Commission and the
MOFCOM, the Provisions on
Administration of Foreign Invested Telecommunications Enterprises
(2016 Revision) promulgated by the State Council, and other
applicable laws and regulations.
We are
a Cayman Islands company and our PRC subsidiaries are considered as
foreign invested enterprises, which include (i) Hebei Anyong
Trading Co., Ltd., or Hebei Anyong Trading, a foreign invested
enterprise wholly owned by our Hong Kong subsidiary Eastern Eagle,
(ii) Ganglian Finance Leasing Co., Ltd., or Ganglian Finance
Leasing, a foreign invested enterprise wholly owned by our Hong
Kong subsidiary Fancy Think Limited, and (iii) Chuanglian Finance
Leasing Co., Ltd., or Chuanglian Finance Leasing, a foreign
invested enterprise jointly owned by Ganglian Finance Leasing and
Fancy Think Limited.
To
comply with PRC laws and regulations, we conduct our internet-based
businesses in China through a series of contractual arrangements
entered into by and among (i) Chuanglian Finance Leasing, (ii) each
of Hebei Xuhua Trading Co., Ltd. and Kaiyuan Auto Trade Co., Ltd.,
which are considered our variable interest entities, and (iii) the
nominee shareholders of these variable interest entities. The
relevant business licenses to carry out our internet-based
businesses are held by the subsidiaries of these variable interest
entities (for more information about our contractual arrangements,
please see note 19 to the Consolidated Financial Statements). As a
result of these contractual arrangements, we exert control over our
variable interest entities and their subsidiaries and consolidate
their operating results in our financial statements under U.S.
GAAP.
It is
uncertain whether any new PRC laws, rules or regulations relating
to VIE structures will be adopted or if adopted, what effect they
may have on our corporate structure. On March 15, 2019, the
National People's Congress promulgated the Foreign Investment Law,
which will become effective on January 1, 2020 and replace the
Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign
Cooperative Joint Venture Enterprise Law and the Foreign Owned
Enterprise Law to become the legal foundation for foreign
investment in the PRC. The Foreign Investment Law stipulates three
forms of foreign investment, but does not explicitly stipulate the
contractual arrangements as a form of foreign investment.
Notwithstanding the above, the Foreign Investment Law stipulates
that the concept of a foreign investment includes foreign investors
investing in China through "any other methods" under laws,
administrative regulations, or provisions prescribed by the State
Council. Therefore, contractual arrangements could be deemed as a
form of foreign investment under future laws, administrative
regulations or provisions of the State Council of the PRC. If the
other laws, administrative regulations and provisions of the State
Council do not incorporate contractual arrangements as a form of
foreign investment, the contractual arrangements as a whole and
each of the agreements comprising the contractual arrangements will
not be materially affected and will continue to be legal, valid and
binding on the parties. See "Regulation—Foreign Investment
Law" and "—We face uncertainties with respect to the
implementation of the Foreign Investment Law."
If the
ownership structure, contractual arrangements and business of our
company, our PRC subsidiary Chuanglian Finance Leasing or our
consolidated variable interest entities are found to be in
violation of any existing or future PRC laws or regulations, or 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
Chuanglian Finance Leasing or our consolidated variable interest
entities, revoking the business licenses or operating licenses of
our PRC subsidiary Chuanglian Finance Leasing or our consolidated
variable interest entities, shutting down our servers or blocking
our online platform, discontinuing or placing restrictions or
onerous conditions on our operations, requiring us to undergo a
costly and disruptive restructuring, restricting or prohibiting our
use of proceeds from public offering or private placement to
finance our business and operations in China, and taking other
regulatory or enforcement actions that could be harmful to our
business. Any of these actions could cause significant disruption
to our business operations and severely damage our reputation,
which would in turn materially and adversely affect our business,
financial condition and results of operations. If any of these
occurrences results in our inability to direct the activities of
our consolidated variable interest entities, and/or our failure to
receive economic benefits from our consolidated variable interest
entities, we may not be able to consolidate its results into our
consolidated financial statements in accordance with U.S.
GAAP.
We face uncertainties with respect to the implementation of the
Foreign Investment Law.
On
March 15, 2019, the National People's Congress promulgated the
Foreign Investment Law, which will become effective on January 1,
2020 and replaces the Sino-Foreign Equity Joint Venture Enterprise
Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and
the Foreign Owned Enterprise Law to become the legal foundation for
foreign investment in the PRC. The Foreign Investment Law
stipulates three forms of foreign investment, but does not
explicitly stipulate the contractual arrangements as a form of
foreign investment. Notwithstanding the above, the Foreign
Investment Law stipulates that the concept of a foreign investment
includes foreign investors investing in China through "any other
methods" under laws, administrative regulations, or provisions
prescribed by the State Council. Therefore, there are possibilities
that future laws, administrative regulations or provisions
prescribed by the State Council may regard contractual arrangements
as a form of foreign investment, at which time it will be uncertain
whether the contractual arrangements will be deemed to be in
violation of the foreign investment access requirements and how the
above-mentioned contractual arrangements will be handled. There is
no guarantee that the contractual arrangements and our business
will not be materially and adversely affected in the future due to
changes in PRC laws and regulations. If future laws, administrative
regulations or provisions prescribed by the State Council mandate
further actions to be completed by companies with existing
contractual arrangements, we may face substantial uncertainties as
to the timely completion of such actions. In the extreme case
scenario, we may be required to unwind the contractual arrangements
and/or dispose our VIEs, which could have a material and adverse
effect on our business, financial condition and result of
operations.
Our contractual arrangements with our variable interest entities
may not be as effective as direct ownership and operational
management.
We rely
and expect to continue to rely on contractual arrangements with our
variable interest entities to operate our online lending and
e-commerce platforms (for more information about our contractual
arrangements, please see note 19 to the Consolidated Financial
Statements). These contractual arrangements may not be as effective
as direct ownership in giving us full operational management and
control over our consolidated variable interest entities. We cannot
prevent our variable interest entities or their nominal
shareholders from breaching the contractual arrangements and
failing to conduct their business operations properly, such as
failing to maintain the website and online marketplace in a proper
and timely manner, or misusing the domain names and trademarks or
otherwise taking actions detrimental to our interests.
If we
directly owned our variable interest entities, we could elect
directors to the board and implement changes at the management and
operational levels. Currently we only have contractual rights in
relation to the performance and financial benefits of the variable
interest entities’ operations. The nominal shareholders of
our variable interest entities may not always act in our best
interests. Such risks exist throughout the period in which we
intend to operate our business through the contractual arrangements
with our consolidated variable interest entities. Although we have
the right to replace any shareholder of our consolidated variable
interest entities under the contractual arrangement, if any
shareholder of our consolidated variable interest entities is
uncooperative or any dispute relating to these contracts remains
unresolved, we will have to enforce our rights under these
contracts through the operations of PRC laws and arbitration,
litigation and other legal proceedings and therefore will be
subject to uncertainties in the PRC legal system. Therefore, our
contractual arrangements with our variable interest entities may
not be as effective in protecting our interests as direct ownership
and operational management would be.
Our founder, chairman and chief executive officer, Mr. Yong Hui Li,
also a controlling shareholder of us, exerts strong influence over
the board and Company affairs and strategy.
Our
founder, chairman and chief executive officer, Mr. Yong Hui Li,
exerts strong influence on our board of directors and management.
He plays an integral role in Company decisions and formulating our
corporate strategies. Mr. Yong Hui Li has considerable influence
over our corporate affairs, including matters that require
shareholder approval, including among others, the election of
directors, approving statutory mergers, and amending our
foundational documents. This concentration in control will limit
shareholder ability to influence corporate matters and may
discourage potential merger, takeover or other change of control
transactions, which could have the effect of depriving holders of
our ordinary shares of the opportunity to sell their shares at a
premium over the prevailing market price.
The nominal shareholders of our variable interest entities may have
potential conflicts of interest with us, which may materially and
adversely affect our business and financial condition.
We,
through our PRC subsidiary Chuanglian Finance Leasing, have
contractual arrangements with our variable interest entities and
their nominal shareholders. Although the nominal shareholders of
our variable interest entities have given undertakings to act in
our best interests, we cannot assure you that when conflicts arise,
these nominal shareholders will act in our best interests or that
conflicts will be resolved in our favor.
Contractual arrangements in relation to our variable interest
entities may be subject to scrutiny by the PRC tax authorities and
they may determine that we, or our variable interest entities and
their subsidiaries, owe additional taxes, which could negatively
affect our financial condition and the value of your
investment.
Under
applicable PRC laws and regulations, arrangements and transactions
among related parties may be subject to audit or challenge by the
PRC tax authorities. The PRC enterprise income tax law requires
every enterprise in China to submit its annual enterprise income
tax return together with a report on transactions with its related
parties to the relevant tax authorities. The tax authorities may
impose reasonable adjustments on taxation if they have identified
any related party transactions that are inconsistent with arm's
length principles. We may face material and adverse tax
consequences if the PRC tax authorities determine that the
contractual arrangements among our PRC subsidiary Chuanglian
Finance Leasing, our variable interest entities and their nominal
shareholders were not entered into on an arm's length basis in such
a way as to result in an impermissible reduction in taxes under
applicable PRC laws, regulations and rules, and adjust income of
our variable interest entities in the form of a transfer pricing
adjustment. A transfer pricing adjustment could, among other
things, result in a reduction of expense deductions recorded by our
variable interest entities for PRC tax purposes, which could in
turn increase their tax liabilities without reducing our PRC
subsidiary Chuanglian Finance Leasing’s tax expenses. In
addition, if our PRC subsidiary Chuanglian Finance Leasing requests
the nominal shareholders of our variable interest entities to
transfer their equity interests at nominal or no value pursuant to
these contractual arrangements, such transfer could be viewed as a
gift and subject our PRC subsidiary Chuanglian Finance Leasing to
PRC income tax. Furthermore, the PRC tax authorities may impose
late payment fees and other penalties on our variable interest
entities for the adjusted but unpaid taxes according to the
applicable regulations. Our financial position could be materially
adversely affected if our variable interest entities’ tax
liabilities increase or if they are required to pay late payment
fees and other penalties
If our variable interest entities go bankrupt or become subject to
dissolutions or liquidation proceedings, we may not be able to
recover or claim ownership over the assets and networks of these
variable interest entities.
Our
variable interest entities and their subsidiaries hold assets
material to our business operations, including the ICP License,
domain names and trademarks and software licenses. Under our
present contractual arrangements, our variable interest entities
cannot, and their nominal shareholders shall not cause it to, in
any manner, sell, transfer, mortgage or dispose of their assets or
their legal or beneficial interests in the business without our
prior consent. However if the nominal shareholders of our variable
interest entities initiate liquidation proceedings in breach of our
contractual arrangements, such that these variable interest
entities undergo voluntary or involuntary liquidation proceedings,
or if they declare bankruptcy and all or part of their assets
become subject to the claims of third party creditors, liens or are
otherwise disposed of without our consent, we may not be able to
continue our business operations, which would materially and
adversely affect our financial condition and results of
operations.
If any of our PRC subsidiaries or variable interest entities loses
its chop, or corporate seal, to the theft and use of unauthorized
persons, the corporate governance of these entities may be severely
and adversely compromised.
In the
PRC, a company chop or seal serves as the legal representation of
the company towards third parties even when unaccompanied by a
signature. Each legally registered company in the PRC is required
to maintain a company chop, which must be registered with the local
Public Security Bureau. In addition to this mandatory company chop,
companies may have several other chops which can be used for
specific purposes. The chops of our PRC subsidiaries and our
consolidated variable interest entities are generally held securely
by personnel designated or approved by us in accordance with our
internal control procedures. To the extent those chops are not kept
safely, are stolen or are used by unauthorized persons or for
unauthorized purposes, the corporate governance of these entities
could be severely and adversely compromised and those corporate
entities may be bound to abide by the terms of any documents so
chopped, even if they were chopped by an individual who lacked the
requisite power and authority to do so. In addition, if the chops
are misused by unauthorized persons, we could experience disruption
to our normal business operations.
RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in political and economic policies of the PRC
government could impede the overall economic growth of the PRC,
which could have a material adverse effect on our business and
result of operations.
We
conduct substantially all of our operations and generate all our
sales in the PRC. Accordingly, our business, financial condition,
results of operations and prospects are affected significantly by
economic, political and legal developments in the PRC. The PRC
economy differs, or may differ, from the economies of most
developed countries in many respects, including:
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a
higher level of government involvement and regulation;
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the
early stage of development of the market-oriented sector of the
economy;
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the
rapid growth rate;
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a
higher rate of inflation;
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a
higher level of control over foreign exchange; and
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government
control over the allocation of many resources.
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As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various
measures to encourage economic growth and guide the allocation of
resources. While these measures may benefit the overall PRC
economy, they may also have a negative effect on us.
Although
the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform,
the PRC government continues to exercise significant control over
economic growth in China through the allocation of resources,
controlling payment of foreign currency-denominated obligations,
setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
In the
past 20 years, the PRC has been one of the world’s fastest
growing economies measured in gross domestic product. However, in
conjunction with recent slowdowns in economies of the United States
and the European Union, the growth rate in China has declined in
recent quarters. Any further adverse change in the economic
conditions or any adverse change in government policies in China
could have a material adverse effect on the overall economic growth
and the level of consumer and business related spending in China,
which in turn could have a material adverse effect on our business,
financial condition and results of operations.
The PRC legal system embodies uncertainties that could limit the
legal protections available to us.
The PRC legal system is based on written statutes and prior court
decisions have limited value as precedents. Since these laws and
regulations are relatively new and the PRC legal system continues
to rapidly evolve, the interpretations of many laws, regulations
and rules are not always uniform and enforcement of these laws,
regulations and rules involves uncertainties.
In particular, PRC laws and regulations concerning the online
lending industry are developing and evolving. Although we have
taken measures to comply with the laws and regulations that are
applicable to our business operations, including the regulatory
principles raised by the CBRC, and avoid conducting any
noncompliant activities under the applicable laws and regulations,
such as illegal fund-raising, forming fund collection or providing
guarantee to investors, the PRC government authority may promulgate
detailed implementation regulation of the Interim Measure, or other
new laws and regulations regulating the online lending industry in
the future. We cannot assure you that our practice would not be
deemed to violate any new PRC laws or regulations relating to the
online lending industry. Moreover, developments in the online
lending industry may lead to changes in PRC laws, regulations and
policies or in the interpretation and application of existing laws,
regulations and policies that may limit or restrict online lending
platforms, which could materially and adversely affect our business
and operations.
From time to time, we may have to resort to administrative and
court proceedings to enforce our legal rights. However, 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. Furthermore, the PRC legal system
is based in part on government policies and internal rules (some of
which are not published in a timely manner or at all) that may have
retroactive effect. As a result, we may not be aware of our
violation of these policies and rules until sometime after the
violation. Such uncertainties, including uncertainty over the scope
and effect of our contractual, property (including intellectual
property) and procedural rights, could materially and adversely
affect our business and impede our ability to continue our
operations.
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. 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 and Information Technology, or the MIIT, 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.
We have
only 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. 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 subsidiaries to fund any cash and financing requirements we may
have, and any limitation on the ability of our PRC subsidiaries 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 subsidiaries 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 our PRC
subsidiary Chuanglian Finance Leasing to adjust its taxable income
under the contractual arrangements it currently has in place with
our variable interest entities and their subsidiaries, in a manner
that would materially and adversely affect their ability to pay
dividends and other distributions to us.
Under
PRC laws and regulations, our PRC subsidiaries, as wholly
foreign-owned enterprises 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.
In
response to the persistent capital outflow and RMB's depreciation
against the U.S. dollar in the fourth quarter of 2016, the People's
Bank of China and the State Administration of Foreign Exchange, or
SAFE, have implemented a series of capital control measures over
recent months, including stricter vetting procedures for
China-based companies to remit foreign currency for overseas
acquisitions, dividend payments and shareholder loan repayments.
For instance, the People's Bank of China issued the Circular on Further Clarification of Relevant
Matters Relating to Offshore RMB Loans Provided by Domestic
Enterprises, or the PBOC Circular 306, in November 2016,
which provides that offshore RMB loans provided by a domestic
enterprise to offshore enterprises that it holds equity interests
in shall not exceed 30% of such equity interests. The PBOC Circular
306 may constrain our PRC subsidiaries' ability to provide offshore
loans to us. The PRC government may continue to strengthen its
capital controls and our PRC subsidiaries' dividends and other
distributions may be subjected to tighter scrutiny in the future.
Any limitation on the ability of our PRC subsidiaries 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. See also
"—If we are classified as a PRC resident enterprise for PRC
income tax purposes, such classification could result in
unfavorable tax consequences to us and our non-PRC
shareholders."
PRC regulation of loans to and direct investment in PRC entities by
offshore holding companies and governmental control of currency
conversion may delay or prevent us from making loans to or making
additional capital contributions to our PRC subsidiaries, which
could materially and adversely affect our liquidity and our ability
to fund and expand our business.
Any
funds we transfer to our PRC subsidiaries, either as a shareholder
loan or as an increase in registered capital, are subject to filing
or registration with the relevant governmental authorities in
China. According to the relevant PRC regulations on foreign
invested enterprises in China, capital contributions to our PRC
subsidiaries are subject to the requirement of making necessary
filings in the Foreign Investment Comprehensive Management
Information System, or FICMIS, and registration with other
governmental authorities in China. In addition, (a) any foreign
loan procured by our PRC subsidiaries is required to be registered
with SAFE, or its local branches, and (b) each of our PRC
subsidiaries may not procure loans which exceed the statutory
limit. Any medium or long-term loan to be provided by us to our
variable interest entities must be recorded and registered by the
National Development and Reform Committee and SAFE or its local
branches. We may not complete such recording or registrations on a
timely basis, if at all, with respect to future capital
contributions or foreign loans by us to our PRC subsidiaries. If we
fail to complete such recording or registration, our ability to use
the proceeds of this offering and to capitalize our PRC operations
may be negatively affected, which could adversely affect our
liquidity and our ability to fund and expand our
business.
In 2008, SAFE promulgated the Notice of the
General Affairs Department of the State Administration of Foreign
Exchange on the Relevant Operating Issues concerning the
Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign Invested
Enterprises, or
Circular 142, which used to regulate the conversion by foreign
invested enterprises of foreign currency into Renminbi by
restricting the usage of converted Renminbi. In March 2015, SAFE
promulgated the Notice of the State
Administration of Foreign Exchange on Reforming the Administrative
Approach Regarding the Settlement of the Foreign Exchange Capitals
of Foreign Invested Enterprises, or Circular 19. Circular 19 took
effect as of June 1, 2015 and superseded Circular 142 on the same
date. Circular 19 launched a nationwide reform of the
administration of the settlement of the foreign exchange capitals
of foreign invested enterprises and allows foreign invested
enterprises to settle their foreign exchange capital at their
discretion, but continues to prohibit foreign invested enterprises
from using the Renminbi fund converted from their foreign exchange
capitals for expenditures beyond their business scopes. In June
2016, SAFE promulgated the Notice of the State
Administration of Foreign Exchange on Reforming and Standardizing
the Administrative Provisions on Capital Account Foreign Exchange
Settlement, or
Circular 16. Circular 19 and Circular 16 continue to prohibit
foreign invested enterprises from, among other things, using the
Renminbi fund converted from its foreign exchange capitals for
expenditure beyond its business scope, investment and financing
(except for security investment or guarantee products issued by
bank), providing loans to non-affiliated enterprises or
constructing or purchasing real estate not for
self-use.
In light of the substantial capital outflows of China in 2016 due
to the weakening of Renminbi, the PRC government has imposed more
restrictive foreign exchange policies and increased scrutiny of
major outbound capital movement. More restrictions and substantial
vetting processes have been put in place by SAFE to regulate
cross-border transactions falling under the capital account. The
PRC government may, at its discretion, further restrict access to
foreign currencies in the future 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.
Fluctuations in exchange rates could result in foreign currency
exchange losses.
The
value of the RMB against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in
China’s political and economic conditions and foreign
exchange policies. The conversion of RMB into foreign currencies,
including U.S. dollars, is based on rates set by the People’s
Bank of China. The PRC government allowed the RMB to appreciate by
more than 20% against the U.S. dollar between July 2005 and July
2008. 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 RMB has fluctuated
against the U.S. dollar, at times significantly and unpredictably,
and in recent years the RMB has depreciated significantly against
the U.S. dollar. Since October 1, 2016, the RMB has joined the
International Monetary Fund (IMF)’s basket of currencies that
make up the Special Drawing Right (SDR), along with the U.S.
dollar, the Euro, the Japanese yen and the British pound. In the
fourth quarter of 2016, the RMB has depreciated significantly in
the backdrop of a surging U.S. dollar and persistent capital
outflows of China. With the development of the foreign exchange
market and progress towards interest rate liberalization and
Renminbi internationalization, the PRC government may in the future
announce further changes to the exchange rate system and there is
no guarantee that the RMB will not appreciate or depreciate
significantly in value against the U.S. dollar in the future. 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.
Significant
revaluation of the Renminbi may have a material and adverse effect
on your investment. For example, to the extent that we need to
convert U.S. dollars we receive from any offering or private
placement into Renminbi for our operations, appreciation of the
Renminbi against the U.S. dollar would have an adverse effect on
the Renminbi amount we would receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our ordinary
shares or for other business purposes, appreciation of the U.S.
dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us.
Very
limited hedging transactions are available in China to reduce our
exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may decide to
enter into hedging transactions in the future, the availability and
effectiveness of these hedging transactions may be limited and we
may not be able to successfully hedge our exposure at all. In
addition, our currency exchange losses may be magnified by PRC
exchange control regulations that restrict our ability to convert
Renminbi into foreign currency.
If we are classified as a PRC resident enterprise for PRC income
tax purposes, such classification could result in unfavorable tax
consequences to us and our non-PRC shareholders.
Under
the PRC Enterprise Income Tax Law and its implementation rules,
enterprises that are registered in countries or regions outside the
PRC but have their "de
facto management bodies" located within China may be
considered as PRC resident enterprises and are therefore subject to
PRC enterprise income tax at the rate of 25% on their worldwide
income.
We
believe 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." As most of
our management members are based in China, it remains unclear how
the tax residency rule will apply to our case. If the PRC tax
authorities determine that Fincera Inc. or any of our subsidiaries
outside of China is a PRC resident enterprise for PRC enterprise
income tax purposes, then Fincera Inc. or such subsidiary could be
subject to PRC tax at a rate of 25% on its worldwide income, which
could materially reduce our net income. In addition, we will also
be subject to PRC enterprise income tax reporting obligations.
Furthermore, if the PRC tax authorities determine that we are a PRC
resident enterprise for enterprise income tax purposes, dividends
we distribute to non-PRC resident holders may be subject to PRC
withholding tax, and gains realized on the sale or other
disposition of our ordinary shares may be subject to PRC tax, at a
rate of 10% in the case of non-PRC enterprises, or 20% in the case
of non-PRC individuals (in each case, subject to the provisions of
any applicable tax treaty), if such gains are deemed to be from PRC
sources. It is unclear whether non-PRC shareholders of our company
would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that we are
treated as a PRC resident enterprise. Any such tax may reduce the
returns on your investment in the ordinary shares. See
"Regulation—Regulations Relating to Tax—Regulations on
Enterprise Income Tax."
We may not be able to obtain certain benefits under relevant tax
treaty on dividends paid by our PRC subsidiaries to us through our
Hong Kong subsidiaries.
We are
a holding company incorporated under the laws of the Cayman Islands
and as such rely on dividends and other distributions on equity
from our PRC subsidiaries to satisfy part of our liquidity
requirements. Pursuant to Enterprise Income Tax Law of the PRC, a
withholding tax rate of 10% currently applies to dividends paid by
a PRC "resident enterprise" to a foreign enterprise investor,
unless any such foreign investor's jurisdiction of incorporation
has a tax treaty with China that provides for preferential tax
treatment. Pursuant to the Arrangement between the Mainland China and the
Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and Tax Evasion on Income, or the Double Tax
Avoidance Arrangement, such withholding tax rate may be lowered to
5% if a Hong Kong resident enterprise owns at least 25% of a 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, the 5% withholding tax rate does not automatically
apply and certain requirements must be satisfied, including without
limitation that (a) the Hong Kong enterprise must be the beneficial
owner of the relevant dividends; and (b) the Hong Kong enterprise
must directly hold at least 25% share ownership in the PRC
enterprise during the 12 consecutive months preceding its receipt
of the dividends. However, a transaction or arrangement entered
into for the primary purpose of enjoying a favorable tax treatment
should not be a reason for the application of the favorable tax
treatment under the Double Tax Avoidance Arrangement. If a taxpayer
inappropriately is entitled to such favorable tax treatment, the
competent tax authority has the power to make appropriate
adjustments.
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.
However, if a competent tax authority finds out that it is
necessary to apply the general anti-tax avoidance rules, it may
start general investigation procedures for anti-tax avoidance and
adopt corresponding measures for subsequent administration.
Accordingly, our Hong Kong subsidiaries may be able to enjoy the 5%
withholding tax rate for the dividends they receive from our PRC
subsidiaries if they satisfy 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. See "Regulation—Regulations Relating to
Tax—Regulations on Withholding Tax for Dividend
Distribution."
We face uncertainty with respect to indirect transfers of equity
interests in PRC resident enterprises by their non-PRC holding
companies.
According
to the Announcement of the SAT on Several Issues Concerning the
Enterprise Income Tax on Indirect Property Transfer by Non-Resident
Enterprises, or Circular 7, promulgated by the SAT in February
2015, if a non-resident enterprise transfers the equity interests
of a PRC resident enterprise indirectly by transfer of the equity
interests of an offshore holding company (other than a purchase and
sale of shares issued by a PRC resident enterprise in public
securities market) without a reasonable commercial purpose, the PRC
tax authorities have the power to reassess the nature of the
transaction and the indirect equity transfer will be treated as a
direct transfer. As a result, the gain derived from such transfer,
which means the equity transfer price minus the cost of equity,
will be subject to PRC withholding tax at a rate of up to 10%.
Under the terms of Circular 7, a transfer meeting all of the
following circumstances shall be directly deemed as having no
reasonable commercial purposes: (i) over 75% of the value of the
equity interests of the offshore holding company are directly or
indirectly derived from PRC taxable properties; (ii) at any time
during the year before the indirect transfer, over 90% of the total
properties of the offshore holding company are investments within
PRC territory, or in the year before the indirect transfer, over
90% of the offshore holding company's revenue is directly or
indirectly derived from PRC territory; (iii) the function performed
and risks assumed by the offshore holding company are insufficient
to substantiate its corporate existence; or (iv) the foreign income
tax imposed on the indirect transfer is lower than the PRC tax
imposed on the direct transfer of the PRC taxable properties. See
"Regulation—Regulations Relating to Tax—Regulations on
Withholding Tax for Indirect Share Transfer."
We face
uncertainties as to the reporting and other implications of certain
past and future transactions where PRC taxable assets are involved,
such as offshore restructuring, sale of the shares in our offshore
subsidiaries or investments. Our company and our non-PRC resident
investors may be subject to filing obligations or taxed or subject
to withholding obligations in such transactions, under Circular 7.
See "Taxation—People's Republic of China Taxation." For
transfer of shares in our company by investors that are non-PRC
resident enterprises, our PRC subsidiaries may be requested to
assist in the filing under Circular 7. As a result, we may be
required to expend valuable resources to comply with Circular 7 or
to request the relevant transferors from whom we purchase taxable
assets to comply with these circulars, or to establish that our
company should not be taxed under these circulars, which may have a
material adverse effect on our financial condition and results of
operations.
PRC regulations relating to offshore investment activities by PRC
residents may limit our PRC subsidiaries’ 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 subsidiaries 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 subsidiaries. Moreover, failure to comply with the SAFE
registration described above could result in liability under PRC
laws for evasion of applicable foreign exchange
restrictions.
To our
knowledge, none of our shareholders who directly or indirectly hold
shares in our Cayman Islands holding company are deemed to be PRC
residents defined under SAFE Circular 37.
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. 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 subsidiaries, could subject us to
fines or legal sanctions, restrict our overseas or cross-border
investment activities, limit our PRC subsidiaries' ability to make
distributions or pay dividends to us or affect our ownership
structure, which could adversely affect our business and prospects.
See "Regulation—Regulations Relating to Foreign Exchange
Controls—Regulations on Foreign Exchange
Outbound."
Certain PRC rules and 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
Regulations on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, or
the M&A Rules, adopted by six PRC regulatory agencies in August
2006 and amended in 2009, 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 MOFCOM 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 MOFCOM shall be notified in advance of
any concentration of undertaking if certain thresholds are
triggered. In addition, the security review rules issued by the
MOFCOM 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 MOFCOM, 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 MOFCOM 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. See "Regulation—Regulations
Relating to Foreign Investment—Regulations on M&A by
Foreign Investors."
Any failure to comply with PRC regulations regarding the
registration requirements for employee stock incentive plans may
subject the PRC plan participants or us to fines and other legal or
administrative sanctions.
In
February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign
Exchange Administration for Domestic Individuals Participating in
Stock Incentive Plan of Overseas Publicly-Listed Company,
replacing earlier rules promulgated in March 2007. Pursuant to
these rules, PRC citizens and non-PRC citizens who reside in China
for a continuous period of not less than one year who participate
in any stock incentive plan of an overseas publicly listed company,
subject to a few exceptions, are required to register with SAFE
through a domestic qualified agent, which could be the PRC
subsidiary of such overseas listed company, and complete certain
other procedures. In addition, an overseas entrusted institution
must be retained to handle matters in connection with the exercise
or sale of stock options and the purchase or sale of shares and
interests. We and our executive officers and other employees who
are PRC citizens or who have resided in the PRC for a continuous
period of not less than one year and who have been granted options
or other awards will be subject to these regulations. Failure to
complete the SAFE registrations may subject them to fines and legal
sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries and limit our PRC subsidiaries'
ability to distribute dividends to us. We also face regulatory
uncertainties that could restrict our ability to adopt additional
incentive plans for our directors, executive officers and employees
under PRC law. See "Regulation—Regulations Relating to
Employment—Regulations on Stock Incentive
Plans."
Increases in labor costs in the PRC may adversely affect our
profitability.
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.
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. We have not made adequate employee benefit payments in
the past and we may be required to make up the contributions for
these plans as well as to pay late fees and fines. If we are
subject to late fees or fines in relation to the underpaid employee
benefits, our profitability could be adversely affected. See
"Regulation—Regulations Relating to
Employment—Regulations on Employee Benefit
Plans."
RISKS RELATED TO OUR ORDINARY SHARES
Because we may not pay regular dividends on our ordinary shares,
shareholders will generally benefit from an investment in our
ordinary shares only if the shares appreciate in
value.
We
declared and paid special cash dividends in the amount of $0.25 and
$2.00 per ordinary share in February 2012 and June 2017,
respectively, to our shareholders. We have not declared any cash
dividends since June 2017 and may not declare or pay any regular
cash dividends on our ordinary shares in the future. We currently
intend to retain future earnings, if any, for use in the operations
and expansion of the business. As a result, we do not anticipate
paying regular cash dividends in the foreseeable future. Any future
determination as to the declaration and payment of cash dividends
will be at the discretion of the Board of Directors and will depend
on factors that the Board of Directors deems relevant, including
among others, the results of operations, financial condition and
cash requirements, business prospects, and the terms of our credit
facilities and other financing arrangements. If no dividends are
paid, realization of a gain on a shareholder's investments will
depend solely on the appreciation of the price of our ordinary
shares. There is no guarantee that our ordinary shares will
appreciate in value.
Our ordinary shares are quoted on the over the counter market,
which may limit the liquidity and price of our ordinary shares more
than if the ordinary shares were quoted or listed on a National
Securities Exchange.
Our
ordinary shares are currently quoted on the over the counter
market, as opposed to being listed on a national securities
exchange such as the Nasdaq Stock Market or the New York Stock
Exchange. Quotation of our ordinary shares on the over the counter
market limits the liquidity and price of our ordinary shares more
than if the ordinary shares were quoted or listed on a national
securities exchange. In addition, certain institutional investors
may be prohibited from purchasing our ordinary shares because the
ordinary shares are not listed on a national securities
exchange.
The trading price of our ordinary shares may be volatile, which
could result in substantial losses to investors.
The
trading price of our ordinary shares may be volatile and could
fluctuate widely due to factors beyond our control. This may happen
because of broad market and industry factors, like the performance
and fluctuation of the market prices of other companies with
business operations located mainly in China that have listed their
securities in the United States. A number of Chinese companies have
listed or are in the process of listing their securities on U.S.
stock markets. The securities of some of these companies have
experienced significant volatility. The trading performances of
these Chinese companies' securities may affect the attitudes of
investors toward Chinese companies listed in the United States in
general and consequently may impact the trading performance of our
ordinary shares, regardless of our actual operating
performance.
In
addition to market and industry factors, the price and trading
volume for our ordinary shares may be highly volatile for factors
specific to our own operations, including the
following:
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(i)
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variations
in our revenues, earnings, cash flow and data related to our user
base or user engagement;
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(ii)
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announcements
of new investments, acquisitions, strategic partnerships or joint
ventures by us or our competitors;
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(iii)
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announcements
of new products, services and expansions by us or our
competitors;
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(iv)
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changes
in financial estimates by securities analysts;
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(v)
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detrimental
adverse publicity about us, our services or our
industry;
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(vi)
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additions
or departures of key personnel;
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(vii)
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release
of lock-up or other transfer restrictions on our outstanding equity
securities or sales of additional equity securities;
and
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(viii)
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potential
litigation or regulatory investigations.
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Any of
these factors may result in material and sudden changes in the
volume and price at which our ordinary shares will
trade.
In the
past, shareholders of public companies have often brought
securities class action suits against those companies following
periods of instability in the market price of their securities. If
we were involved in a class action suit, it could divert a
significant amount of our management's attention and other
resources from our business and operations and require us to incur
significant expenses to defend the suit, which could harm our
results of operations. Any such class action suit, whether or not
successful, could harm our reputation and restrict our ability to
raise capital in the future. In addition, if a claim is
successfully made against us, we may be required to pay significant
damages, which could have a material adverse effect on our
financial condition and results of operations.
If securities or industry analysts do not publish research or
reports about our business, or if they adversely change their
recommendations regarding our ordinary shares, the market price for
our ordinary shares and trading volume could decline.
The
trading market for our ordinary shares will be influenced by
research or reports that industry or securities analysts publish
about our business. If one or more analysts who cover us downgrade
our stock, the market price for our ordinary shares would likely
decline. If one or more of these analysts cease to cover us or fail
to regularly publish reports on us, we could lose visibility in the
financial markets, which in turn could cause the market price or
trading volume for our ordinary shares to decline.
We may qualify as a passive foreign investment company, or
“PFIC,” which could result in adverse U.S. federal
income tax consequences to U.S. investors.
In
general, we will be treated as a PFIC for any taxable year in which
either (1) at least 75% of our gross income (looking through
certain 25% or more-owned corporate subsidiaries) is passive income
or (2) at least 50% of the average value of our assets (looking
through certain 25% or more-owned corporate subsidiaries) is
attributable to assets that produce, or are held for the production
of, passive income. Passive income generally includes, without
limitation, dividends, interest, rents, royalties, and gains from
the disposition of passive assets. If we are determined to be a
PFIC for any taxable year (or portion thereof) that is included in
the holding period of a U.S. Holder (as defined in the section of
this Annual Report on Form 20-F captioned
“Taxation—United States Federal Income
Taxation—General”) of our ordinary shares, the U.S.
Holder may be subject to increased U.S. federal income tax
liability and may be subject to additional reporting requirements.
Based on the composition (and estimated values) of the assets and
the nature of the income of us and our subsidiaries for our 2018
taxable year, we do not believe that we would be a PFIC for the
taxable year ended December 31, 2018 and do not anticipate becoming
a PFIC in the foreseeable future. However, since we have not
performed a definitive analysis with respect to our PFIC status for
our 2018 taxable year, there can be no assurance with respect to
our status as a PFIC for such taxable year. There also can be no
assurance with respect to our PFIC status for any future taxable
year. We urge U.S. Holders to consult their own tax advisors
regarding the possible application of the PFIC rules. For a more
detailed explanation of the U.S. federal income tax consequences of
PFIC classification to U.S. Holders, see the section of this Annual
Report on Form 20-F captioned “Taxation—United States
Federal Income Taxation—Tax Consequences to U.S.
Holders—Passive Foreign Investment Company
Rules.”
Changes to U.S. tax law could materially impact us or our
shareholders.
U.S.
federal income tax laws and the administrative interpretations of
those laws may be amended at any time, potentially with retroactive
effect. For example, the recently enacted tax reform bill in the
U.S., informally known as the Tax Cuts and Jobs Act, or TCJA, made
significant changes to the U.S. federal income tax laws applicable
to individuals and corporations. Technical corrections or other
amendments to the TCJA or administrative guidance interpreting the
TCJA may be forthcoming at any time. We cannot predict the
long-term effect of the TCJA or any future changes on us or our
shareholders. Current and prospective shareholders are urged to
consult with their tax advisors with respect to the TCJA and any
other regulatory or administrative developments and proposals and
their potential effect on an investment in our securities. In
addition, future U.S. tax legislation, regulations, administrative
interpretations or court decisions cannot be predicted by us and
could adversely affect us or our shareholders.
Mr. Yong Hui Li, our Chairman and Chief Executive Officer, is the
beneficial owner of a substantial amount of our ordinary shares and
Mr. Li may take actions with respect to such shares which are not
consistent with the interests of the other
shareholders.
Mr.
Yong Hui Li, our Chairman and Chief Executive Officer, beneficially
owns approximately 81.22% of the outstanding ordinary shares of us
as of the date of this Annual Report on Form 20-F, assuming that
there are no other changes to the number of ordinary shares
outstanding. Mr. Li may take actions with respect to such shares
without the approval of other shareholders and which are not
consistent with the interests of the other shareholders, including
the election of the directors and other corporate actions such
as:
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●
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merger
with or into another company;
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●
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a sale
of substantially all of our assets; and
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●
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amendments
to our memorandum and articles of incorporation.
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Certain judgments obtained against us by our shareholders may not
be enforceable.
We are
an exempted company limited by shares incorporated under the laws
of the Cayman Islands. We conduct substantially all of our
operations in China and substantially all of our assets are located
in China. In addition, a majority of our directors and executive
officers reside within China, and most of the assets of these
persons are located within China. We have appointed CT Corporation
System located at 111 Eighth Avenue, 13/F, New York, New York 10011
as our agent to receive service of process with respect to any
action brought against us in the United States District Court for
the Southern District of New York under the federal securities laws
of the United States or of any state in the United States or any
action brought against us in the Supreme Court of the State of New
York in the County of New York under the securities laws of the
State of New York, and intend to abide by judgments entered by such
courts in such actions.
However,
there is no statutory enforcement in the Cayman Islands of
judgments obtained in the federal or state courts of the United
States (and the Cayman Islands are not a party to any treaties for
the reciprocal enforcement or recognition of such judgments). A
judgment obtained in such jurisdiction will be recognized and
enforced in the courts of the Cayman Islands at common law, without
any re-examination of the merits of the underlying dispute, by an
action commenced on the foreign judgment debt in the Grand Court of
the Cayman Islands, provided such judgment (a) is given by a
foreign court of competent jurisdiction, (b) imposes on the
judgment debtor a liability to pay a liquidated sum for which the
judgment has been given, (c) is final, (d) is not in respect of
taxes, a fine or a penalty, and (e) was not obtained in a manner
and is not of a kind the enforcement of which is contrary to
natural justice or the public policy of the Cayman Islands.
However, the Cayman Islands courts are unlikely to enforce a
judgment obtained from the U.S. courts under civil liability
provisions of the U.S. federal securities law if such judgment is
determined by the courts of the Cayman Islands to give rise to
obligations to make payments that are penal or punitive in nature.
Because such a determination has not yet been made by a court of
the Cayman Islands, it is uncertain whether such civil liability
judgments from U.S. courts would be enforceable in the Cayman
Islands.
Furthermore,
the recognition and enforcement of foreign judgments are provided
for under the PRC Civil Procedures Law. PRC courts may recognize
and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedures Law based either on treaties between
China and the country where the judgment is made or on principles
of reciprocity between jurisdictions. China does not have any
treaties or other forms of reciprocity with the United States that
provide for the reciprocal recognition and enforcement of foreign
judgments. In addition, according to the PRC Civil Procedures Law,
the PRC courts will not enforce a foreign judgment against us or
our director and officers if they decide that the judgment violates
the basic principles of PRC laws or national sovereignty, security
or public interest. As a result, it is uncertain whether and on
what basis a PRC court would enforce a judgment rendered by a court
in the United States.
You may face difficulties in protecting your interests, and your
ability to protect your rights through U.S. courts may be limited,
because we are incorporated under Cayman Islands law.
We are
an exempted company incorporated under the laws of the Cayman
Islands with limited liability. Our corporate affairs are governed
by our memorandum and articles of association, the Companies Law
(2016 Revision) of the Cayman Islands and the common law of the
Cayman Islands. The rights of shareholders to take action against
the directors, actions by minority shareholders and the fiduciary
duties of our directors to us under Cayman Islands law are to a
large extent governed by the common law of the Cayman Islands. The
common law of the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands as
well as from the common law of England, the decisions of whose
courts are of persuasive authority, but are not binding, on a court
in the Cayman Islands. The rights of our shareholders and the
fiduciary duties of our directors under Cayman Islands law are not
as clearly established as they would be under statutes or judicial
precedent in some jurisdictions in the United States. In
particular, the Cayman Islands has a less developed body of
securities laws than the United States. Some U.S. states, such as
Delaware, have more fully developed and judicially interpreted
bodies of corporate law than the Cayman Islands. In addition,
Cayman Islands companies may not have standing to initiate a
shareholder derivative action in a federal court of the United
States.
Shareholders
of Cayman Islands exempted companies like us have no general rights
under Cayman Islands law to inspect corporate records or to obtain
copies of register of members of these companies. Our directors
have discretion under our articles of association to determine
whether or not, and under what conditions, our corporate records
may be inspected by our shareholders, but are not obliged to make
them available to our shareholders. This may make it more difficult
for you to obtain the information needed to establish any facts
necessary for a shareholder motion or to solicit proxies from other
shareholders in connection with a proxy contest.
Certain
corporate governance practices in the Cayman Islands, which is our
home country, differ significantly from requirements for companies
incorporated in other jurisdictions such as the U.S. Currently, we
do not plan to rely on home country practice with respect to any
corporate governance matter. However, if we choose to follow home
country practice in the future, our shareholders may be afforded
less protection than they otherwise would under rules and
regulations applicable to U.S. domestic issuers.
As a
result of all of the above, public shareholders may have more
difficulty in protecting their interests in the face of actions
taken by our management, members of the board of directors or
controlling shareholders than they would as public shareholders of
a company incorporated in the United States.
We are a foreign private issuer within the meaning of the rules
under the Exchange Act, and as such we are exempt from certain
provisions applicable to United States domestic public
companies.
Because
we are a foreign private issuer under the Exchange Act, we are
exempt from certain provisions of the securities rules and
regulations in the United States that are applicable to U.S.
domestic issuers, including:
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(i)
|
the
rules under the Exchange Act requiring the filing of quarterly
reports on Form 10-Q or current reports on Form 8-K with the
SEC;
|
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(ii)
|
certain
sections of the Exchange Act regulating the solicitation of
proxies, consents, or authorizations in respect of a security
registered under the Exchange Act;
|
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(iii)
|
the
sections of the Exchange Act requiring insiders to file public
reports of their stock ownership and trading activities and
liability for insiders who profit from trades made in a short
period of time; and
|
|
(iv)
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the
selective disclosure rules by issuers of material non-public
information under Regulation FD.
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We will
be required to file an annual report on Form 20-F within four
months of the end of each fiscal year. In addition, we intend to
publish our results on a quarterly basis through press releases,
distributed pursuant to the rules and regulations of the OTCQB.
Press releases relating to financial results and material events
will also be furnished to the SEC on Form 6-K. However, the
information we are required to file with or furnish to the SEC will
be less extensive and less timely compared to that required to be
filed with the SEC by U.S. domestic issuers. As a result, you may
not be afforded the same protections or information, which would be
made available to you if you were you investing in a U.S. domestic
issuer.
We may be subject to changes in laws, regulations, and standards
relating to corporate governance and public disclosure that could
cause us to incur significantly increased costs and divert
substantial additional attention of management to such matters and
away from revenue-generating activities.
Changing
laws, regulations and standards relating to corporate governance
and public disclosure are creating uncertainty for public
companies, increasing legal and financial compliance costs and
making some activities more time-consuming. These laws, regulations
and standards are subject to varying interpretations, in many cases
due to their lack of specificity, and, as a result, their
application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in
continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management's time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may also initiate legal proceedings against
us and our business may be adversely affected.
We have granted, and may continue to grant, share incentive awards,
which may result in increased share-based compensation
expenses.
We
first adopted our stock option plan, or the 2009 Equity Incentive
Plan, in 2009 for purposes of granting share-based compensation
awards to employees, directors and consultants to incentivize their
performance and align their interests with ours. The 2009 Equity
Incentive Plan was later superseded by the 2015 Omnibus Equity
Incentive Plan, which took effect on September 24, 2015 and was
approved by shareholders at the Company’s annual meeting of
shareholders held on July 12, 2016. We account for compensation
costs for all share options using a fair-value based method and
recognize expenses in our consolidated statements of operations in
accordance with U.S. GAAP. Under the terms of the 2015 incentive
plan, 5,200,000 ordinary shares are reserved for issuance in
accordance with its terms (provided, however, that dividend
equivalent rights are payable solely in cash and therefore do not
reduce the number of shares that may be granted under the incentive
plan and that stock appreciation rights only reduce the number of
shares available for grant under the incentive plan by the number
of shares actually received by the grantee in connection with the
stock appreciation right, if any). All awards under the incentive
plan are made by our Board of Directors or its Compensation
Committee.
As of
December 31, 2018, 787,748 of these stock options had been
exercised, and we had recorded aggregate compensation expense of
RMB152.5 million based on the estimated fair value of the stock
options on their dates of grant. All of the exercised stock options
utilized a net exercise method, and therefore, the Company did not
receive any cash proceeds from their exercise. We believe the
granting of share incentive awards is of significant importance to
our ability to attract and retain employees, and we will continue
to grant share incentive awards to employees in the future. As a
result, our expenses associated with share-based compensation may
increase, which may have an adverse effect on our results of
operations.
ITEM
4.
INFORMATION ON OUR COMPANY
A. History and Development
of the Company
We were
incorporated in the Cayman Islands on October 16, 2007 under the
name “Spring Creek Acquisition Corp.” as a blank check
company formed for the purpose of acquiring an operating business
that had its principal operations in China.
On
April 9, 2009, we acquired all of the outstanding securities of
AutoChina Group, Inc. ("ACG"), an exempt company incorporated in
the Cayman Islands, from Honest Best Int’l Ltd ("Honest
Best"). At the time of our acquisition of ACG, Honest Best was
wholly owned by Ms. Yan Wang, Mr. Li's wife. Prior to our
acquisition of ACG, we had no operating business. Promptly after
our acquisition of ACG, we changed our name to “AutoChina
International Limited.”
On
August 30, 2012, the Company’s independent directors
approved, and the Company entered into, an equity transfer
agreement through its wholly owned subsidiary, ACG, to purchase
100% of the equity of Heat Planet Holdings Limited (“Heat
Planet”) and its subsidiaries, whose primary asset consists
of 23 floors, or over 60,000 square meters, of newly constructed
office space in the Kaiyuan Financial Center building (the
“Kaiyuan Finance Center”). Heat Planet was controlled
by Mr. Li. The total transaction value of approximately RMB 1
billion ($159.3 million) was negotiated and approved by the
Company’s Audit Committee and equals the appraisal value that
was determined by a third party appraisal of the Kaiyuan Finance
Center. Located at 5 East Main Street in Shijiazhuang the 245-meter
tall Kaiyuan Finance Center is the tallest building in Shijiazhuang
and Hebei Province. The Company's headquarters are located in the
Kaiyuan Finance Center, which serves as the control center for the
Company’s operations throughout China. The Company does not
occupy the entire office space purchased, and has been leasing out
the unoccupied space, the proceeds from which are reported as
rental income. Additionally, the Kaiyuan Finance Center also
contains a Hilton Worldwide-operated hotel.
Heat
Planet’s equity was purchased for approximately $56.4
million. In connection with the acquisition, the Company assumed
approximately $102.9 million in debt, resulting in a total
transaction value of approximately $159.3 million.
In
November 2014, the Company launched its CeraPay product, also known
as Dianfubao in Chinese, which is a proprietary transaction
platform for participants in the transportation industry that
allows its users to make purchases at participating merchants on
credit. CeraPay has features similar to traditional credit cards,
such as no fees for users if the outstanding monthly balance is
paid on time. The Company charges transaction fees to merchants at
a fixed rate who accept CeraPay as a form of payment.
In
November 2014, the Company also launched its CeraVest product also
known as Qingyidai in Chinese, which is an online lending platform
that acts as an intermediary to provide short-term financing
primarily to small and medium sized business in the transportation
industry by connecting loan requests with investors seeking to
purchase loans for a fixed return. The Company earns transaction
fees for loans facilitated through CeraVest.
In June
2015 the Company changed its name from AutoChina International Ltd.
to Fincera Inc. to better suit its new internet-based
businesses.
In
October 2015 the Company launched TruShip, also known as Yihaoche
in Chinese, its first e-commerce platform, which allows trucking
industry merchants, such as dealerships and leasing companies, to
establish online store-fronts and conveniently conduct sales
transactions through CeraPay.
In
March 2016, the Company launched AutoChekk, also known as
Chekuaikuai in Chinese, its first e-commerce platform for the
passenger vehicle industry. AutoChekk provides consumers in China
with online tools and information designed to make researching and
purchasing passenger cars or maintenance services more convenient
and affordable.
In July
2016, the Company launched PingPing, an e-commerce platform that
allows small businesses to establish an online presence while
providing an online shopping portal for their
customers.
On
October 19, 2016, the Company closed its purchase of 100% of the
equity interest of Eastern Eagle and its subsidiaries, whose
primary asset consists of the remaining portions of the Kaiyuan
Finance Center that the company did not already own, namely 31
floors and an underground parking garage, together totaling over
119,000 square meters, which house the Shijiazhuang Hilton Hotel.
Eastern Eagle was controlled by Mr. Li. The total transaction
value, as adjusted to account for changes in the net asset carrying
value determined for Eastern Eagle, was $409.3 million, consisting
of cash of $111.5 million and assumed liabilities of $297.8
million.
In May
2017, the Company launched Qingyifenqi, a consumer lending product
that provides zero-interest payment by installment financing for
purchases of consumer goods such as mobiles phones, large
appliances, furniture, home decoration materials, passenger
vehicles, etc.
In July
2017, the Company completed a special cash dividend of $2.00 per
share to all shareholders of record as of the close of business on
June 23, 2017.
In
September 2017, the Company changed its trading symbol from AUTCF
to YUANF. The new ticker YUANF pays homage to the Company's Chinese
name-Kaiyuan-which we believe has a degree of recognition in the
Chinese trucking industry.
In
November 2017, the Company conducted a two-for-one stock split of
the Company's outstanding shares of common stock in the form of a
100% stock dividend paid to shareholders of record on November 1,
2017.
From
September to October 2018, the Company shut down three e-commerce
platforms (AutoChekk, PingPing, and TruShip) to streamline the
business channels.
The
following chart illustrates our corporate structure as of February
28, 2019:
|
(1)
|
The
public company, quoted on the OTCQB under the symbol
“YUANF”
|
|
(2)
|
Eastern
Eagle International and its subsidiaries were acquired in October
2016. Eastern Eagle holds the ownership of the hotel segment of the
Kaiyuan Finance Center building.
|
|
(3)
|
On
August 30, 2012, the Company’s independent directors
approved, and the Company entered into, an equity transfer
agreement through its wholly owned subsidiary, ACG, to purchase
100% of the equity of Heat Planet and its subsidiaries, whose
primary asset consists of 23 floors, or over 60,000 square meters,
of newly constructed office space in the Kaiyuan Finance Center.
Heat Planet is currently in the process of being wound up and its
holdings were transferred to Hebei Remittance Guarantee in November
2016.
|
|
(4)
|
Ganglian
Finance Leasing was formed in September 2010 for the purpose of
conducting our leasing business. It commenced the leasing business
in the fourth quarter of 2010.
|
|
(5)
|
Hebei
Ruiliang Trading holds the ownership of the office segment of
Kaiyuan Finance Center building.
|
|
(6)
|
Hebei
Ruiliang Property Services was formed in June 2013. It engages in
property management of the Kaiyuan Finance Center.
|
|
(7)
|
Shijiazhuang
Chuanglang Trade was formed in June 2017 to facilitate debt
collection activities of the new internet-based
businesses.
|
|
(8)
|
Hebei
Remittance Guarantee was formed in October 2014 to facilitate the
CeraVest business.
|
|
(9)
|
Chuangjin
World Investment was formed in September 2014 to facilitate the
CeraVest business.
|
|
(10)
|
Hebei
Shengrong Investment is an entity 100% indirectly controlled by Mr.
Yong Hui Li, our Chairman and Chief Executive Officer. (“Mr.
Li”)
|
|
(11)
|
In
December 2016 Hebei Yarui Trading replaced Kai Yuan Real Estate in
the corporate structure.
|
|
(12)
|
Hebei
Xuhua Trading is the entity that Fincera indirectly acquired
control of through contractual arrangements and which held the cash
consideration paid to Fincera in connection with its sale of its
automobile dealership business in December 2009. Currently, its
main purpose is to act as an intermediary in the facilitation
process for certain CeraVest Loans.
|
|
(13)
|
Kaiyuan
Auto Trade Group was established in January 2008. Currently, its
main purpose is to act as an intermediary in the facilitation
process for certain CeraVest Loans.
|
|
(14)
|
Shenzhen
Shijie Kaiyuan Financial Services was formed in April 2015 to
facilitate the new internet-based businesses.
|
|
(15)
|
Shenzhen
Kaiyuan Inclusive Financial Services was formed in April 2015 to
facilitate the new internet-based businesses.
|
|
(16)
|
Qingyi
Technology was formed in September 2014 and operates the CeraVest
platform.
|
|
(17)
|
Dianfubao
Investment was formed in August 2014 to facilitate the CeraVest and
CeraPay businesses.
|
|
(18)
|
Beijing
Yihaoche Technology was originally formed in February 2012 as
Kaiyuan Information Processing. It engages in developing and
management of the Companies internet-based businesses.
|
|
(19)
|
Dianfubao
Information Technology was formed in February 2018 to facilitate
the CeraVest and CeraPay businesses.
|
|
(20)
|
Beijing
Wendu Technology was formed in October 2018 to gradually replace
Beijing Yihaoche Technology.
|
Fincera’s
principal executive office is located at 27/F, Kaiyuan Finance
Center, No. 5, East Main Street, Shijiazhuang, Hebei,
People’s Republic of China. Our telephone number is +86 311
8382 7688. Our principal website is located at
http://www.fincera.net. The information on our website is not part
of this Annual Report. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC, including us, which is available free of cost at
http://www.sec.gov.
B. Business
Overview
Fincera
focuses on providing innovative online lending and e-commerce
services for small and medium-sized businesses (“SMBs”)
and individuals in China. Our mission is to promote the success of
SMBs by giving them the tools to grow their business online while
providing them access to affordable credit. Through our product
offerings, we aim to enable a new era of inclusive finance and
Offline to Online shopping experiences in China.
Leveraging
deep knowledge of the transportation industry gained from our
extensive history as a commercial vehicle sales, leasing and
support business, our product platforms include complementary tools
that, beyond giving access to a source of capital, allow SMBs in
the transportation and other industries to streamline their
business processes and increase their sales. We encourage SMBs and
their customers to use our platforms to conduct transactions or
browse inventory by offering cross-platform incentives and
integration capabilities. For the end consumers, we can offer
financing options for the purchases they make from merchants using
our e-commerce platforms. By providing financial solutions to both
sides of a transaction and providing a convenient tool to
facilitate the transaction, we can convert an offline business
scenario to an online revenue-generating opportunity for our
products.
We
currently operate in two distinct businesses segments: 1)
internet-based financial and e-commerce services and 2) property
lease and management. Our internet-based services are a single
reportable segment. Together, our online lending and e-commerce
services have contributed immensely to our transition and growth
from our discontinued leasing business. Our revenue increased by
17% from RMB875.93 million in the fiscal year ended December 31,
2016 to RMB1,023.85 million in the fiscal year ended December 31,
2017, and by 37.9% from RMB1,023.85 million in the fiscal year
ended December 31, 2017 to RMB 1,412.02 million in the fiscal year
ended December 31, 2018. Our property lease and management business
has two additional reportable segments: hotel and office leasing.
We are in the process of winding down our commercial vehicle sales,
leasing and support business and insurance agency business, which
are all classified as discontinued operations.
Internet-Based Services: Financial Services
Currently
our primary financial services platform is CeraVest. CeraVest,
known as Qingyidai in China and launched at the end of 2014, is our
proprietary peer-to-peer lending platform, through which we offer
SMBs short-term financing at competitive interest
rates.
We
strive to offer competitive rates and fees on our online lending
platform for borrowers and attractive investment returns for loan
investors. We offer interest-free and fee-free credit-lines to
borrowers that are reusable within the customer’s credit
limit provided that the customer pays off the credit account in
full each month. For our fixed-term loans, our effective annual
percentage rate (EAPR) charged to borrowers, inclusive of fees and
security deposits, falls between 8.62% to 21.63%, Investors that
purchase loans on our online marketplace may receive annualized
returns from 7.3% to upwards of approximately 14% if the loans are
purchased on the secondary market.
The
total amount of loans facilitated through our lending platforms
increased by 4.05% from the fiscal year ended December 31, 2017 to
the fiscal year ended December 31, 2018. Cumulatively since the
launch of our online lending platforms, we have facilitated
approximately RMB91.1 billion in total loans as of December 31,
2018.
CeraPay
CeraPay,
launched at the end of 2014, was our revolving credit product that
processed and settled transactions between our borrowers and
merchants. CeraPay users were provided with a credit line that
could be utilized at participating CeraPay merchants or be used to
pay other CeraPay users.
On June
2018, we had a development on the loan transaction process and
replaced 30-day credit lines and 12-month installment loans which
were offered from CeraPay with similar offerings from CeraVest
where these loans are facilitated by our peer-to-peer lending
platform.
CeraVest
Through
CeraVest, we now offer three types of financing services with
different terms and payment schedules for borrowers and offer three
corresponding investment products for investors. Previously, we
have offered 180-day loans with a different transaction process as
CeraVest Fixed and also offered CeraVest Flex as a highly liquid
investment option to our customers. CeraVest Fixed and CeraVest
Flex were phased out and terminated by December 2017 and February
2018, respectively, and replaced with new products listed below to
comply with the relevant regulations.
Loan Types
We now
offer the following three loan types to our borrowers. 30-day lines
of credit, 180-day term loans and installment loans via our
CeraVest platforms.
30-day Lines of Credit
We
issue interest-free revolving credit lines to SMBs to fund their
short-term working capital needs. The credit lines have a 30-day
billing cycle and outstanding balances after the bill due date are
considered delinquent and will be subject to certain penalties. We
typically reduce or waive all penalties if the borrower is
cooperative in communicating a payment plan with us or submits the
payment shortly after the due date.
Similar
to credit cards, our credit lines contain no fees for borrowers to
use this service as long as any outstanding balances are paid in
full each month. We generate revenue primarily by charging
transaction fees, which are currently in a range of 1.6-2.2%.
Merchants may use funds received from transactions to make payments
to other users or merchants or cash out the funds via transfer to a
bank account. Credit line users are subject to an application and
credit approval process and are required to provide us with
guarantees and collateral.
As of
December 31, 2018, we have facilitated an aggregate of RMB59.2
billion in 30-day lines of credit transactions. We believe that our
30-day revolving lines of credit product will become our primary
profit driver. We are catering to substantial demand from the
trucking industry for short-term, low-cost credit to fund working
capital needs. Not only are we able to generate high returns from
transaction fees, but our 30-day credit product is also highly
scalable since we can benefit from repeat transaction volumes from
a one-time customer acquisition expense.
180-Day Term Loans
Currently,
our 180-day term loans accrue interest at 4.25% (or 8.62% on an
annualized basis). We charge a facilitation fee between 3-5%
depending on the type of the loan. The fee portion is collected by
the Company while the investor holding the loan at maturity
receives the interest payment. In addition, the borrower remits 10%
of the loan to the Company as a security deposit that is refunded
to the borrower upon timely repayment. Payment of principal and
interest is due in a lump sum at the maturity date at the end of
the 180-days. Outstanding balances after the maturity date are
considered delinquent, and the Company will keep the security
deposit as a one-time penalty fee and may assess additional
penalties.
As of
December 31, 2018, we have facilitated an aggregate of RMB24.9
billion in 180-day term loans.
Installment Loans
We
began offering installment loans to fund purchases of trucks and
consumer discretionary goods and services in December 2016. The
loans require an order to be completed on one of our e-commerce
websites with the borrowed purchase funds being transferred
directly to the merchant via our payment network. Given the term of
the loan and the type of purchase, we charge a fee between 6.5
– 8.9% to the merchant on the transaction and require some
borrowers to provide us with collateral to partially secure their
obligations. Terms of these installment loans may vary between 3-24
months; however, the majority of the installment loans carry a term
of 12 months. As of December 31, 2018, we have facilitated an
aggregate RMB7.0 billion in installment loans.
Borrowers
As of
December 31, 2018, our borrowers consisted of 21.1% companies and
78.9% individuals. We have rigorous criteria for the selection of
borrowers. We strictly prohibit providing services to people with
criminal records or those listed on the national list of delinquent
debtors.
As a
result of industry knowledge we acquired through our legacy
operations, we emphasize bringing SMBs in the trucking industry to
our online lending platforms. These businesses may be individual
truck owner and operators, truck leasing companies, truck
dealerships, or logistic companies. Our borrowers in the trucking
industry typically require financing for working capital needs or
business expansions, and our online lending platform provides them
with the flexibility to choose a financing option that best meets
their needs. These borrowers typically reside in rural areas or
lower tier cities.
We also
facilitate consumer loans for retail purchases and other
discretionary purchases such as home furnishing and decoration,
albeit on a much smaller scale. The emerging middle class in China
is a driver of growing consumption of discretionary products and
services.
Brokers
Starting
from early 2018, we launched a new broker business model and have
converted the previous distribution network into a broker
distribution network that is not owned, leased, or staffed by the
Company. Brokers earn money via a revenue-sharing agreement. We
began sourcing the borrowers from our nationwide sales network of
independent brokers located in 30 provinces and covering 301 cities
across China in April 2018.
We
believe that this broker network may expand broadly going forward
and using this new borrower sourcing channel will allow us to grow
our online business rapidly.
Investment Products
Each of
the three types of our loan products are available to retail
investors as fixed income investments on our Qingyidai marketplace.
180-day loans are named “Qingying” and provide
annualized returns of 8.62% with principal and returned in lump-sum
at maturity. 30-day loans are named “Yueying” and
provide annualized returns of 8.1% with the principal and interest
returned at maturity. Installment loans are named
“Zhongying” and provide annualized returns of 9.02%
with principal and interest returned monthly.
Investors
are also able to exit any of the loan investments before full
maturity by selling the loans to other investors on a secondary
market provided by our platform. Secondary transactions are
conducted based on a fixed pricing method by the Company where
interest returns to the selling investor is discounted and the
discounted amount passed on to boost the expected return of the
purchasing investor. Investors selling 180-day loans before
maturity will receive an annualized yield of 7.93% while the
purchasing investor can earn an annualized return of 8.62 –
14.71% depending on the time to maturity. Investors selling 30-day
loans before maturity will receive an annualized yield of 7.69%
while the purchasing investor can earn an annualized return of
8.1-10.08% depending on the time to maturity. Investors selling
installment loans before maturity will receive an annualized yield
of 7.21% while the purchasing investor can earn an annualized
return of 9.02-10.04% depending on the time to
maturity.
At
times the Company voluntarily purchases defaulted loans at maturity
so that investors can retain their principal and the expected
interest income. The Company also willingly purchases notes from
investors on the secondary market if no other investors can buy the
notes within a specified period; after which the Company
immediately relists these loans for sale to other investors on the
secondary market. All of the Company’s loan purchases are
intended to provide the desired level of liquidity to investors;
these actions are part of the Company’s commitment to
providing the best investment experience to our
customers.
We
serve all investors domiciled in China and offer them investment
opportunities in loans available on our marketplace. Currently, we
focus our efforts on attracting individual investors and SMBs with
idle cash on hand. We plan to expand and diversify our investor
base to include institutional investors, such as banks, trust
funds, and fixed income funds, as well as additional high-net-worth
individuals who may invest more substantial amounts of funds. Due
to our reliance on our offline sales network across China, we
attract mostly investors located in lower tier cities since our
brokers operate in these regions, and there is less competition for
investors as compared to the 1st tier cities.
As of
December 31, 2018, our investors’ profile consisted of 56%
male and 44% female. In terms of age distribution, 27.8% of our
investors were in their 20's, 36.6% in their 30's, 21.8% in their
40's, and 13.7% were in their 50's or older. The majority of our
investors are located in the Hebei region as shown on the map
below:
Sales & Marketing
We
primarily utilize a highly targeted, multi-tiered approach to sell
and market our products. We began launching a new broker network
across China in early 2018 and rely on word of mouth advertising to
market our products. For branding and promotional purposes, we
invest a small portion of our budget on ads on various traditional
and digital media sources such as news outlets, social media, app
stores, and other third-party web or mobile app platforms. While we
currently rely heavily on our broker network for customer
acquisition, we expect digital and multimedia marketing to be our
main channels going forward as we build capabilities in this
area.
Under
the new broker network business model, the Company’s
distribution network is structured into a 4-layer hierarchy: level
A brokers, level B brokers, level C brokers, and level D brokers.
The function of each level is similar to the Company’s prior
structure of provincial store, city store, associate store, and
franchise store, respectively. Under our previous sales network,
associate stores were small businesses that have an extensive
network of business and customer relationships within their region
that have a keen interest in promoting our products. To become an
associate store, the owner of the small business signed an
employment agreement with the Company while his or her firm remains
independent. The franchise stores were small businesses that have
borrowing needs and a customer base that need Fincera’s
financial products. To become a franchise store, the business owner
or manager had to complete a full credit assessment and execute a
franchise agreement with the Company. New brokers are not limited
to former Fincera employees and can be any private entities and
entrepreneurs who are interested in joining. As of April 24, 2019, the number of
level A brokers, level B brokers and level C brokers is 24, 349 and
98 respectively.
In
conjunction with our sales and customer acquisition efforts, we
also offer ongoing promotions that provide cash incentives to
first-time investors on our platform. Existing customers that refer
new investors to our platform can also receive a cash reward. From
time to time, we will also conduct promotional campaigns targeted
at specific segments of our existing customer base to retain or
increase a customer’s invested balance. For investors in the
Shijiazhuang region, we also offer room and dining vouchers for our
hotel during seasonal promotional events.
Risk Management
We have
extensive experience underwriting credit and managing risk
concerning SMBs in the transportation industry. To manage the
credit risk from the loans extended to customers, we have leveraged
this experience in our current risk management practices. Our risk
management efforts mainly focus on: i) thorough verification of
personal and asset information; ii) building robust evidence for
cases to collect through litigation; iii) maintaining and promoting
a “never-call-it-quits” culture when it comes to
collections; iv) developing our data-driven anti-fraud and credit
assessment and decision systems.
Screening and Verification
As
outlined in our transaction process, our verification of the
information provided in each credit application is a core process
of our risk management procedures. Each application begins with
credit request submitted online. There could be an in-person
meeting to collect information and record photo and video evidence
of the entire process if necessary. We are in the process of
introducing a facial recognition technology provided by the third
party to verify the authentication of applicant or
guarantor’s identity. After our regional service
representatives submit the application information to our
headquarters for review, we verify the information provided against
third-party sources such as state authorized personal identity
databases, commerce bureau registration information, vehicle
registration data providers, telecom data providers, industry
blacklist and more. We also manually scrutinized the identification
and documents provided to spot any false documentation. Finally, we
also conduct an interview over the phone with the applicant to
verify specific information and that they have indeed submitted a
credit application for the purposes stated in the application
materials. Most importantly, since the majority of loans are
trucking related, we ensure that we verify the truck assets and
ownership information since trucks are income generating assets and
this allows us to determine whether the borrower can repay the
loan. We are planning to draw risk profiles for applicants,
incorporating the historical transaction information from returning
borrowers, to determine the risk level of applicants and then
customize the screening and follow-up strategy.
Evidence and Case Building for Litigation
We have
developed a streamlined set of procedures to efficiently file
lawsuits against delinquent borrowers in local courts as well as
establish criminal cases against fraudulent borrowers with the
local police. In both scenarios, we must provide a robust record of
evidence that documents the loan agreement’s validity, the
borrower’s participation, and the borrower’s intent to
commit fraud (if applicable). Thus as part of our application
process, we emphasize that documents must be physically signed,
fingerprinted or stamped with the borrower's company chop,
witnessed by our service representative, and also require the
process to be documented by photo and video. Physical signatures
and multimedia records are strong evidence that we could use in
court against an uncooperative delinquent borrower. Similarly,
across all of our platforms and information systems, we keep
complete logs of all user account activity that could be provided
as evidence of the borrower committing fraud. In certain processes,
we may use facial recognition service provided by a third party to
verify the user conducting a transaction is, in fact, the
authorized and registered user named on the account We are also in
the process of implementing China’s new online arbitration
courts to deal with some of our cases against delinquent borrowers
or fraudulent borrowers. The online arbitration courts will make
all aspects of a case from lawsuit filing to mediation, hearing,
and judgment announcement accessible online and therefore save us
time and reduce the costs.
Developing Data Driven Risk Management Systems
We are
in the process of implementing credit risk models that utilize both
internal and external data sources to rate borrowers’
creditworthiness and calculate default risk for future use in our
screening process. Since China has an underdeveloped credit rating
system, we must rely on our proprietary models and alternative data
to rate and underwrite prospective borrowers. Aside from internal
data sources such as transaction history and user activity on our
platform websites, we also purchase external data such as an
applicant’s cell phone activity, bank card activity, traffic
violations record, and highway toll data. We are also in the
process of implementing a dynamic risk monitoring system to
periodically review current borrowers that may be on industry or
judiciary blacklist to identify potential frauds. Using a wide
array of data that we collect over time, we can optimize our risk
models to better calculate default risk.
Data-driven
risk management is an area in which we are striving for
improvement. Since our target customers have limited data that
could be collected and verified by reliable third parties, we are
continually experimenting with data sources that could help us
improve our data-driven anti-fraud and credit evaluation
processes.
Transaction Overview
Our
loan facilitation process is designed to ensure that our customers
can access the funds they need within a reasonable time while not
sacrificing the quality of our risk management measures. Typically,
our initial credit application process takes 1 business week, while
subsequent credit line drawdowns or loan funding requests are
processed instantaneously.
Step 1: Application Submission
In most
of our loan facilitation scenarios, a borrower completes an initial
application with one of our service representatives in person. At
this stage, we ask the borrower to submit detailed documentation
regarding the borrower’s identity and creditworthiness. The
initial application and related agreements are signed in person and
witnessed by our service representative. A video is recorded of the
borrower signing agreements and citing that he or she acknowledges
the terms and that the information submitted is accurate and
complete. We also take photographs of assets such as the
borrower’s truck with the borrower appearing in the same
frame of the vehicle. All of the applicant information is submitted
electronically via our backend management systems to our
application review department for evaluation. Regional service
centers mail hard copies of signed agreements to our headquarters
for processing and record keeping.
Step 2: Screening and Verification
After
our regional service representatives send the borrower’s
credit application to our review department,
we
conduct a series of anti-fraud checks on each credit application to
ensure the information provided is true and complete. We use
third-party data sources to check information such as the
applicant’s cell phone activity, bank card activity, business
registration, and vehicle registration. We also call the applicant
to confirm specific details over the phone as well as contact the
family members listed to ensure the contact information is valid.
If any application information is deemed to be false or incorrect,
we may contact the service representative who processed the
application to make a correction or additional in-person
validation. If we believe that an applicant purposely submitted
false information or documentation, we will terminate the
application and take additional measures to prevent the applicant
from making use of our platform.
Step 3: Credit Assessment and Approval
Applications
that clear our rigorous screening procedures move on to our credit
assessment process for final credit approval. Our loan officers
follow established credit limit policies and approve credit limits
based on the verified information and collateral pledged by the
borrower. Because all of our credit products are either
interest-free or offered at a single fixed rate, we do not conduct
risk-based pricing. For lines of credit and term loans, once we
approve a credit limit, the borrower may request a drawdown of any
amount within the credit limit either online or by conducting a
transaction on our CeraPay platform. For our installment loans,
each loan is approved based on a purchase order on our e-commerce
platform and requires the borrower to complete the purchase at the
point of sale, in person, at the merchant’s place of
business.
Step 4: Loan Listing and Funding
When a
borrower requests a loan online or conducts a credit transaction on
our network, a loan request will list on our Qingyidai peer-to-peer
lending platform for funding by retail investors. Investors will
subscribe to a loan request, and once investors fully subscribe to
a loan, we will transfer the funds after deducting fees and the
deposit to the borrower’s platform account, from which the
borrower can withdraw to his bank account for use. If a loan is not
fully subscribed before the end of the day, the Company will use a
subsidiary that is not Qingyi Technology to purchase the unfunded
portion to ensure that we can fund the borrower’s loan
request on the same day without delay.
Step 5: Servicing and Collections
We
conduct collections for scheduled loan payments through an
automated online process. Borrowers just have to deposit funds into
their platform custody account before the scheduled time on the day
of repayment. The borrower’s account is delinquent if he or
she does not remit payment at the expected time and penalties would
apply. We employ a variety of sequenced collection procedures,
including working with delinquent borrowers to structure feasible
payment plans, to ensure that we, and our investors, are
repaid.
For
borrowers across all of our loan products that have difficulty
repaying delinquent balances within a reasonable time, we also
offer our 180-day term loans as a way for these borrowers to
restructure their delinquent loans. We may negotiate with
delinquent borrowers to create a payment plan to repay a portion of
the delinquent balance after verifying the credibility and
repayment ability of these borrowers. Loan restructure can be
provided to the borrowers as long as they satisfy the conditions
requested by the Company. Facilitation fees charged for 30-day
loans are generally higher at 0.4% after restructure.
Beginning
in the fourth quarter of 2017, we began to sell certain delinquent
loans to third-party collection companies or individuals. With the
launch of the new broker network, brokers are also given the
opportunity to purchase delinquent loans. After the purchasing,
brokers are entitled to the ownership of the delinquent loans and
all the proceeds generated from the delinquent loans, such penalty
and late fees, repayments, etc. Prices for the loan sales are
negotiated on a case by case basis. Alternatively, we may sell
loans that have been delinquent for an extended period and have a
low chance of being recovered at a significant discount to recover
as much as possible. During the year of 2018, we have sold RMB 2.7
billion of delinquent loans to third parties and incurred RMB 216.5
million in gains from it. The average age of the delinquent loans
sold as of December 31, 2018, is 303 days.
Internet-Based Services: E-Commerce
We used
to have several e-commerce products targeting different vertical
markets spanning the trucking, passenger vehicle, and retail
industries. To streamline our business channels, we have closed our
old e-commerce platforms TruShip, AutoChekk, and PingPing in 2018
and consolidated their functions in our merchant-facing application
Kaiyuan Helper. We are planning to add those functions to our new
instant messaging application Haima Chat in 2019. Both are
mobile-based applications that aim to provide a robust suite of
services for our customers. Haima Chat has the added feature of a
built-in messaging application with the goal of facilitating
e-commerce. We offer our e-commerce services in conjunction with
our lending services in an effort to establish an online presence
for the merchants in our network and to help them grow their online
business.
Merchants
Merchants
in our payment and e-commerce network are primarily SMBs within the
trucking industry, while some are small retailers that have
customers that require our purchase financing services. Our
financing services support the sales efforts of our merchants by
attracting more customers that need purchase financing. In addition
to increasing merchant sales, we also help improve their cash flow
by reducing the number of customer receivables resulting from
merchants providing goods or services to their customers on credit,
a common practice in the trucking industry. For most of our
financing services, the merchant pays us a percentage of the
purchase amount as a transaction fee. The fee charged varies by
merchant type and the type of the financing service and terms.
Merchants can also invest their idle cash on our peer-to-peer
lending platform to earn additional interest income. In addition to
our financial services, merchants can also establish and manage
online stores on any of our e-commerce websites to market their
goods online.
As of
December 31, 2018, we had 63,339 active registered merchants across
all of our platforms. The majority of our merchants are located in
mid-east China as shown on the map below.
Property Lease and Management Business
We own
the Kaiyuan Finance Center, which is a 53-floor large-scale
commercial building with hotel, office and ancillary facilities,
erected on a land parcel with a site area of approximately 10,601
square meters in the central business district of Shijiazhuang,
China. The office space in the building comprises a total gross
floor area of roughly 62,701 square meters. Our corporate
headquarters is located in the building, and we lease out the space
that we do not occupy (about 54,696 square meters). As of December
31, 2018, we have leased out 95% of the area available for rent
pursuant to leases that expire on various dates through
2022.
The
Kaiyuan Finance Center also houses the Shijiazhuang Hilton Hotel.
This full-service hotel property totals over 119,000 square meters
and includes guest rooms, restaurants, conference facilities, a
fitness center, spa and an underground parking garage. The Company
has entered into a management and franchise agreement with Hilton
Worldwide Holdings Inc. to manage and operate the
hotel.
We
believe that the Kaiyuan Finance Center is one of the premier
commercial properties in Shijiazhuang, making it highly attractive
to both office tenants and hotel guests. It is currently the
tallest building in Hebei province and sits in a central location
next to a large luxury shopping mall, the Hebei Provincial Museum
and the Hebei Provincial Library. Its convenient location places it
steps away from one of Shijiazhuang’s main thoroughfares,
Zhongshan Road, where the city is running 2 subway lines up to
2018.
Our
Chairman has significant experience developing, owning and
operating real estate assets. We aim to continually improve the
operating results of our existing property through concentrated
leasing, asset management, cost control and customer service
efforts. We focus on meeting our customers’ needs and
providing them with cost-effective services such as build-to-suit
construction and space modification, including tenant improvements
and expansions. Our property competes against similar properties
located in our market primarily by location, rent, services
provided and the design, quality, amenities, and condition of the
facilities.
Customers
Our
office leasing business mainly serves corporate clients with
operations in Shijiazhuang with a need for premier office space in
the city center. We attract many financial services companies as
our tenants as well as regional divisions of large
enterprises.
Our
hotel business mainly serves individual guests, corporate guests,
ballroom event or conference attendees, third-party travel
agencies, and hotel restaurant customers. The majority of our hotel
guests are Chinese nationals; however, approximately 7% of our past
guests have been foreign nationals.
Sales & Marketing
As one
of the premier office locations in Shijiazhuang, we require little
advertisement or marketing to attract tenants for our vacant office
space at Kaiyuan Finance Center. We maintain a staff of 5 team
members to manage tenant relationships, collect lease payments,
receive inbound inquiries from prospective tenants, negotiate lease
contracts, and coordinate tenant requests. When space is available
for lease, our sales sometimes may also proactively make sales
calls to reputable local enterprises currently leasing other
comparable high-end office spaces in the area. As of December 31,
2018, approximately 95% of the office space had been leased
out.
Our
hotel business follows sales and marketing guidelines set forth by
Hilton. Our Hilton sales and marketing department consists of 21
team members responsible for executing marketing strategy and
managing sales and promotions of all hotel products including space
rentals for conferences and other corporate functions. The
marketing team routinely advertises in traditional media such as
magazines, local radio, and outdoor ads at central locations to
target local customers. We also promote through social media and
partner with banks to reach customers using their channels. The
hotel will also conduct seasonal promotions to increase food and
dining revenue as well as annual charitable events to promote the
Shijiazhuang Hilton brand.
Competition & Competitive Strengths
We face
direct competition for borrowers from a multitude of financial
institutions and lending platforms in China. In the trucking
industry, our installment loans for truck purchases competes
against other leasing companies’ services as well as
financing services provided by the manufacturer. Our 180-day term
loans compete against regional banks and private lenders that may
lend to small businesses within the trucking industry. Moreover,
our installment loans for consumer purchases of non-discretionary
goods compete directly against consumer loans offered consumer
lending platforms, consumer finance companies, micro-finance
companies, and commercial banks.
We also
face considerable competition for individual investors. We compete
with a multitude of different investment products in various asset
classes. These include but are not limited to equities, bonds,
peer-to-peer loans, investment trust products, bank savings
accounts, and real estate and alternative asset
classes.
Our
e-commerce businesses face competition from many nascent and
established internet companies. Our trucking e-commerce business
faces competition from well-funded logistics platforms such as
Manbang Group. Our consumer e-commerce business directly compete
against various consumer and new vehicle e-commerce startups or
subsidiaries of established e-commerce companies such as JD.com and
Alibaba.
Our
office leasing and hotel business face competition from other
premier office space for lease as well as internationally branded
hotel chains located in the city of Shijiazhuang.
Nevertheless,
we believe the following strengths make us competitive in this
environment:
Our experience developing proprietary credit controls and
information systems minimizes risk and potential
losses.
We have
several years of experience developing standardized underwriting
and credit control procedures. We believe that this knowledge and
expertise allows us to profitably service underserved market
segments with a minimum amount of risk. Our screening and approval
process helps to ensure that we only accept customers whom we
believe will be able to fulfill the terms of the loans facilitated
through our platform.
With
the rapid growth of our high-volume online lending platforms, we
are developing data-driven risk assessment systems in conjunction
with third-party consultants. Because we possess proprietary and
exclusive transaction data on borrowers that transact through our
e-commerce websites, we believe we have strong potential to develop
value-added risk models that will further improve our underwriting
and credit control procedures and better position us to compete in
the lending and payment processing markets.
We offer competitive rates and fees to our borrowers.
Our
30-day credit lines and 12-month purchase financing are
interest-free if borrowers are not late on their payments and our
180-day term loans currently carry an effective annual percentage
rate of 8.62%-21.63%. We believe borrowers find that our rates and
fees can significantly lower their cost of capital for their
business financing needs. We believe our financing products offers
unique opportunities for businesses and consumers to access
affordable credit at rates and with fees that that few competitors
can match.
Our nationwide broker network provides us greater borrower
access.
We
believe that our vast broker network differentiates us from our
competitors. Our bricks-and-mortar locations span a broad
geographic footprint that facilitates our sales, marketing and
service efforts with our target customers, who are located mostly
in smaller cities and rural areas that are not readily reached
through online advertising or our other media
channels.
Our management team has significant experience operating in our
industries of focus.
Our
founder started one of the earliest commercial vehicle leasing
companies in 1994 and, by the time we began winding down our legacy
commercial vehicle business in 2015, we considered ourselves the
leading provider of commercial vehicle leases to owners and
owner-operators. Key members of the founding team remain in senior
sales and risk management positions with Fincera. Over time we have
accumulated significant experience in the trucking industry and
knowledge about its participants. We also have developed a strong
reputation and many business relationships through our commercial
vehicle sales, leasing and support business. Because the trucking
industry is the primary focus of our initial strategy, we believe
our over two-decade long experience in this sector as well as
working with SMBs will be crucial to making our new Internet-based
businesses successful in this industry and others.
Additionally, our
founder has significant experience in developing, owning, and
operating real estate assets. Through Hebei Kaiyuan Real Estate
Development Co., Ltd. he has become one of the preeminent
developers of real estate in Shijiazhuang by developing several
landmark commercial and residential projects in the city center. He
leverages this expertise in owning and operating the Kaiyuan
Finance Center.
We offer flexible investment products that provide greater
liquidity for investors
Investors
that purchase any of our products are allowed to sell their
investments to other investors on a secondary market that we
operate. We determine the pricing of loans sold on the secondary
market and could adjust certain aspects of the transactions to
encourage investors to purchase secondary market investments for
increased returns.
Corporate Strategy
Leveraging
our strengths and our risk management experience, we plan to
implement the following key strategies to continue to grow our
business volume and gain market share within our target
industries.
Broaden our selection of financing and e-commerce services and
increase our market share in the trucking industry
We are
leveraging our experience in the trucking industry to expand our
product lines within the industry. In the past two years, we have
launched new products to provide financing for truck purchases,
fuel card purchases, employee payments, and highway toll fees. We
plan to expand our product offerings to serve even more trucking
related businesses such as shipping agencies and repair shops. We
hope that by connecting even more trucking SMBs with financing
through our online lending platform, we can gain additional
customers and increase our market share in the industry. With the
increased traffic to our online lending platforms, we can then
monetize these expanded services by charging transaction fees or by
using the transaction data in our risk models to further decrease
default risk and related expenses.
Expand our financial services to retail and other
industries.
As we
grow our product offerings and business volume in the trucking
industry, we plan to expand our financial services to other
consumer-facing sectors and further diversify our lending
activities. Developments such as government policies on
environmental protection and the proliferation of electric vehicles
may affect the Chinese trucking industry. We seek to diversify into
other sectors to maintain our prospects for growth in the future.
We believe that our financial products are highly adaptable for use
in retail and other industries.
Expand and diversify our investor base and offer more investment
products
The
investors currently on our platform are geographically concentrated
around the Hebei province and surrounding regions in mid-east
China. Our investor base consists mainly of individuals or small
businesses, and their average investment tends to be higher than
the industry standard as the average age of our investors is 39. We
plan to expand and diversify our investor base by increasing sales
and marketing efforts in regions where we lack investors, and we
seek to attract younger investors that may increase their
investment profile with us over time. We are also seeking
relationships with institutional investors that have lower return
expectations and can help reduce the cost of capital to our
borrowers.
Continue to improve our risk management processes and risk modeling
capabilities
We plan
to continue to monitor and refine our risk management processes to
reduce the incidence of frauds and defaults. In addition to
gathering more data from our internal process to drive improvements
in our operations, we seek to interface with more data providers
that can supply us with various forms of credit data or other
personal information of borrowers to support our anti-fraud and
risk modeling mechanisms. We plan to strengthen our data analytics
and machine-learning development team to develop and refine
additional risk models as we produce different types of loan
products targeted at customers in various industries.
Invest in our technology platforms to increase the efficiency of
our operations
We plan
to continue to invest in our development teams and technology
platforms to provide more process automation and increase the
stability of our online services. In the past year, we have adopted
DevOps, a software engineering culture and practice that aims at
unifying software development (Dev) and software operation (Ops).
The main characteristic of the DevOps movement is to strongly
advocate automation and monitoring at all steps of software
construction, from integration, testing, releasing to deployment
and infrastructure management. DevOps aims at shorter development
cycles, increased deployment frequency, more dependable releases,
in close alignment with business objectives. We have spent a
considerable effort to automate our virtual environment creation,
code integration, testing, code deployment, and feature release
processes. We will continue to implement DevOps best practices to
increase our speed of feature releases and responses to service
interruptions. By doing so, we may improve the security and
stability of our online services, which will enhance our brand
reputation in the market.
Furthermore,
because our businesses require significant interaction between our
broker network across China and our information systems, we plan to
develop more convenient mobile-enabled applications to support our
sales efforts. We also intend to invest in and use technologies to
further enhance operational efficiencies in our human resources,
finance and accounting, and marketing teams.
Maintain our status and market share as the premier office and
luxury hotel property in Shijiazhuang
We
believe that our Kaiyuan Finance Center is currently one of the
premier commercial properties in Shijiazhuang. It is the tallest
building in the Hebei province and is located in the city’s
financial and political center immediately next to the provincial
government’s offices. Office space in the Kaiyuan Finance
Center is in demand, and we have an occupancy rate of 95% as of
December 31, 2018. Our five-star, Hilton operated hotel is one of
the best five-star hotels in Hebei and was awarded Hilton’s
Connie Award in 2014 for Asia. We plan to maintain Kaiyuan Finance
Center’s status in the area by continuing to provide
excellent service to our customers. We also plan to leverage the
brand value of the Kaiyuan Finance Center to increase the brand
recognition of our online services in the region.
Increase public recognition of our brand through multi-channel
marketing
As we
continue to launch more consumer-facing online services, we plan to
increase our brand marketing through a multi-channel approach to
extend our reach beyond the trucking industry and the Hebei region
where we are based. We intend to invest prudently in online
advertising and to optimize our channel selection based on cost
efficiency. We also intend to invest in social media advertising.
We also seek to participate in more cross-platform and
cross-industry collaborations with well-branded companies that can
help elevate our brand recognition. Finally, we seek to gain brand
exposure through our offline merchant partners who may choose to
display our brand signage and promotional materials at their store
locations.
Seasonality
We
experience seasonality in both our internet and our hotel
businesses, reflecting effects from market seasonality and our
promotional activities. For our financial services, we typically
see seasonally low lending and borrowing activity around the
calendar year end and around the time of Chinese New Year when
business activity usually slows down. Consequently, we often
experience a season-high immediately after the Chinese New Year as
business activity rebounds in the spring. Also, for our
trucking-related financial and e-commerce services, we often
experience a season-high in the months of September and October, a
period regarded as high season for truck sales.
Our
hotel business typically sees decreased activity immediately before
and after the Chinese New Year when corporate clients are not as
active. Seasonal highs occur in the fourth quarter of each year as
corporate activity picks up close to year end. Food and beverage
sales also experience increases during summer and winter school
holidays from increased family activity and spending during this
period.
Capital Expenditures
Our
capital expenditure primarily includes leasehold improvements of
the Kaiyuan Finance Center that we acquired in September 2012. For
fiscal 2016 we incurred RMB4.0 million in leasehold improvement for
the Kaiyuan Finance Center. For fiscal 2017 we incurred RMB5.1
million in leasehold improvement for the Kaiyuan Finance Center.
For fiscal 2018 no leasehold improvements were incurred for the
Kaiyuan Finance Center For fiscal 2018 we incurred RMB2.5 million
in leasehold improvement for the Beijing product development and IT
office.
Discontinued Operations
In late
2015 we began winding down the operations of our commercial vehicle
sales, leasing and support business because we felt that our
Internet-based business presented both a better opportunity and a
more efficient way to operate. Our commercial vehicle sales,
leasing and support business provided commercial vehicle leasing
solutions for small and medium-sized businesses in China’s
transportation industry. We offered sales-type leases that include
after-sales service and support for Class 8 heavy trucks (gross
vehicle weight rating “GVWR” of over 33,000 lbs). Our
insurance agency business, in which we established an insurance
agency company, Shijie Kaiyuan Insurance Agency Co., Ltd
(“Kaiyuan Insurance”), to act as a direct insurance
agent in China, is part of this segment. Due to this strategic
shift, we present our commercial vehicle sales, leasing and support
business as a discontinued operation in our financial
statements.
In
2017, we accelerated the wind-down of the tail-end portfolio by
selling our registered logistics subsidiaries to third parties
along with the leasing portfolio held by these subsidiaries. As of
December 31, 2018, our remaining leasing portfolio consists of
RMB36.2 million in receivables.
Our Technology Systems
We have
established a comprehensive suite of information technology systems
to operate our various business lines. We host most of these
technology systems on Microsoft Azure’s cloud computing
platforms. We believe using Microsoft’s cloud solution would
allow us to scale capacity quickly when needed and also reduces the
operational risks and costs from maintaining a cloud infrastructure
by ourselves. Microsoft’s services offer many layers of
security and redundancy to ensure the reliability and safety of our
systems. We also maintain our own set of Docker-based platform
infrastructure used to run our internal tools and testing
environments as well as for periodic data backup. We have plans to
establish a set of self-maintained platform infrastructure to serve
as a backup service for our customers in case of interruptions in
Microsoft’s cloud service.
Our
product development and IT teams comprise of 193 employees as of
December 31, 2018 and they focus primarily on developing our
front-end and backend systems and maintaining high-performance
operations of all of our technology systems and infrastructure. Our
technology systems consist of mainly the following:
|
1.
|
Front-end systems: Customer facing services such as websites
and mobile apps developed entirely in-house by our product
development team based in Beijing. We utilize a distributed
infrastructure to allow for scalability and high availability for
all of our customer-facing applications.
|
|
2.
|
Back-end management systems: Internal management systems
used by our employees to operate the business and include systems
such as our CRM, call center, credit review, financial, and
accounting systems. Most of our back-end systems are developed
in-house as they require substantial customization for our use
cases, while some are purchased from third parties and integrated
with our core back-end management systems. We use financial
accounting software provided by SAP, office administration software
provided by Weaver Software, call center software supplied by
Udesk, reservation and point-of-sale systems provided by Hilton for
our hotel business, and Tencent’s WeChat Enterprise for
internal instant messaging.
|
|
3.
|
Development tools and monitoring systems: We have developed
many in-house tools to increase our development speed and help
improve our product quality through active monitoring. We can test
in production-like environments throughout our testing process and
deploy in production without any interruptions to our services
since we can control the traffic that can visit the newly released
features. As part of our coding practices, we insert monitoring
code on all system services and link log results to multiple
graphic-interfaces that display monitoring data and issue alerts in
real time. All of the continuous integration, continuous
deployment, and monitoring systems that we have developed allow us
to develop, test, and deploy our products quickly and
safely.
|
We
believe that improving performance, stability, and user experience
is the primary focus of our product development efforts for our
front-end systems. For our back-end systems, we hope to improve the
integration between sub-systems to create a more seamless and
efficient interface and also develop machine learning algorithms to
increase the usage of our automated and data-driven credit
assessment processes. Also, we hope to discover and purchase
additional third-party software that could help us save development
and maintenance costs on generic back-end systems that require
little customization.
Employees
As of
December 31, 2018 our employee headcount was as
follows:
|
Product
Development
|
|
|
193
|
|
|
Administrative
|
|
|
57
|
|
|
Finance
& Audit
|
|
|
55
|
|
|
Operations
& Marketing
|
|
|
40
|
|
|
Risk
Management
|
|
|
7
|
|
|
Office
Leasing Operations
|
|
|
44
|
|
|
Hotel
Operations
|
|
|
366
|
|
|
Total
|
|
|
762
|
|
As
required by laws and regulations in China, we participate in
various employee social security plans that are organized by
municipal and provincial governments, including, among other
things, housing, pension, medical insurance and unemployment
insurance. We are required under PRC 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 determined by the local government from time to time. Due to
the launch of our new brokerage business model, we cut down a great
amount of sales staff in 2018.
Insurance
We provide social security insurance including pension insurance,
unemployment insurance, work-related injury insurance and medical
insurance for our employees. We have property insurance covering
our equipment on all floors of the Kaiyuan Finance Center and also
various property insurance policies insuring the different floors
of the office space and hotel. We have also purchased terrorism
insurance and business interruption insurance for our hotel
operations. We do not maintain product liability insurance or
key-man insurance. We consider our insurance coverage to be
sufficient for our business operations in China.
Facilities
Our
headquarters is based in Shijiazhuang, the capital of Hebei
Province. We own the Kaiyuan Finance Center where our headquarters
occupy approximately 8,005 square meters of office space. We also
lease office space with an area of roughly 2,018 square meters in
Beijing for our product development and IT teams. We no longer have
company-owned stores nation-wide after the conversion to the new
broker business model completed by the end of November
2018.
Trademarks and Intellectual Property
Fincera,
CeraPay, and CeraVest are registered trademarks of the Company in
the United States. We have also been granted software copyrights in
China for four of our mobile applications. We have successfully
registered over 132 trademarks of different variations of our
current and potential product logos and names and have several
other trademark applications in China that are pending
approval.
Legal Proceedings
We may
from time to time be subject to various legal or administrative
claims and proceedings arising in the ordinary course of business.
Litigation or any other legal or administrative proceeding,
regardless of the outcome, is likely to result in substantial cost
and diversion of our resources, including our management's time and
attention. We currently are not a party to any material legal or
administrative proceedings.
Governmental Regulations
This
section sets forth a summary of the most significant rules and
regulations that affect our business activities in
China.
Because
we provide online lending services and operate e-commerce websites,
we are regulated by various government authorities, including,
among others:
|
(i)
|
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,
assisting the administration of the financing and acting as the
regulator for third party payment platforms;
|
|
(ii)
|
China
Banking and Insurance Regulatory Commission, or the CBIRC, formerly
known as China Banking Regulatory Commission, or the CBRC,
regulating financial institutions, promulgating the regulations
related to the administration of financial institutions and acting
as the regulator for the online lending industry; and
|
|
(iii)
|
the
Ministry of Industry and Information Technology, or the MIIT,
regulating the telecommunications and telecommunications-related
activities, including, but not limited to, internet information
services and other value-added telecommunication
services.
|
Regulations Relating to Online Lending Services
Regulations on Online Lending Information
Intermediaries
In July
2015, ten PRC regulatory agencies, including the PBOC, the MIIT and
the CBRC, jointly issued the Guidelines on Promoting the Healthy
Development of Internet Finance, or the Internet Finance
Guidelines. The Internet Finance Guidelines call for active
government support of China's internet finance industry, including
the online peer-to-peer lending service industry, and clarify the
division of responsibility among regulatory agencies. The Internet
Finance Guidelines specify that the CBRC will have primary
regulatory responsibility for the online peer-to-peer lending
service industry in China and state that online peer-to-peer
lending service providers shall act as an intermediary platform to
provide information exchange, matching, credit assessment and other
intermediary services, and must not provide credit enhancement
services and/or engage in illegal fundraising. The Internet Finance
Guidelines provide additional requirements for China's internet
finance industry, including the use of custody accounts with
qualified banks to hold customer funds as well as information
disclosure requirements.
In
April 2016, to further implement the requirements specified in the
Internet Finance Guidelines, the General Office of the State
Council issued the Implementation
Plan of Specific Rectification for Risks Related to Internet
Finance and fifteen regulatory agencies (including the CBRC)
issued the Implementation Plan of
Specific Rectification for Risks Related to Online Peer-to-Peer
Lending, or the Implementation Plans. The Implementation
Plans emphasize several requirements that are contemplated for the
rectification of the peer-to-peer lending service industry, which
include, among others, (i) that an online peer-to-peer lending
service provider is an information intermediary; (ii) the lending
through the online platform conducted by such service provider
meets the standards of direct lending, namely the direct lending
from individuals to individuals realized through the online
platform; (iii) the online peer-to-peer lending service provider
shall not violate regulatory "red lines", including setting up any
capital pools, financing for itself, promising on a guarantee of
principal and interest and etc.; (iv) the funds of lenders and
borrowers shall be deposited with eligible third-party custodian
accounts and (v) full, timely and objective disclosure of the
information, and the establishment of information security
measures.
In
August 2016, four PRC regulatory agencies, including the CBRC, the
MIIT, the MPS and Cyberspace Administration of China, issued the
Interim Measures for
Administration of Business Activities of Online Lending Information
Intermediaries, or the Interim Measures. The Interim
Measures define online lending information intermediaries as the
financial information intermediaries that are engaged in the online
peer-to-peer lending information business and provide lenders and
borrowers with lending information services, such as information
collection and publication, credit rating, information interaction
and loan facilitation. Consistent with the Internet Finance
Guidelines, the Interim Measures prohibit online lending
information intermediaries from providing credit enhancement
services and collecting funds directly or indirectly, and require
that, among other things, that (i) online lending information
intermediaries intending to provide online lending information
agency services and their subsidiaries and branches must make
relevant record-filing with local financial regulatory authorities
with which they are registered after obtaining the business
license; (ii) online lending information intermediaries operating
telecommunication services must apply for relevant
telecommunication service license after the completion of the
record-filing and registration with the local financial regulatory
authority; and (iii) online lending information intermediaries must
materially specify the “online lending information
intermediary” in the business scope.
The
Interim Measures list the following businesses that an online
lending information intermediary must not, by itself or on behalf
of a third party, participate in: (i) financing for themselves,
whether or not in disguised form; (ii) accepting or collecting
directly or indirectly the funds of lenders; (iii) providing
lenders with guarantees or promises on guarantees of principal and
interest directly or in disguised form; (iv) publicizing or
promoting financing projects at physical locations; (v) extending
loans, except otherwise as provided by laws and regulations; (vi)
splitting the term of any financing project; (vii) offering wealth
management and other financial products by themselves to raise
funds, and selling as an agent bank wealth management, securities
company asset management, fund, insurance or trust products and
other financial products; (viii) conducting asset securitization
business or realizing transfer of creditors' rights in the forms of
asset packaging, asset securitization, trust assets, fund shares,
etc.; (ix) engaging in any form of mixture, bundling or agency with
other institutions in investment, agency in sale, brokerage and
other business except as permitted by laws, regulations and
relevant regulatory provisions on online peer-to-peer lending; (x)
falsifying or exaggerating earnings outlooks of financing projects,
concealing the defects and risks of financing projects, making
false advertising or promotion, etc., by using ambiguous words or
other fraudulent means, fabricating or spreading false or
incomplete information impairing the business reputation of others
or otherwise misleading lenders or borrowers; (xi) providing
information intermediary services for high-risk financing which
uses the borrowed funds for investment in stocks, over-the-counter
fund distribution, futures contracts, structured funds and other
derivative products; (xii) engaging in businesses such as
crowd-funding in equity; and (xiii) other activities prohibited by
the laws, regulations and the regulatory provisions on online
peer-to-peer lending.
In
addition, the Interim Measures stipulate that online lending
information intermediaries shall not operate businesses other than
risk management and necessary business processes such as
information collection and confirmation, post-facilitation loan
management in accordance with online lending regulations, via
offline physical locations. Furthermore, the Interim Measures
provide that online lending information 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
information intermediary and from all online lending information
intermediaries. In the case of natural persons, this limit shall
not be more than RMB 200,000 (US$29,141) for one online lending
information intermediary and not more than RMB 1 million
(US$145,705) in total from all platforms, while the limit for a
legal person or organization shall not be more than RMB 1 million
(US$145,705) for one online lending information intermediary and
not more than RMB 5 million (US$728,523) in total from all
platforms. Moreover, the Interim Measures require that each online
lending information intermediary (i) separate its own capital from
funds received from lenders and borrowers and (ii) select a
qualified banking financial institution as its fund custodian
institution, which shall perform custody and administrative
responsibilities as required.
The
Interim Measures also set out certain additional requirements
applicable to online lending information intermediaries on, among
other things, the real-name registration of lenders and borrowers,
risk management procedures, internet and information security,
limits on the loan funding period (no more than 20 business days),
personal credit management, file management, lenders and borrowers
protection, prohibition on making decisions by online lending
information intermediaries on behalf of the lender without the
authorization of the lender, administration of electronic
signatures and information disclosure.
Any
violation of the Interim Measures by an online lending information
intermediary may subject such online lending information
intermediary to certain penalties as determined by applicable laws
and regulations, or by relevant government authorities if the
applicable laws and regulations are silent on the penalties. The
applicable penalties may include, but are not limited to, criminal
liabilities, warning, rectification, tainted integrity record and
fines of up to RMB 30,000 (US$4,371). If any online lending
information intermediary established prior to the implementation of
these Interim Measures fails to conform to the provisions of these
Interim Measures, the local financial regulatory authority shall
require such online lending information intermediary to make
rectification, and the rectification period shall not exceed 12
months. See "Risk Factors—Risks Related to Our
Business—If our online lending services are deemed to violate
any PRC laws or regulations governing the online lending industry
in China, our business, financial condition and results of
operations would be materially and adversely
affected."
Regulations on Record-filings of Online Lending Information
Intermediaries
In
November 2016, the CBRC, the MIIT and the General Office of the
State Administration for Industry and Commerce, jointly issued the
Guidelines on the Administration
of Record-filings of Online Lending Information Intermediary
Agencies, or the Record-filings Guidelines, to establish and
improve the record-filing mechanisms for online lending information
intermediaries.
According
to the Record-filings Guidelines, a newly established online
lending information intermediary shall make the record-filings with
the local financial regulatory authority after obtaining the
business license. With respect to any online lending information
intermediary that was established and conducting business prior to
the publication of this Record-filings Guidelines, the local
financial regulatory authority shall, pursuant to relevant
arrangement of specific rectification work for risks in online
peer-to-peer lending, accept the application for record-filings
submitted by a qualified online lending information intermediary,
or any online lending information intermediary which has completed
the rectification confirmed by relevant authorities.
In
December 2017, the Online Lending Rectification Office issued the
Notice on Rectification and
Inspection Acceptance of Risk of Online Lending Information
Intermediaries, or Circular 57, which provides for further
clarification on several matters in connection with the
rectification and record-filing of online lending information
intermediaries, including, among other things:
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Circular
57 sets forth certain requirements that an online lending
information intermediary must meet before it can qualify for the
record-filing, including: (i) an online lending information
intermediary may not conduct the "thirteen prohibited actions" or
exceed the Individual Lending Amount Limit after August 24, 2016,
and shall gradually reduce the balance; (ii) an online lending
information intermediary which has participated in businesses of
real estate mortgages, campus loans or "cash loans" is required to
suspend new loan facilitation and the outstanding balance of the
abovementioned loans shall be gradually reduced within a certain
timetable as required under CBRC Circular 26 and Circular 141; and
(iii) the online lending intermediaries are required to set up
custody accounts with qualified banks that have passed certain
testing and evaluation procedures conducted by the Online Lending
Rectification Office to hold customer funds. For the online lending
intermediaries that are unable to accomplish the rectification and
record-filing but are continuing to participate in the online
lending business, the relevant authorities shall subject online
lending intermediaries to administrative sanctions, including but
not limited to revoking their telecommunicating business operation
licenses, shutting down their business websites and requesting
financial institutions not to provide any financial services to
such online lending intermediaries.
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the
local governmental authorities shall conduct and complete
acceptance inspection of the rectification with the following
timetable: (i) completion of record-filing for major online lending
information intermediaries by the end of April 2018; (ii) with
respect to online lending information intermediaries with
substantial outstanding balance of those loans prohibited under the
relevant laws and regulations and where timely reduction of those
balance is difficult, the relevant business and outstanding balance
shall be disposed of and/or carved out, and record-filing shall be
completed by the end of May 2018; and (iii) with respect to those
online lending information intermediaries with complex and
extraordinary circumstances and substantial difficulties exist to
complete rectification, the "relevant work" shall be completed by
the end of June 2018.
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the
online lending information intermediaries shall discontinue setting
aside additional funds as risk reserve funds or originating new
risk reserve funds. In addition, the existing balance of risk
reserve funds shall be gradually reduced. Moreover, online lending
information intermediaries are prohibited from promoting their
services by publicizing the risk reserve funds, and authorities
shall actively encourage the online lending information
intermediaries to seek third parties to provide lenders with
alternate means of investor protection, including third-party
guarantee arrangements.
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On August 13, 2018, the Online Lending Rectification Office issued
the Notice on Launching Compliance Inspection on Peer-to-Peer
Online Lending Information Intermediaries, or the Circular 63, and
the Compliance Checklist for Online Lending Information
Intermediaries as specified in the Circular 63, or the Checklist
108. The Circular 63 requires all the online lending information
intermediaries shall start three
types of inspection according to the national inspection standard
list attached, including
the self-inspection conducted by the online lending information
intermediaries, the
self-discipline inspection conducted by local internet finance
associations or other local
organizations and the administrative verification conducted by the
local Online Lending
Rectification Offices.
Circular 63 states that the above-mentioned inspections and
verification shall be conducted
according to the Interim Measures, the Record-filings Guidelines,
the Custodian
Guidelines and the Disclosure Guidelines. Circular 63 highlights
and reaffirms the
top 10 areas for inspection as follows:
(i)
whether the online
lending information intermediary strictly operates as
an information
intermediary between borrowers and lenders or provides any
credit services
to the clients;
(ii)
whether the online lending information intermediary has a capital
pool or makes any payment on behalf of its users;
(iii)
whether the online
lending information intermediary is financing for its own projects,
or doing so in a disguised form;
(iv)
whether the online
lending information intermediary is offering guarantees to lenders
or promises guaranteed returns, directly or
disguisedly;
(v)
whether the online
lending information intermediary provides guaranteed repayment of
principal;
(vi)
whether the online
lending information intermediary evaluates the risk of the
borrowers and makes a hierarchy management of such
borrowers;
(vii)
whether the online
lending information intermediary fully discloses all information
regarding the risk of borrowers;
(viii)
whether the online
lending information intermediary adheres to the online lending
principle of the small-amount and scattered manner when
participating in network-based lending;
(ix)
whether the online
lending information intermediary has sold any kinds of asset
management products, or authorized any related organizations to
sell any asset management products, and
(x)
whether the online
lending information intermediary is attracting the lenders or
investors by exaggerating the earnings prospects of a financing
project.
On
August 22, 2018, the National Internet Finance Association of
China, or the NIFA, issued the Circular on Conducting the Self-Discipline and
Inspection by the Peer-to-Peer Online Lending Information
Intermediaries, or the Self-Discipline Circular and
a List of Self-inspection and
Self-rectification for P2P Online Lending Member
Intermediaries, or the Self-Discipline
Checklist, involving 119
articles. As we are a member of the NIFA and the regional Internet
Finance Association, we shall accurately fill out and submit
self-inspection and self-rectification reports.
The
Self-Discipline Circular and the Self-Discipline Checklist provide
a number of other clarifications on the internet finance
association inspection, including, among others, that members of
the NIFA shall connect their systems to the NIFA Online Finance
Inspection Platform and duly report statistics and information as
required. The reports for the self-inspection and internet finance
association inspection shall be delivered to the provincial Online
Lending Rectification Office, which will conduct ultimate
verification. Based on the results of the compliance inspections,
systems of online lending information intermediaries that are in
compliance with the applicable rules and regulations can be
integrated to industry-wide information disclosure systems and
product registration systems. Upon completion of such integration,
the online lending information intermediaries will be able to
submit filing applications pursuant to detailed standards and
procedures for record-filings. However, it remains unclear when the
detailed standards and procedures for the system integrations and
filing applications will be issued.
The
Circular 63 creates three steps to complete the compliance
inspections. The first step is to complete the submission of
Compliance Self-Inspection Report to the regional Online Lending
Rectification Office. The second step is a self-disciplinary
inspection conducted by NIFA and regional regulatory authorities.
The final step is a verification of inspection results by the
regional Online Lending Rectification Office.
We
submitted our self-inspection report pursuant to the Circular 63
and the Checklist 108 on September 17, 2018 and are in the process
of completing the next two subsequent inspections. We may also
become subject to additional requirements throughout the inspection
process. Furthermore, there can be no assurance that we ultimately
will be successful in passing the inspections by the competent
authority. As of the date of this annual report, to our knowledge, as of the date of
this annual report, none of the online lending intermediaries
including
us have been permitted to submit such filing application.
See "Risk Factors—Risks Related to Our Business—If our
online lending services are deemed to violate any PRC laws or
regulations governing the online lending industry in China, our
business, financial condition and results of operations would be
materially and adversely
affected—Record-Filing."
In
December 2018, the Internet Finance Rectification Office and the
Online Lending Rectification Office jointly issued the Opinions on Properly Performing the Work on
Category-based Disposal of Online Lending Agencies and Risk
Prevention of Online Lending Agencies, or Circular 175,
which classifies the P2P online lending platforms into six
categories by the current status of such platforms’ operation
performance and risk exposure, and aims at winding down those
non-compliant P2P online lending platforms. In accordance with the
Circular 175, those P2P online lending platforms that are
operated normally and
strictly comply with regulations are allowed to continue to conduct
the P2P online lending businesses, but should comply with certain
requirements, which include the requirement on control and decrease
of the platform’s balance of loans and number of
investors.
Regulations on Custody of Funds of Online Lending Information
Intermediaries
The
Interim Measures require an online lending information intermediary
to carry out isolated management of its proprietary funds and the
funds of lenders and borrowers and to choose an eligible banking
financial institution as the custodian institution for the funds of
lenders and borrowers. Pursuant to the Interim Measures, the
depositary shall enter into fund custodian agreements with an
online information intermediary, the borrowers, the lenders and/or
other related parties, and conduct custodian, transfer, payment,
accounting and supervision of the funds of lenders and borrowers
pursuant to such agreements.
In
February 2017, the CBRC issued the Guidelines on Online Lending Funds Custodian
Business, or the Custodian Guidelines, which define
depositories as commercial banks that provide online lending fund
custodian services, and stipulate that the depositories shall not
engage 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; and (ii) offering guarantees
to lenders, guaranteeing principal and dividend payments or bearing
the risks associated with fund lending operations for
lenders.
Apart
from the requirements set forth in the Interim Measures and the
Internet Finance Guidelines, the Custodian Guidelines impose
certain responsibilities on online lending information
intermediaries, including entering into fund custodian agreements
with only one commercial bank to provide fund custodian services,
and organizing independent audit on funds custodian accounts of
borrowers and investors and various other services. The Custodian
Guidelines also provide that online lending information
intermediaries are permitted to entrust a custodian bank to render
fund custodian services only after satisfying certain conditions,
including: (i) completing registration, filing records and
obtaining a business license from the competent industry and
commerce administration authority; (ii) filing records with the
local financial regulatory authority (but according to Circular 57
issued after the Custodian Guidelines and other relevant
regulations, opening a fund custodian account with qualified banks
may be a pre-condition for the online lending information
intermediaries to file with the local financial regulatory
authority); and (iii) applying for a corresponding
telecommunications service license pursuant with the relevant
telecommunication authorities. The Custodian Guidelines also
require online lending information intermediaries to perform
various obligations and prohibits them from advertising their
services except in accordance with certain exposure requirements,
the interpretation and applicability of which is unclear, as well
as certain oversight requirements. The Custodian Guidelines also
sets forth other business standards and miscellaneous requirements
for depositories and online lending information intermediaries.
Online lending information intermediaries and commercial banks
conducting the online custodian services prior to the effectiveness
of the Custodian Guidelines have a six-month grace period to
rectify any activities not in compliance with the Custodian
Guidelines.
Furthermore,
Circular 57 requires online lending information intermediaries to
set up custody accounts with qualified banks that have passed
certain testing and evaluation procedures run by the Online Lending
Rectification Office.
We have
entered into an agreement XWBank, under which the bank provides
custodian services for funds of borrowers and investors, we
implemented the XWBank custody program for customer funds on March
20, 2018. Though, XWBank has passed the testing and evaluation
procedures, if any new laws, regulations or rules impose additional
restrictions on our custody account arrangement with XWBank, we may
need to amend our arrangement with XWBank or seek an alternative
qualified custodian bank. See "Risk Factors—Risks Related to
Our Business—If our online lending services are deemed to
violate any PRC laws or regulations governing the online lending
industry in China, our business, financial condition and results of
operations would be materially and adversely affected—Custody
of Funds."
Regulations on Information Disclosure by Online Lending Information
Intermediaries
The
Interim Measures stipulate certain requirements on the information
disclosure by an online lending information intermediary, which
include, among other things: (i) full disclosure of the basic
information of borrowers and the financing projects, the risk
assessment results and potential risk of the projects, the use of
funds, and other related information on the official websites; and
(ii) submission of the regular information disclosure announcements
and other relevant documents to the local financial regulatory
authorities for records, and preservation of such documents at the
intermediary's domicile for inspection by the public. Pursuant to
the Interim Measures, detailed rules on the information disclosure
by an online lending information intermediary shall be formulated
separately.
In
August 2017, the General Office of the CBRC issued
the Guidelines on Information
Disclosure of the Business Activities of Online Lending Information
Intermediaries, or the Disclosure Guidelines. Consistent
with the Interim Measures, the Disclosure Guidelines emphasize the
requirement of information disclosure by an online lending
information intermediary and detail the frequency and scope of such
information disclosure. Pursuant to the Disclosure Guidelines,
online lending information service providers should disclose
certain information on their websites and all other internet
channels, including mobile applications, WeChat official accounts
or Weibo, including, among others, (i) the record-filing and
registration information, the organization information, the
examination and verification information, and transaction related
information, including transactions matched through the online
lending information service providers for the previous month, all
of which shall be disclosed to the public; (ii) the basic
information of the borrowers and the loans, the risk assessment of
such loans, and the information of the outstanding transactions
matched, all of which shall be disclosed to the investors; and
(iii) any event that would result in a material adverse effect to
the operations of online lending information providers, which shall
be disclosed to the public within 48 hours upon occurrence. The
Disclosure Guidelines also require online lending information
service providers to record all the disclosed information and
retain such information for no less than five years from the date
of the disclosure. Any violation of the Disclosure Guidelines by an
online lending information intermediary may subject the online
lending information intermediary to certain penalties under Interim
Measures. In addition, the Disclosure Guidelines require online
lending information intermediaries that do not fully comply with
the Disclosure Guidelines in conducting their business to rectify
the relevant activities within six months after the release of the
Disclosure Guidelines.
Regulations on Cash Loans
In
April 2017, the Online Lending Rectification Office issued the
Notice on the Performance of Check
and Rectification of Cash Loan Business Activities and a
supplementary notice, or the Notice on Cash Loan. The Notice on
Cash Loan requires the local branches of the Online Lending
Rectification Office to conduct a comprehensive review and
inspection of the cash loan business of online lending platforms
and require such platforms to implement necessary improvements and
remediation within a specific period to comply with the relevant
requirements under the applicable laws and regulations. The Notice
on Cash Loan focuses on preventing malicious fraudulent activities,
loans that are offered at excessive interest rates and violence in
the loan collection processes in the cash loan business operation
of online lending platforms. The Online Lending Rectification
Office also issued a list of cash loan business activities that are
to be examined.
In
December 2017, the Internet Finance Rectification Office and the
Online Lending Rectification Office jointly issued the Notice on Regulating and Rectifying "Cash
Loan" Business, or Circular 141, which specifies the
features of "cash loans" as not relying on consumption scenarios,
with no specified use of loan proceeds, no qualification
requirement on customers and unsecured, etc.
Circular
141 sets forth several general requirements with respect to the
"cash loan" business, including, without limitation, that: (i) no
organizations or individuals may conduct the lending business
without obtaining approvals for the lending business; (ii) the
aggregate borrowing costs of borrowers charged by institutions in
the forms of interest and various fees should be annualized and
subject to the limit on interest rate of private lending set forth
in 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; (iii) all
relevant institutions shall follow the "know-your-customer"
principle and prudentially assess and determine the borrower's
eligibility, credit limit and cooling-off period, etc., loans to
any borrower without income sources are prohibited; and (iv) all
relevant institutions shall enhance the internal risk control and
prudentially use the "data-driven" risk management
model.
Moreover,
Circular 141 provides that online lending information
intermediaries are prohibited from facilitating any loans to
students or other persons without repayment source or repayment
capacity, or loans with no designated use of proceeds, or
participating in the real estate mortgage business. Also, such
intermediaries are not permitted to deduct interest, handling fees,
management fees or deposits from the principal of loans provided to
the borrowers in advance. Online lending information
intermediaries shall not match or match in a disguised form any
loans in violation of the provisions on the interest
rate.
Regulations on Microcredit Companies
In May
2008, the CBRC and the PBOC jointly issued the Guiding Opinions of the China Banking
Regulatory Commission and the People’s Bank of China on the
Pilot Operation of Microcredit Companies, or the Microcredit
Companies Guidelines, which provide that a microcredit company is a
company specialized in operating a small or micro lending business,
established with investments from natural persons, legal-person
enterprises or other social organizations, and not accepting any
public deposits. Currently there is no regulatory authority at the
national level with respect to the administration and supervision
of microcredit companies in the PRC.
Pursuant
to the Microcredit Companies Guidelines, if a provincial government
determines a competent department (office of finance or relevant
organizations) to be responsible for the supervision and
administration of microcredit companies and the regulation of risks
associated with microcredit companies, such provincial government
may carry out the pilot operation of microcredit companies within
such province. The applicant is required to file an application
with the competent department of the provincial government for
approval to establish a microcredit company. The major sources of
funds of a microcredit company are required to be the capital paid
by shareholders, donated capital and the capital borrowed from a
maximum of two banking financial institutions. Furthermore, the
balance of the capital borrowed from banking financial institutions
within the scope as prescribed by applicable laws and regulations
cannot exceed 50% of the net capital.
When
granting credit, microcredit companies are required to adhere to
the principle of "small loan amounts and diversification." They are
encouraged to provide credit services for farmers and small
businesses and make greater efforts to increase their number of
clients and expand their coverage of services. The outstanding
amount of credit granted by a microcredit company to the same
borrower cannot exceed 5% of the net capital of the company.
Microcredit companies are required to operate on the
market-oriented principle. The interest ceiling is floating but
cannot exceed the ceiling prescribed by the judicatory authority,
and the interest floor is required to be 0.9 times the base
interest rate published by the PBOC. The specific floating range is
required to be determined independently according to market
principles.
In
addition, according to the Microcredit Companies Guidelines,
microcredit companies are required to establish and improve the
corporate governance structure, the loan management system, the
enterprise financial accounting system, a prudent and normative
asset classification system and provision system for accurate asset
classification and adequate provision of bad debt reserves as well
as the information disclosure system and are required to accept
public scrutiny and cannot carry out illegal fund-raising in any
form.
In July
2015, the Internet Finance Guidelines firstly defined “Online
Microcredit”, which means small-sum loans provided to
customers over the internet by internet companies through
microcredit companies under their control. Online microcredit shall
comply with existing regulatory requirements for microcredit
companies. The online microcredit business shall be subject to the
supervision and administration of the CBRC.
In
August 2015, the Legislative Affairs Office of the State Council
issued the Regulation on the
non- depository
lending institutions (Opinion Soliciting Draft). The draft regulation proposed that organizations
or individuals not licensed by regulatory authorities should be
prohibited from issuing or providing loans. In addition, for those
non-depository lending institutions that engage in lending business
through internet platforms, the draft regulation proposed to
specify that such institutions shall comply with this regulation as
well.
In
November 2017, the Internet Finance Rectification Office issued the
Notice on the Immediate Halt on
Approvals for Establishing Online Microcredit Companies, or
the Halt Notice, which states that in the recent years, select
regional governments have approved online microcredit companies to
conduct small loan businesses online, and many of these companies
have conducted high interest "cash loan" businesses that hold a
high level of potential risk. The Halt Notice orders all local
financial regulatory authorities to stop approving the
establishment of new online microcredit companies and to prohibit
all microcredit companies from conducting lending business outside
the region for which they were approved by local
authorities.
As of
December 2017, Circular 141 requires the relevant regulatory
authorities to suspend the approval of the establishment of online
microcredit companies and the approval of any microcredit business
across provinces. Circular 141 also specifies that online
microcredit companies shall not provide campus loans and should
suspend the funding of network micro-loans with no specific
scenario or designated use of loan proceeds, gradually reduce the
volume of the existing business relating to such loans and take
rectification measures in a period to be separately specified by
authorities.
In the
event that our lending platforms are considered to be
conducting direct lending, we may have to apply for the necessary
permits to operate such business. If we are required to obtain a
“microcredit approval” and establish an online
microcredit company like many other industry peers have done for
their direct lending business through the online marketplace, we
may encounter substantial obstacles as Circular 141 requires the
relevant regulatory authorities to suspend the approval of the
establishment of online microcredit companies and the approval of
any microcredit business conducted across provincial jurisdictions.
The failure to obtain such necessary approval or permit may have a
material adverse effect on our business. See "Risk
Factors—Risks Related to Our Business—If our online
lending services are considered providing direct loans to the
customers, we may have to obtain the relevant approval for such
business, and the failure to obtain such approval may have a
material adverse effect on our business."
Regulations on Third-Party Payment Providers
We rely
on commercial banks and other third-party payment providers to
manage the investor funds, originate and service loans, collect
service fees and ensure compliance with the relevant PRC laws and
regulations that may be relevant to our business. Third-party
payment agents in China are subject to oversight by the PBOC and
must comply with complex rules and regulations.
In
2010, the PBOC issued the Measures
for the Administration of Payment Services of Non-Financial
Institutions and its implementation rules, which require any
non-financial institution engaging in payment services, such as
online payment, issuance and acceptance of prepaid cards, and bill
collection via bankcard, to obtain a Payment Service License. The
registered capital of an applicant that engages in a nationwide
payment business must be at least RMB 100 million (US$14.6
million), while that of an applicant engaging in payment business
within a province must be at least RMB 30 million (US$4.4
million).
In
December 2015, the PBOC issued the Administrative Measures for Online Payment
Services of Non-Bank Payment Institutions, which provide
that a payment institution must follow the principles of "know your
clients" and establish a sound client identification mechanism. A
payment institution must not open payment accounts for financial
institutions, or other institutions engaging in financial services
such as credit extension, financing, wealth management, guarantee,
trust or currency exchange. In addition, it must not engage in,
directly or in a disguised form, businesses such as securities,
insurance, credit loans, financing, wealth management, guarantee,
trust, currency exchange, cash deposit and withdrawal
services.
In the
last few years, some third-party payment providers have been
punished by the PBOC for various violations. If our third-party
payment providers were to suspend, limit or cease their operations,
we would need to arrange substantially similar arrangements with
other third-party payment agents, and the operation of our platform
could be materially impaired and our results of operations would
suffer. See "Risk Factors—Risks Related to Our
Business—If we cannot continue to maintain relationships with
third-party service providers, or if increases in fees are incurred
by third-party service providers, our profitability could be
adversely affected."
Regulations on Private Loans
Interest Rate
The
Contract Law of the PRC (i)
governs the formation, validity, performance, enforcement and
assignment of contracts, (ii) confirms the validity of loan
agreements between individuals and provides that the loan agreement
becomes effective when the individual lender provides the loan to
the individual borrower, and (iii) 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 Private Lending Judicial Interpretations,
“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
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 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 lending information intermediary 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 online lending information intermediary 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.
In
August 2017, the Supreme People’s Court issued the
Circular of Several Suggestions on
Further Strengthening the Judicial Practice Regarding Financial
Cases, or the Financial Cases Judicial Interpretations,
which provides, among others, that: (ⅰ) the claim of the
borrower under a financial loan agreement to adjust or cut down the
part of interest exceeding 24% per annum on the basis that the
aggregate amount of interest, compound interest, default interest,
liquidated damages and other fees collectively claimed by the
lender is overly high shall be supported by the PRC courts; and
(ⅱ) in the
context of internet finance disputes, if the online lending
information intermediary platforms and the lender circumvent the
upper limit of the judicially protected interest rate by charging
intermediary fees, it shall be determined as invalid.
Circular
141 outlines general requirements on the "cash loan" business
conducted by online microcredit companies, banking financial
institutions and online lending information intermediaries.
Circular 141 requires that (i) the aggregated borrowing costs of
borrowers charged by institutions in the forms of interest and
various fees should be annualized and subject to the limit on
interest rate of private lending set forth in the Private Lending
Judicial Interpretations; and (ii) the online lending information
intermediaries are not permitted to deduct interest, handling fees,
management fees or deposits from the principal of loans provided to
the borrowers in advance.
The
effective annual percentage rate for term loans facilitated by our
platform currently ranges from 11.58% to 29.20%, which comprises a
nominal interest rate and a loan facilitation fee we charge
borrowers and takes into account the effect on cost of the late
fees and penalty fess. Moreover, our standard form of loan
agreements stipulate that if the annual percentage rate exceed the
mandatory limit for loan interest rates, the effective annual
percentage rate should be set as the mandatory limit. In addition,
we currently deduct the loan facilitation fee and certain
supervision fees (such supervision fees are only applicable to our
“Qingqing” product) in advance from the principal,
which is not in compliance with the requirements imposed by
Circular 141. We plan to re-examine our fee policies and make the
necessary changes as required by the local financial regulators.
See "Risk Factors—Risks Related to Our Business—The
transaction fees we charge borrowers and merchants may decline in
the future and any material decrease in such fees could have a
material adverse effect on our business, financial condition and
results of operations."
Intermediary Contractual Relationship
According
to the Contract Law of the
PRC, an intermediation contract is defined as a contract
whereby an intermediary present 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.
Pursuant to the same 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. The Financial Cases Judicial Interpretations
further specify that the relationship between an online lending
information intermediary and each party of an online lending loan
agreement shall be defined as an intermediary contractual
relationship, and the intermediary service fees charged by an
online lending information intermediary to circumvent the legal
limit of interest of private lending shall be invalid.
Transfer of Loans
Pursuant
to the Contract Law of the
PRC, 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 template loan agreement applicable to the lenders
and borrowers on our platform 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.
However, Circular 57 only permits the low-frequency debts transfer
between the lender and the borrower. Though there is no clear
explanation of low-frequency debts transfer, our secondary loan
market may be considered in violation of Circular 57, and we may
need to modify our products accordingly, which may have a material
adverse effect on our financial condition and results of
operations. See "Risk Factors—Risks Related to Our
Business—Limited liquidity for the loans on our marketplace
may adversely affect the appeal of our marketplace to
investors."
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.
In July
1998, the State Council promulgated the Measures for the Banning of Illegal Financial
Institutions and Illegal Financial Business Operations,
which became effective on July 1, 1998 and were amended in 2011. In
July 2007, the General Office of the State Council issued the
Notice on Relevant Issues
Concerning the Penalty on Illegal Fund-Raising. These
measures explicitly prohibit illegal public fund-raising. The main
features of illegal public fund-raising include:
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(i)
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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;
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(ii)
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promising
a return of interest or profits or investment returns in cash,
properties or other forms within a specified period of time;
and
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(iii)
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using a
legitimate form to disguise an unlawful purpose.
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In
December 2010, the Supreme People's Court issued 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, in order to further clarify the criminal charges
and punishments relating to illegal public fund-raising. 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
Criminal Law of the PRC, if
it meets all the following four criteria:
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(i)
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the
fund-raising has not been approved by the relevant authorities or
is concealed under the guise of legitimate acts;
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(ii)
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the
fund-raising employs general solicitation or advertising such as
social media, promotion meetings, leafleting and SMS
advertising;
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(iii)
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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
|
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(iv)
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the
fund-raising targets the general public as opposed to specific
individuals.
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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 (US$145,705), (ii) with over 150
fund-raising targets involved, or (iii) with direct economic loss
caused to fund-raising targets exceeding RMB500,000 (US$72,852), 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, may be considered an accomplice in the
crime of illegal fund-raising.
In
March 2014, the Supreme People's Court, the Supreme People's
Procurator and the Ministry of Public Security jointly issued 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, which provide that the
administrative proceeding for determining the nature of illegal
fund-raising activities is not a prerequisite procedure for the
initiation of criminal proceedings 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.
In
addition, the Interim Measures and the Custodian Guidelines require
each online lending information intermediary to separate its own
funds from the funds of investors and borrowers, choose one
qualified commercial bank as the fund custodian institutions for
the funds of lenders and borrowers, and limit the maximum amount of
the loan borrowed by one person. According to the Custodian
Guidelines, online lending information intermediaries are further
required to review and verify the records and information of their
custody accounts with its fund custodian institution on a daily
basis.
Though
our marketplace only acts as a service provider in the facilitation
of loans between borrowers and investors, in some situations we may
be negligently liable as a facilitator of an illegal use. See
"Risk Factors—Risks Related to Our Business—The
facilitation of loans through our marketplace could give rise to
liabilities under PRC laws and regulations that prohibit illegal
fundraising."
In
January 2019, the Supreme People's Court, the Supreme People's
Procuratorate and the Ministry of Public Security jointly issued
the Opinions on Several Issues
Concerning the Handling of Criminal Cases Involving Illegal
Fund-Raising, which provides that the people’s courts,
people’s procuratorates and public security organs shall take
the financial management laws and regulations of the State as basis
for determining the “illegality” of illegal
fund-raising. If there are only provisions in principle under the
financial management laws and regulations of the State, the
determination can be made in accordance with the spirit of the laws
and regulations and with reference to the departmental rules
formulated by the People’s Bank of China (PBOC), the China
Banking and Insurance Regulatory Commission (CBIRC), the China
Securities Regulatory Commission (CSRC) and other competent
administrative authorities in accordance with the financial
management laws and regulations of the State or financial
management provisions, measures, implementing rules and other
normative documents of the State.
Regulations on Unauthorized Public Offerings
The
Securities Law of the PRC
stipulates that no organization or individual is permitted to issue
securities for public offering without obtaining prior approval in
accordance with the provisions of the law. The following offerings
are deemed to be public offerings under the Securities Law of the PRC:
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(i)
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offering
of securities to non-specific targets;
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(ii)
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offering
of securities to more than 200 specific targets; and
|
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(iii)
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other
offerings provided by the laws and administrative
regulations.
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Additionally,
private offerings of securities shall not be carried out through
advertising, open solicitation and disguised publicity campaigns.
If any transaction between one borrower and multiple investors on
our marketplace is identified as a public offering by PRC
government authorities, we may be subject to sanctions under PRC
laws and our business may be adversely affected. See "Risk
Factors—Risks Related to Our Business—The facilitation
of loans through our marketplace could give rise to liabilities
under PRC laws and regulations that prohibit unauthorized public
offerings."
Regulations on Anti-Money Laundering and Anti-Terrorism
Financing
In
October 2006, the Standing Committee of the National People’s
Congress, or the SCNPC, promulgated the Anti-Money Laundering Law of the PRC,
which became effective on January 1, 2007 and 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
Anti-Money Laundering Law of the
PRC, financial institutions subject to the Anti-Money Laundering Law of the PRC
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
Internet Finance Guidelines require internet finance service
providers 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 implementation rules to further specify the
anti-money laundering obligations of internet finance service
providers.
The
Interim Measures and the Custodian Guidelines also require internet
finance service providers, including online lending information
intermediaries, 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.
In
December 2015, the SCNPC promulgated the Anti-Terrorism Law of the PRC, which
became effective on January 1, 2006 and requires telecoms and
internet companies to cooperate with the government on
counter-terrorism investigations. For example, companies are
required to provide "technical interfaces, decryption and other
technical support assistance to public security organs and state
security organs conducting prevention and investigation of
terrorist activities in accordance with law." In addition,
telecommunications operators and internet service providers shall,
according to provisions of law and administrative regulations, put
into practice cybersecurity systems and information content
monitoring systems, technical prevention and safety measures, to
avoid the dissemination of information with terrorist or extremist
content.
In
August 2017, the General Office of the State Council issued the
Opinions of the General Office of
the State Council on Improving Anti-Money Laundering,
Anti-Terrorism Financing and Anti-Tax Evasion Regulatory Systems
and Mechanisms, which clarify that the state will strengthen
risk monitoring over particular non-financial institutions and
explore the establishment of anti-money laundering and
anti-terrorism financing regulatory systems for particular
non-financial institutions. Anti-money laundering related
authorities should, under the principle of "one policy for one
industry", jointly with specific non-financial industry related
authorities, issue anti-money laundering and anti-terrorism
financing regulatory systems for particular
industries.
In
October 2018, the PBOC, the CBIRC and the CSRC jointly issued the
Administrative Measures on
Anti-Money Laundering and Anti-Terrorism Financing of Internet
Financial Institutions (Trial), or the Trial Measures, which
would become effective on January 1, 2019. The Trial Measures
clearly defines the scope of internet finance institutions and
requires deeper compliance requirements for internet finance
institutions, including but not limited to online payment, online
lending, online lending information intermediaries, etc. It also
stipulates five basic obligations of internet finance
practitioners: establishing and improve internal control mechanisms
for anti-money laundering and anti-terrorism financing, effectively
identifying customers, submitting large and suspicious transaction
reports, conducting monitoring of terrorism lists, and storing
customer identity information and transactions
records.
In
cooperation with our partnering custody bank and third party
payment companies, we have adopted various policies and procedures,
such as internal controls and "know-your-customer" procedures, for
anti-money laundering purposes. We are in the process of ensuring
that all of our policies and procedures fully comply with the
requirements set forth in the Interim Measures. However, the
implementation rules of the Internet Finance Guidelines have not
been published, there is uncertainty as to how the anti-money
laundering requirements in the Internet Finance Guidelines will be
interpreted and implemented, and whether online consumer finance
service providers like us must abide by the rules and procedures
set forth in the Anti-Money
Laundering Law of the PRC that are applicable to
non-financial institutions with anti-money laundering obligations
remains unclear. Therefore, we cannot assure you that our existing
anti-money laundering policies and procedures will be deemed to be
in full compliance with any anti-money laundering laws and
regulations. In addition, we cannot assure you that the anti-money
laundering policies and procedures we adopt will be effective in
protecting our marketplace from being exploited for money
laundering purposes or will be deemed to be in compliance with
applicable anti-money laundering implementation rules if and when
adopted. See "Risk Factors—Risks Related to Our
Business—If our online lending services are deemed to violate
any PRC laws or regulations governing the online lending industry
in China, our business, financial condition and results of
operations would be materially and adversely
affected—Anti-Money Laundering."
Regulations Relating to Internet-based Services
Regulations on Value-Added Telecommunication Services
In
September 2000, the State Council promulgated the Telecommunications Regulations of the
PRC, or the Telecommunications Regulations, which became
effective on September 25, 2000 and were amended in 2014 and 2016,
respectively. The Telecommunications Regulations (i) provide a
regulatory framework for telecommunications services providers in
the PRC; (ii) require telecommunications services providers to
obtain an operating license prior to the commencement of their
operations; (iii) categorize telecommunications services into basic
telecommunication services and value-added telecommunications
services. According to the Catalog
of Telecommunications Business, attached to the
Telecommunications Regulations, information services provided via
fixed network, mobile network and internet fall within value-added
telecommunications services.
In September 2000, the State Council also promulgated the
Administrative
Measures on Internet Information Services, which became effective on September
25, 2000 and were amended in 2011. Pursuant to the measures,
"internet information services" refer to provision of internet
information to online users, and are divided into "commercial
internet information services" and "non-commercial internet
information services." A commercial internet information services
operator must obtain an ICP License from the relevant government
authorities before engaging in any commercial internet information
services operations in China, while the ICP license will not be
required if the operator only provides internet information on a
non-commercial basis. The ICP License has a term of five years and
can be renewed within 90 days before
expiration.
In March 2009, the MIIT issued the Administrative
Measures on Telecommunications Business Operating
Licenses, which
became effective on April 10, 2009 and were amended in 2017 and 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, or VATS License, from the
MIIT or its provincial level counterparts, otherwise such operator
might be subject to sanctions including corrective orders and
warnings from the competent administration authority, fines and
confiscation of illegal gains and, in the case of significant
infringements, the websites may be ordered to
close.
Qingyi Technology, one of the subsidiaries of our consolidated
variable interest entity, has obtained an ICP License for provision
of commercial internet information services issued by the Hebei
Telecommunication Administration Bureau in May 2016. In addition,
the other subsidiaries of our consolidated variable interest entity
that operate online services, Beijing Yihaoche Technology and
Dianfubao Investments Limited have each applied for the applicable
VATS License and have the necessary file number to operate until
the final VATS License is granted.
Before the issuance of the Interim Measures in August 2016, there
was no clear or official regulation or guidance from the PRC
government as to whether online lending information service was a
type of value-added telecommunication services and whether its
provider should be subject to value-added telecommunication
regulations. Since then the Interim Measures came into
force, such that an
online lending information intermediary must apply for an appropriate telecommunication
business license in accordance with relevant provisions of
competent telecommunications departments. However, as the
implementation rules of the Interim Measures have not been
published, there is uncertainty as to how the registration
requirements in the Interim Measures will be interpreted and
implemented, and which type of telecommunication business operating
licenses that online lending service providers like us are required
to obtain. We plan to apply for any requisite telecommunication
services license once the detailed implementation rules become
available.
Furthermore,
as we are providing mobile applications to mobile device users, it
is uncertain if the subsidiaries of our consolidated variable
interest entity that operate mobile applications will be required
to obtain a separate operating license in addition to the ICP
License. We have not applied for such separate license. We cannot
assure you that we will not be required to apply for an operating
license for our mobile applications in the future. See "Risk
Factors—Risks Related to Doing Business in China—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."
Regulations on Mobile Internet Applications Information
Services
In June
2016, the Cyberspace Administration of China issued the
Administrative Provisions on
Mobile Internet Applications Information Services, or the
APP Provisions. Under the APP Provisions, mobile application
information service providers (including App owners or operators)
are required to obtain relevant qualifications prescribed by laws
and regulations and shall be responsible for the supervision and
administration of mobile application information required by laws
and regulations and to implement the information security
management responsibilities strictly, including but not limited
to:
(i)
authenticating
the identity information of the registered users;
(ii)
protecting
user information, and obtaining the consent of users while
collecting and using users’ personal information in a lawful
and proper manner;
(iii)
establishing
information content audit and management mechanism, and take
against any information content in violation of laws or regulations
depending on circumstances;
(iv)
establishing
and improving the verification and management mechanism for the
information content;
(v)
adopting
proper sanctions and measures relating to the release of illegal
information content;
(vi)
respecting
and protecting intellectual property rights of others;
and
(vii)
recording
and retaining users’ log information the same for sixty (60)
days.
See
"Risk Factors—Risks Related to Our Business —We may be
held liable for information or content displayed on, retrieved from
or linked to our mobile applications, which may materially and
adversely affect our business and operating results."
Regulations on Online Transactions
In
January 2014, the State Administration for Industry and Commerce,
or the SAIC, issued the Administrative Measures for Online
Transactions, or the Online Transactions Measures, which
strengthen the protection of consumers and impose stringent
requirements and obligations on online business operators and
third-party online marketplace operators. Online business operators
and third-party online marketplace operators are prohibited from
collecting any information on consumers and business operators or
disclosing, selling or providing any such information to any third
party, or sending commercial electronic messages to consumers
without their consent. Fictitious transactions, deletion of adverse
comments and technical attacks on competitors’ websites are
prohibited as well. In addition, third-party online marketplace
operators are required to examine and verify the identifications of
the online business operators and set up and retain relevant
records for at least two years. Moreover, any third-party online
marketplace operator that simultaneously engages in online trading
for products and services should clearly distinguish itself from
other online business operators on the marketplace platform. For an
entity or individual that has been registered with the SAIC or its
local counterparts and obtained a business license, if it engages
in online commodity trading and related services, it shall disclose
the information indicated in its business license or an electronic
linkage identifier of its business license at a notable position of
the homepage of its website or the web-page where it conducts its
business activities. We are subject to these measures as a result
of our online platform services.
The
Online Transaction Measures also specify that online distributors
or related service operators, as well as marketplace platform
providers, shall conduct their business in full compliance with the
Anti-Unfair Competition Law of the
PRC and other relevant PRC laws and regulations, and shall
not unfairly compete with other operators or disturb social and
economic orders, including but not limited to carrying out any
fictitious transactions and deleting any unfavorable
comments.
Regulations on E-Commerce Services
In
August 2018, the SCNPC promulgated the E-Commerce Law, which came
into effect on January 1, 2019. Pursuant to the E-Commerce Law, an
e-commerce platform operator shall (i) collect, verify and register
the truthful information of the merchants that apply to sell
products or provide services on its platform, including the
identities, addresses, contacts and licenses, establish
registration archives and update such information on a regular
basis; (ii) submit the identification information of the merchants
on its platform to SAIC and remind the merchants to complete the
registration with SAIC; (iii) submit identification information and
tax-related information to the tax authorities and remind the
merchants to complete the tax registration; (iv) record and retain
the information of the products and information on its platform and
the sales information; (v) display the platform service agreement
and the transaction rules or links to such information on the
homepage of the platform; (vi) display the information of
“self-operated” regarding the products or services
provided by the platform operator itself on its platform, and take
liabilities for such products and services; (vii) establish a
credit evaluation system, display the credit evaluation rules,
provide consumers with accesses to make comments on the products
and services provided on its platform operator that his
intellectual property rights have been infringed. An e-commerce
platform operator shall take joint liabilities with the relevant
merchants on its platform and may be subject to warning and fines
up to RMB2,000,000 where (i) it fails to take necessary measures
when it knows or should have known that the products or services
provided by the merchants on its platform do not meet the personal
or property safety requirements or such merchants’ other acts
may infringe on the lawful rights and interests of the consumers;
or (ii) it fails to take necessary measures, such as deleting and
blocking information, disconnecting, terminating transactions and
services, when it knows or should have known that the respect to
products or services affecting the consumers’ life and
health, if an e-commerce platform operator fails to verify the
merchants’ qualification or assure the consumers’
security, which results in damages to the consumers, it shall take
corresponding liabilities and may be subject to warnings and fines
up to RMB 2,000,000.
Regulations on Internet Advertising
In July
2016, the SAIC issued the Interim
Measures for Administration of Internet Advertising, or the
Internet Advertising Measures, which provide that the 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 RMB 100,000 (US$14,570) may be imposed in
accordance with the Advertising
Law of the PRC. A fine ranging from RMB 5,000 (US$729) to
RMB 30,000 (US$4,371) 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 RMB 10,000 (US$1,457) to RMB 30,000
(US$4,371).
Regulations on Cybersecurity
PRC
government authorities have enacted laws and regulations with
respect to internet information security and protection of personal
information from any abuse or unauthorized disclosure. Internet
information in China is also regulated and restricted from a
national security standpoint.
In
December 2000, the SCNPC promulgated the Decisions on Maintaining Internet
Security, which became effective on December 28, 2000 and
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 issued 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
September 2016, the MIIT issued the Trial Administrative Measures on Use,
Operation and Maintenance of Internet Information Security
Management System, or the Trial Administrative
Measures, to regulate
internet-based service providers' internet information security
management systems' operation and maintenance to provide guidance on the use,
operation and maintenance of internet information security
management systems for both local communications administrations
and internet access service providers. The "internet information
security management systems" referred to in the Trial
Administrative Measures include ministerial-level systems,
provincial-level systems, and enterprise systems constructed or
rented by telecommunications business operators operating internet
data centers (including internet resource collaboration services)
and providing internet access services and content delivery network
services. The MIIT, along with local communications
administrations, is responsible for directing, supervising and
coordinating the use and operation & maintenance of respective
levels of those systems. The Trial Administrative Measures mainly
include three parts:
(i)
use
requirements such as system data management, management of
violating websites and illegal information, and access log
management;
(ii)
operation
& maintenance requirements such as system operation monitoring,
capacity expansion and upgrade, security protection, privilege
management, audit of operational log, and data security;
and
(iii)
auxiliary
requirements such as organizational framework, education and
training, and offering assistance.
In
particular, the Trial Administrative Measures require telecom
authority and enterprises to introduce a privilege management model
for staff of the internet information security management system,
to keep an operational log and conduct audits regularly, and to
retain such log and audit record for at least six months. In
addition, enterprises are required to use their own enterprise
systems to keep access log, and provide such log within two hours
upon a lawful request of review from relevant
departments.
In
November 2016, the SCNPC promulgated the Cybersecurity Law of the PRC, or the
Cybersecurity Law, which became effective on June 1, 2017 and
requires information technology network operators, including online
lending service providers, to take technical measures and other
necessary measures to ensure the secure and stable operation of the
network, effectively respond to cyber security incidents, prevent
illegal crimes committed on the network, and maintain the
integrity, confidentiality and availability of network data. The
Cybersecurity Law emphasizes that any individuals and organizations
that use networks is required to comply with the Constitution of the PRC and the laws of
the PRC, abide by public order and cannot endanger network security
or make use of networks to engage in unlawful activities such as
endangering national security, economic order and social order, and
infringing the reputation, privacy, intellectual property rights
and other lawful rights and interests of other people. Any
violation of the provisions and requirements under the
Cybersecurity Law may subject the internet service provider to
warnings, fines, confiscation of illegal gains, revocation of
licenses, cancellation of filings, closedown of websites or even
criminal liabilities.
In
August 2017, the MIIT issued the Notice on Promulgating the Measures for
Monitoring and Handling Threats to the Cyber Security of Public
Internet, which provide that the telecommunications
authorities may take one or more measures from the following
options on cybersecurity threats:
(i)
notify
the basic telecommunication enterprises, internet enterprises, and
management and services agencies for domain name registration to
adopt measures such as suspension of services or blockage on
malicious IP address (or broadband access account), malicious
domain name, malicious URL, malicious e-mail account or malicious
mobile phone number;
(ii)
notify
the network service providers to clear the malicious programmers in
the network, system or website of their entities which may be
spread;
(iii)
notify
the providers of network services and products that have loopholes,
the back door of which may have already been illegally invaded,
controlled or altered to adopt rectification measures and to
eliminate safety risks; if the problems are related to the
infrastructures of the party and government organs and key
information, the upper authorities and the network cyberspace
administration shall also be notified.
Since
2018, cybersecurity departments of public security organs have
strengthened the enforcement and inspection of cybersecurity
protection and gradually required enterprises within the
jurisdiction to perform the duty of graded system for cybersecurity
protection. The enterprises fail to perform the duty will be turned
around or punished. The Cybersecurity Law first raised the graded
system to the legal level. The Cybersecurity Law stipulates all
operators, users or competent authorities of network information
systems with the function of networking have to implement
cybersecurity graded system and perform the duty
accordingly.
In
addition, the Internet Finance Guidelines purport, among other
things, to require online lending information intermediaries to
improve technology security standards and safeguard customer and
transaction information. The Interim Measures requires the online
lending information intermediaries, among other things, to (i)
carry out grading filing and testing for their information systems,
(ii) implement thorough cyberspace security facilities and
management measures, including firewall, intrusion detect, data
encryption, and disaster recovery, etc., (iii) establish
information technology management, technology risk management,
technology auditing and related systems, (iv) allocate sufficient
resources and implement thorough management and control measures
and technological means to ensure safe and steady operation of
their information systems, (v) protect the security of the
information of lenders and borrowers, (vi) carry out a
comprehensive security evaluation at least once every two years,
(vii) accept the information security inspection and auditing by
competent authorities, and (viii) establish or adopt
application-level disaster recovery systems and facilities
compatible with their business scales within two years after their
establishment.
Moreover,
the Interim Measures also requires online lending intermediaries to
apply for the registration of information system security
protection according to the relevant provisions of national cyber
security and the requirements of the graded protection system for
national information security. In March 2018, we conducted a
network security graded protection evaluation, and the local Public
Security Authority issued to us the Certification of Record of
Information System Security Graded Protection, under which our
system is qualified as grade three (the highest level applicable to
online lending intermediaries).
See
"Risk Factors—Risks Related to Our Business—A security
breach or malicious attack by way of hacking, cyber-attacks,
infiltration of computer viruses, physical or e-sabotage, could
damage our reputation, expose us to the risks of litigation and
liability, disrupt our business or otherwise harm our results of
operations."
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.
In
December 2011, the MIIT issued the Several Provisions on Regulating the Market
Order of Internet Information Services, pursuant to which an
internet information service provider may not collect any
user’s personal information or provide any such information
to third parties without the consent of the user. An internet
information service provider 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
internet information service provider is also required to properly
maintain the user’s personal information, and in case of any
leak or likely leak of the user’s personal information, the
internet information service provider 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
promulgated by the SCNPC 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 internet information service
provider 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 internet information service provider 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
internet information service provider to warnings, fines,
confiscation of illegal gains, revocation of licenses, cancellation
of filings, closedown of websites or even criminal
liabilities.
In
August 2015, the SCNPC promulgated the Ninth Amendment to the Criminal Law of the
PRC, pursuant to which 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 in 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 sells or provides personal information to others in a
way violating the applicable law, or steals or illegally obtain any
personal information, shall be subject to criminal penalty in
severe situations.
In May
2017, the Supreme People’s Court and the Supreme
People’s Procuratorate jointly issued the Interpretations of the Supreme People’s
Court and the Supreme People’s Procuratorate on Several
Issues Concerning the Application of Law in the Handling of
Criminal Cases Involving Infringement of Citizens’ Personal
Information, which provide more practical conviction and
sentencing criteria for the infringement of citizens’
personal information and mark a milestone for the criminal
protection of citizens’ personal information. Pursuant to the
Interpretations, the following activities may constitute the crime
of infringing upon a citizen’s personal
information:
(i)
providing
a citizen’s personal information to specified persons or
releasing a citizen’s personal information online or through
other methods in violation of relevant national
provisions;
(ii)
providing
legitimately collected information relating to a citizen to others
without such citizen’s consent (unless the information is
processed, not traceable to a specific person and not
recoverable);
(iii)
collecting
a citizen’s personal information in violation of applicable
rules and regulations when performing a duty or providing services;
or
(iv)
collecting
a citizen’s personal information by purchasing, accepting or
exchanging such information in violation of applicable rules and
regulations.
The
Cybersecurity Law has reaffirmed the basic principles and
requirements as specified in other existing laws and regulations on
personal information protections, such as the requirements on the
collection, use, processing, storage and disclosure of personal
information, and internet service providers being required to take
technical and other necessary measures to ensure the security of
the personal information they have collected and prevent the
personal information from being divulged, damaged or lost.
Moreover, the Cybersecurity Law requires network operators to
perform certain functions related to internet security protection
and the strengthening of network information management. For
instance, under the Cybersecurity 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 the
PRC.
In
December 2017, the National Information Security Standardization
Technical Committee, which is jointly administered by the
Cyberspace Administration of China and the Standardization
Administration of China, issued the Information Security Technology –
Personal Information Security Specifications, which became
effective as of May 1, 2018. Key aspects of the standard include:
(i) clarifying the rights of personal data subjects and requiring a
higher level of protection for "personal sensitive information"
than for ordinary "personal information"; (ii) requiring data
controllers to obtain "explicit consent", that is, written consent
or other affirmative action by a personal data subject, such as
electronically clicking to consent, before collecting and using
personal sensitive information; (iii) requiring network operators
to notify regulators and affected individuals of security incidents
involving an actual or potential leak, damage or loss of personal
information; (iv) obligating data controllers to carry out security
assessments of third-party data processors, and to adhere to a set
of general principles when processing personal
information.
The
standard is recommended, as opposed to mandatory, but government
agencies often refer to recommended standards when evaluating
compliance with broadly phrased laws and regulations. The standard
also contains a model privacy policy that incorporates the
principles and obligations found in the standard and provides
useful guidance for compliance purposes. Currently, our privacy
policy for our online services is modified by reference to this standard, and
we also take multiple measures by reference to this standard to
protect the personal information we gathered.
Furthermore,
the Interim Measures require online lending information
intermediaries to reinforce the management of lenders’ and
borrowers’ information, so as to ensure the legitimacy and
security regarding the collection, processing and use of
lenders’ and borrowers’ information. Also, online
lending information intermediaries should keep confidential the
lenders’ and borrowers’ information collected in the
course of their business, and should not use such information for
any other purpose except for services they provide without approval
of lenders or borrowers.
We are
currently in the process of ensuring that our policies and
procedures will be deemed to be in full compliance with the above
laws and regulations. However, we cannot assure you that our
existing policies and procedures will be deemed to be in full
compliance with any laws and regulations that are applicable, or
may become applicable to us in the future. See "Risk
Factors—Risks Related to Our Business—We may be subject
to liabilities imposed by relevant governmental regulations due to
the personal data and other confidential information of borrowers
and investors which we collect or are provided access
to."
Regulations Relating to the Trucking Industry
Regulations on Emission Standards
In
September 1987, the SCNPC promulgated the Law of the PRC on Prevention and Control of
Atmospheric Pollution, or the Atmospheric Pollution Law,
which became effective on June 1, 1988 and was amended in 1995,
2000 and 2015, respectively. According to this law, the State
adopts fiscal, tax and government procurement measures etc. to
promote energy-saving and environmental-friendly and new energy
motor vehicles and vessels, restricts the development of high fuel
consumption, high emission motor vehicles and vessels. The
Atmospheric Pollution Law also stipulates that Motor vehicles shall
not emit atmospheric pollutants beyond the standards, and
manufacturing, importation or sale of motor vehicles which emit
atmospheric pollutants beyond the standards shall be prohibited.
Motor vehicle manufacturing and importing enterprises shall post
emission inspection information for motor vehicles manufactured and
imported by them, information on pollution control techniques and
information on the relevant maintenance and repair techniques, and
they should recall the motor vehicles when it is a case of design
or manufacturing defect or non-compliance with the stipulated
requirements for sustainable environmental protection.
In
January 2016, The Ministry of Environmental Protection, or the MEP,
and the MIIT issued the Notice on
the implementation of the fifth stage motor vehicle emission
standards, the main content concerning the implementation of the
Limits and Measurement Methods for
Emissions from Light-Duty Vehicles（CHINA
5）(
GB 18352.5-2013), and the fifth stage of the Limits and measurement methods for exhaust
pollutants from compression ignition and gas fueled positive
ignition engines of vehicles（Ⅲ,
Ⅳ,
Ⅴ）(
GB 17691-2005), or the National-V standard. The National-V
standard is similar to the level V of European emission standards,
or the Euro V standard, and requires sulfur content in fuel to be
no more than 10 parts per million, one-fifth of the National
IV’s 50 ppm requirement. The notice calls for nationwide
implementation of the National V standard for light petrol vehicles
and heavy diesel vehicles used for public transportation,
environmental sanitation and postal services from January 1, 2017.
It also requires all heavy diesel vehicles across the country to
meet the standard from July 1, 2017. All light diesel vehicles
throughout China must conform to the standard from January 1,
2018.
In
December 2016, the MEP and the MIIT jointly issued the Limits and Measurement Methods for Emissions
from Light-Duty Vehicles（CHINA
6）
(GB18352.6-2016), or the National-VI standard, which will come into
effect on July 1, 2020 and replace the CHINA 5, GB 18352.5-2013. Compared to
National-V standard, National-VI standard emission limits for
heavy-duty diesel vehicles: NOx limit reduced 80% from 2.0 to 0.4
g/kWh; PM limit reduced 50% from 0.02 to 0.01 g/kWh, most
importantly, to meet this PM limit, diesel vehicles must install
wall-flow diesel particulate filters (DPFs), which trap 99% of
particles including black carbon.
If our
customers are affected by such emission regulations, we may see a
decrease in our loan volumes and an increase in default which, in
turn, would adversely and materially affect our operating results.
See "Risk Factors—Risks Related to Our
Business—Stringent regulations on the trucking industry and
the proliferation of electric vehicles as transportation tools may
have a material adverse effect on our trucking related
businesses."
Regulations on Safety Standards
In
October 2003, the SCNPC promulgated the Law of the PRC on Road Traffic Safety,
which became effective on May 1, 2004 and was amended in 2007 and
2011, respectively. Under the Law
of the PRC on Road Traffic Safety and its implementation
rules, passenger vehicles, heavy trucks and semi-trailer tractors
used for public roads operation shall be installed the national
standard vehicle driving data recorder. As to the verified loading
capacity, the cargo motor vehicle carrying capacity shall not
exceed the verified loading capacity approved by the motor vehicle
driving license, the loading length and width shall not exceed the
carriage, and shall comply with other special regulations. If a
cargo motor vehicle operator violates the relevant loading capacity
regulations, a fine of not less than 200 yuan but not more than 500
yuan shall be imposed; and if the verified loading capacity is
exceeded by 30 per cent or the vehicle carries passengers in
violation of relevant regulations, a fine of not less than 500 yuan
but not more than 2,000 yuan shall be imposed.
In
August 2016, the Ministry of Transportation issued the Administrative Provisions concerning the
Running of Cargo Vehicles with Out-of-Gauge Goods, pursuant
to which, cargo vehicles running on public roads shall not carry
cargo weighing more than the limits prescribed by this regulation
and their dimensions shall not exceed those as set forth in the
same regulation. Vehicle operators who violate this regulation may
be subject to a fine of up to RMB 30,000 for each violation. In the
event of repeated violations, the regulatory authority may suspend
the operating license of the vehicle operator and/or revoke the
business operation registration of the relevant
vehicle.
In
April 2017, the Ministry of Transportation issued the Notice of the Ministry of Transportation on
Issues concerning the Implementation of Running of Cargo Vehicles
with Out-of-Gauge Good, which further emphasizes the
strengthening of illegal over-limit transport management, and
stipulates that if the outer dimensions exceed the specified
standard for the transport of special vehicles on the public roads,
the license administration shall be implemented. See "Risk
Factors—Risks Related to Our Business—Stringent
regulations on the trucking industry and the proliferation of
electric vehicles as transportation tools may have a material
adverse effect on our trucking related businesses."
Regulations Relating to Hotel Operation
The
hotel industry in China is subject to a number of laws and
regulations, including laws and regulations relating specifically
to hotel operation and management, as
well as those relating to environmental and consumer protection. As
of the date of this Annual Report, we have complied with all such
related laws and regulations in all material respects, and we have
never been subject to any material fines or other penalties under
any such related laws and regulations. The principal regulation
governing foreign ownership of hotel businesses in the PRC
is the Guidance Catalog of
Industries for Foreign Investment, or the Foreign Investment Industry
Catalog. Pursuant to this catalog, there are no restrictions on
foreign investment in limited service hotel businesses in China
aside from business licenses and other permits that every hotel
must obtain. Relative to other industries in China, regulations
governing the hotel industry in China are still developing and
evolving. As a result, most legislative actions have consisted of
general measures such as industry standards, rules or circulars
issued by different ministries rather than detailed
legislations.
Regulations on Hotel Operation
In
April 1987, the State Council promulgated the Regulations on the Administration of Public
Area Hygiene, which became effective on April 1, 1987 and
were amended in 2016. According to these regulations, a hotel must
obtain a public area hygiene license before opening for business,
and hotels failing to obtain a public area hygiene license may be
subject to the following administrative penalties depending on the
seriousness of their respective activities: (i) warnings; (ii)
fines; or (iii) orders to suspend or cease continuing business
operations. In March 2011, the Ministry of Health issued the
Implementation Rules of the Public
Area Hygiene Administration Regulation, which became
effective on May 1, 2011 and were amended in 2016 and 2017,
respectively. According to the implementation rules, starting from
May 1, 2011, hotel operators shall establish hygiene administration
system and keep records of hygiene administration.
In
November 1987, the Ministry of Public Security issued the
Measures for the Control of
Security in the Hotel Industry, which became effective on
November 10, 1987 and were amended in 2011. Pursuant to the
Measures for the Control of
Security in the Hotel Industry and the Decision of the State Council on Establishing
Administrative License for the Administrative Examination and
Approval Items Really Necessary to Be Retained (promulgated
by the State Council in June 2004), anyone who applies
to operate a hotel is subject to examination and approval by the
local public security authority and must obtain a special industry
license. The Measures for the
Control of Security in the Hotel Industry impose certain
security control obligations on the operators. For example, the
hotel must examine the identification card of any guest to whom
accommodation is provided and make an accurate registration. The
hotel must also report to the local public security authority if it
discovers anyone violating the law or behaving suspiciously or an
offender wanted by the public security authority. Pursuant to the
Measures for the Control of
Security in the Hotel Industry, hotels failing to obtain the
special industry license may be subject to warnings or fines of up
to RMB200 (US$29). In addition, pursuant to various local
regulations, hotels failing to obtain the special industry license
may be subject to warnings, orders to suspend or cease continuing
business operations, confiscations of illegal gains or
fines.
In
April 1998, the SCNPC promulgated the Fire Prevention Law of the PRC, which
became effective on September 1, 1998 and was amended in 2008. In
April 2009, the Ministry of Public Security issued the Provisions on Supervision and Inspection on
Fire Prevention and Control, which became effective on May
1, 2009 and were amended in 2012. Pursuant to these regulations,
public gathering places such as hotels shall submit a fire
prevention design plan to apply for the completion acceptance of
fire prevention facilities for their construction projects and to
pass a fire prevention safety inspection by the local public
security fire department, which is a prerequisite for opening
business; and hotels failing to obtain approval of fire prevention
design plans or failing fire prevention safety inspections may be
subject to: (i) orders to suspend the construction of projects, use
or operation of business; and (ii) fines between RMB30,000
(US$4,371) and RMB300,000 (US$43,711).
In
January 2006, the State Council promulgated the Regulations for Administration of
Entertainment Places, which became effective on March 1,
2006 and were amended in 2016. In March 2006, the Ministry of
Culture issued the Circular on
Carrying Out the Regulations for Administration of Entertainment
Places. In February 2013, the Ministry of Culture issued the
Administrative Measures for
Entertainment Places, which became effective on March 11,
2013 and were amended in 2017. Under these regulations, hotels that
provide entertainment facilities are required to obtain a license
for entertainment business operations.
In
February 2009, the SCNPC promulgated the Food Safety Law of the PRC, which
became effective on June 1, 2009 and was amended in 2015. According
to the Food Safety Law of the
PRC, any hotel that provides food must obtain a food service
license and any food hygiene license which had been obtained prior
to June 1, 2009 will be replaced by the food service license once
the food hygiene license expires.
In
October 2010, the General Administration of Quality Supervision,
Inspection and Quarantine and Standardization Administration issued
Classification and Accreditation
for Star-rated Tourist Hotels (GB/T14308-2010), which became
effective on January 1, 2011. In November 2010, the National
Tourist Administration issued the Implementation Measures of Classification and
Accreditation for Star-rated Tourist Hotels, which became
effective on January 1, 2011. Under these regulations, all hotels
with operations of over one year are eligible to apply for a star
rating assessment. There are five ratings from one star to five
stars for tourist hotels, assessment based on the level of
facilities, management standards and quality of service. A star
rating, once granted, is valid for three years.
In
September 2012, the Ministry of Commerce, or the MOFCOM, issued the
Provisional Administrative
Measures for Single-purpose Commercial Prepaid Cards, which
became effective on November 1, 2012 and were amended in 2016.
According to the measures, if an enterprise engaged in retail,
accommodation and catering, or residential services issues any
single-purpose commercial prepaid card to its customers, it shall
undergo a record-filing procedure. For a hotel primarily engaged in
the business of accommodation, the aggregate balance of the advance
payment under the single-purpose commercial prepaid cards it issued
shall not exceed 40% of its income from its primary business in the
previous financial year.
In
April 2013, the SCNPC promulgated the Tourism Law of the PRC, which became
effective on October 1, 2013 and was amended in 2016. According to
this law, the accommodation operators shall fulfill their
obligations under the agreements with consumers. If the
accommodation operators subcontract part of their services to any
third party or involve any third party to provide services to
customers, the accommodation operators shall assume the joint and
several liabilities with the third parties for any damage caused to
the customers.
Regulations on Environmental Protection
According
to the following laws and regulations, hotels shall submit a Report
on Environmental Impact Assessment and an Application Letter for
Acceptance of Environmental Protection Facilities in Construction
Projects to competent environmental protection authorities for
approvals before commencing the operation:
(i)
Environmental Protection Law of the PRC ,promulgated by the
SCNPC in December 1989 and amended in 2014;
(ii)
Environmental Impact Assessment Law of the PRC ,promulgated
by the SCNPC in October 2002 and amended in 2016;
(iii)
Regulations Governing Environmental Protection in Construction
Projects , promulgated by the State Council in November 1998
and amended in 2017; and
(iv)
Regulations Governing Completion Acceptance of Environmental
Protection in Construction Projects , issued by the MEP in
December 2001 and amended in 2010.
Pursuant
to the Environmental Impact
Assessment Law of the PRC, any hotel failing to obtain the
approval of the Report/Form of Environmental Impact Assessment may
be ordered to cease construction and restore the property to its
original state, and according to the violation activities committed
and the harmful consequences thereof, be subject to fines of no
less than 1% but no more than 5% of the total investment amount for
the construction project of such hotel. The person directly
responsible for the project may be subject to certain
administrative penalties. Pursuant to the Regulations Governing Completion Acceptance of
Environmental Protection in Construction Projects, any hotel
failing to obtain an Acceptance of Environmental Protection
Facilities in Construction Projects may be subject to fines and an
order to obtain approval within a specified time
limit.
In June
2002, the SCNPC promulgated the Law of the PRC on Promoting Clean
Production, which became effective on January 1,
2003 and was amended in 2012. This law regulates service
enterprises such as restaurants, entertainment establishments and
hotels and requires them to use technologies and equipment that
conserve energy and water, serve other environmental protection
purposes, and reduce or stop the use of consumer goods that waste
resources or pollute the environment.
Regulations Relating to Office Leasing
In July
1994, the SCNPC promulgated the Law of the PRC on Urban Real Estate
Administration, which became effective on January 1, 1995
and was amended in 2007 and 2009, respectively. In December 2010,
the Ministry of Housing and Urban-rural Construction issued the
Administrative Measures for
Commodity House Leasing, which became effective on February
1, 2011. According to these laws and regulations, when leasing
premises, the lessor and lessee are required to enter into a
written lease contract, prescribing such provisions as the leasing
term, use of the premises, rental and repair liabilities, and other
rights and obligations of both parties. Both lessor and lessee are
also required to go through registration procedures to record the
lease with the real estate administration department. Pursuant to
these laws and regulations and various local regulations, if the
lessor and lessee fail to go through the registration procedures,
both lessor and lessee may be subject to fines, and the leasing
interest will be subordinated to an interested third party acting
in good faith.
According
to the Contract Law of the
PRC, subject to consent of the lessor, the lessee may
sublease the leased item to a third party. Where the lessee
subleases the lease item, the leasing contract between the lessee
and the lessor remains valid. The lessor is entitled to terminate
the contract if the lessee subleases the lease item without the
consent of the lessor.
Pursuant
to the Property Law of the
PRC, if a mortgagor leases the mortgaged property before the
mortgage contract is executed, the previously established leasehold
interest will not be affected by the subsequent mortgage; and where
a mortgagor leases the mortgaged property after the creation and
registration of the mortgage interest, the leasehold interest will
be subordinated to the registered mortgage.
Regulations Relating to Consumer Rights Protection
Business Operators
In
October 1993, the SCNPC promulgated the Law of the PRC on the Protection of the Rights
and Interests of Consumers, or the Consumer Protection Law,
which became effective on January 1, 1994 and was amended in 2013.
Under the Consumer Protection Law, a business operator providing a
commodity or service to a consumer is subject to a number of
requirements, including the following:
(i)
to
ensure that commodities and services meet with certain safety
requirements;
(ii)
to
protect the safety of consumers;
(iii)
to
disclose serious defects of a commodity or a service and to adopt
preventive measures against damage occurrence;
(iv)
to
provide consumers with accurate information and to refrain from
conducting false advertising;
(v)
to
obtain consents of consumers and to disclose the rules for the
collection and/or use of information when collecting data or
information from consumers; to take technical measures and other
necessary measures to protect the personal information collected
from consumers; not to divulge, sell, or illegally provide
consumers’ information to others; not to send commercial
information to consumers without the consent or request of
consumers or with a clear refusal from consumers;
(vi)
not to
set unreasonable or unfair terms for consumers or alleviate or
release itself from civil liability for harming the legal rights
and interests of consumers by means of standard contracts,
circulars, announcements, shop notices or other means;
(vii)
to
remind consumers in a conspicuous manner to pay attention to the
quality, quantity and prices or fees of commodities or services,
duration and manner of performance, safety precautions and risk
warnings, after-sales service, civil liability and other terms and
conditions vital to the interests of consumers under a standard
form of agreement prepared by the business operators, and to
provide explanations as required by consumers; and
(viii)
not to
insult or slander consumers or to search the person of, or articles
carried by, a consumer or to infringe upon the personal freedom of
a consumer.
Business
operators may be subject to civil liabilities for failing to
fulfill the obligations discussed above. These liabilities include
restoring the consumer’s reputation, eliminating the adverse
effects suffered by the consumer, and offering an apology and
compensation for any losses incurred. The following penalties may
also be imposed upon business operators for the infraction of these
obligations: issuance of a warning, confiscation of any illegal
income, imposition of a fine, an order to cease business operation,
revocation of its business license or imposition of criminal
liabilities under circumstances that are specified in laws and
statutory regulations.
Online Service Providers
The
Consumer Protection Law and the Online Transaction Measures have
provided stringent requirements and obligations on business
operators, including internet business operators and platform
service providers. For example, consumers are entitled to return
goods purchased online, subject to certain exceptions, within seven
days upon receipt of such goods for no reason. To ensure that
sellers and service providers comply with these laws and
regulations, the platform operators are required to implement rules
governing transactions on the platform, monitor the information
posted by sellers and service providers, and report any violations
by such sellers or service providers to the relevant authorities.
In addition, online marketplace platform providers may, pursuant to
the relevant PRC consumer protection laws, be exposed to
liabilities if the lawful rights and interests of consumers are
infringed upon in connection with consumers' purchase of goods or
acceptance of services on online marketplace platforms and the
online marketplace platform providers fail to provide consumers
with the contact information of the seller or manufacturer. In
addition, online marketplace platform providers may be jointly and
severally liable with sellers and manufacturers if they are aware
or should be aware that any seller or manufacturer is using the
online platform to infringe upon the lawful rights and interests of
consumers and fail to take measures necessary to prevent or stop
such activity. See "Risk Factors—Risks Related to Our
Business—We may be subject to claims under consumer
protection laws, including health and safety claims and product
liability claims, if property or people are harmed by the
merchandise and services offered on our marketplace."
In
December 2009, the SCNPC promulgated the Tort Liability Law of the PRC, which
became effective on July 1, 2010 and provides that if an online
service provider is aware that an online user is committing
infringing activities, such as selling counterfeit products,
through its internet services and fails to take necessary measures,
it shall be jointly liable with the said online user for such
infringement. If the online service provider receives any notice
from the infringed party on any infringing activities, the online
service provider shall take necessary measures, including deleting,
blocking and unlinking the infringing content, in a timely manner.
Otherwise, it will be jointly liable with the relevant online user
for the extended damages. See "Risk Factors—Risks
Related to our Business—We could be subject to allegations
and lawsuits claiming that items listed on our ecommerce websites
by merchants are pirated, counterfeit or illegal."
Hotel Operators
In
December 2003, the Supreme People’s Court issued the
Interpretation of Some Issues
Concerning the Application of Law for the Trial of Cases on
Compensation for Personal Injury, which further increases
the liabilities of business operators engaged in the operation of
hotels, restaurants, or entertainment facilities and subjects such
operators to compensatory liabilities for failing to fulfill their
statutory obligations to a reasonable extent or to guarantee the
personal safety of others.
Regulations Relating to Foreign Investment
Foreign Investment Law
On
March 15, 2019, the National People's Congress promulgated the
Foreign Investment Law, which will become effective on January 1,
2020 and replace the Sino-Foreign Equity Joint Venture Enterprise
Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and
the Foreign Owned Enterprise Law to become the legal foundation for
foreign investment in the PRC. The Foreign Investment Law
stipulates three forms of foreign investment, but does not
explicitly stipulate the contractual arrangements as a form of
foreign investment. Notwithstanding the above, the Foreign
Investment Law stipulates that the concept of a foreign investment
includes foreign investors investing in China through "any other
methods" under laws, administrative regulations, or provisions
prescribed by the State Council. Therefore, there are possibilities
that future laws, administrative regulations or provisions
prescribed by the State Council may regard contractual arrangements
as a form of foreign investment, at which time it will be uncertain
whether the contractual arrangements will be deemed to be in
violation of the foreign investment access requirements and how the
above-mentioned contractual arrangements will be handled. For the
potential impact of the Foreign Investment Law on our Company,
please see "Risk Factors—Risks Relating to Our Corporate
Structure—We face uncertainties with respect to the
implementation of the Foreign Investment Law."
Regulations on M&A by Foreign Investors
In
August 2006, six PRC regulatory agencies issued the Regulations on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, or the M&A
Rules, which became
effective on September 8, 2006 and were amended in 2009. The
M&A Rules and other recently adopted 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.
For example, the M&A Rules require that MOFCOM be notified in
advance of any change-of-control transaction in which a foreign
investor takes control of a PRC domestic enterprise, if (i) any
important industry is concerned, (ii) such transaction involves
factors that impact or may impact national economic security, or
(iii) such transaction will lead to a change in control of a
domestic enterprise which holds a famous trademark or PRC
time-honored brand.
In
August 2007, the SCNPC promulgated the Anti-Monopoly Law of the PRC, which
became effective on August 1, 2008 and requires that transactions
which are deemed concentrations and involve parties with specified
turnover thresholds must be cleared by MOFCOM before they can be
completed.
In
February 2011, the General Office of the State Council issued the
Notice of the General Office of
State Council on Establishment of Security Review System Pertaining
to Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or Circular 6, which officially established a
security review system for mergers and acquisitions of domestic
enterprises by foreign investors. In August 2011, the MOFCOM issued
the Provisions of the Ministry of
Commerce on the Implementation of the Security Review System for
Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the Security Review Regulations, to
implement Circular 6. Under Circular 6, a security review is
required for mergers and acquisitions by foreign investors having
"national defense and security" concerns and mergers and
acquisitions by which foreign investors may acquire the "de facto
control" of domestic enterprises with "national security" concerns.
Under these regulations, the MOFCOM will focus on the substance and
actual impact of the transaction when deciding whether a specific
merger or acquisition is subject to security review. If MOFCOM
decides that a specific merger or acquisition is subject to
security review, it will submit it to the Inter-Ministerial Panel,
an authority established under Circular 6 led by the National
Development and Reform Commission, or the NDRC, and MOFCOM under
the leadership of the State Council, to carry out the security
review. The Security Review regulations also prohibit foreign
investors from bypassing the security review by structuring
transactions through trusts, indirect investments, leases, loans,
control through contractual arrangements or offshore
transactions.
See
"Risk Factors—Risk Related to Doing Business in
China—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."
Regulations on Establishment of Foreign Invested
Enterprises
The
establishment, operation and management of corporate entities in
China is governed by the Company
Law of the PRC, which was promulgated by the SCNPC in
December 1993 and became effective on July 1, 1994 and was amended
in 1999, 2004, 2005 and 2013, respectively. According to the
Company Law of the PRC,
companies established in the PRC are either limited liability
companies or joint stock limited liability companies.
The
Company Law of the PRC
applies to both PRC domestic companies and foreign invested
companies. Our PRC subsidiaries, Hebei Anyong Trading and Ganglian
Finance Leasing are wholly foreign-owned enterprises, and
Chuanglian Finance Leasing is a Sino-foreign equity joint venture
enterprise under the PRC laws. The establishment procedures,
approval procedures, registered capital requirements, foreign
exchange matters, accounting practices, taxation and labor matters
of our PRC subsidiaries are regulated by the following laws and
regulations:
(i)
Wholly Foreign Owned Enterprise Law , promulgated in 1986
and amended in 2000 and 2016;
(ii)
Implementation Rules for Wholly Foreign Owned Enterprise ,
promulgated in 1990 and amended in 2001 and 2014;
(iii)
Sino-Foreign Equity Joint Venture Enterprise Law ,
promulgated in 1979 and amended in 1990, 2001 and 2016;
and
(iv)
Implementation Rules for Sino-Foreign Equity Joint Ventures
Enterprise Law Implementation Rules , promulgated in 1983
and amended in 1986, 1987, 2001, 2011 and 2014.
In
September 2016, the SCNPC promulgated the Decision of the Standing Committee of the
National People's Congress on Amending Four Laws, including
the Wholly Foreign-Owned
Enterprise Law of the PRC and the Sino-Foreign Equity Joint Venture Enterprise
Law of the PRC, which provides that the establishment of
foreign invested enterprises will be subject to the recording
administration if the implementation of special entry management
measures as prescribed by the state is not applicable.
In
October 2016, the MOFCOM issued the Interim Measures for the Record-Filing
Administration of the Establishment and Change of Foreign Invested
Enterprises, which became effective on October 8 and were
amended in 2017. According to the measures, if the establishment
and changes of foreign invested enterprises are not subject to the
approvals under the special entry management measures, they shall
be filed with the relevant authorities.
Regulations on Foreign Investment Industry Catalog
Investment
activities in the PRC by foreign investors are principally governed
by the Foreign Investment Industry Catalog, which was issued and
has been amended from time to time by the MOFCOM and the NDRC, with
the most recent revision made in 2017. Industries listed in the
Foreign Investment Industry Catalog are divided into three
categories: encouraged, restricted and prohibited. Industries not
listed in the Foreign Investment Industry 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 Foreign Investment Industry Catalog
are generally open to foreign investment unless specifically
restricted by other PRC regulations.
Moreover,
in June 2018, the NDRC and the MOFCOM promulgated the Special Management Measures for the Access of
Foreign Investment (Negative List) (2018 version), which
became effective on July 28, 2018. The Negative List repeals the
"restricted" and "prohibited" categories stipulated in the Foreign
Investment Industry Catalog. The Negative List is a list of
industries in which foreign investment is either prohibited or
restricted. For industries not included in the Negative List,
foreign investors are given equal treatment to domestic Chinese
investments, save for record-filing requirements. Restricted
industries are usually only accessible to foreign investors through
joint venture structures with Chinese companies or are restricted
through shareholding limits. In other cases, foreign investors
might need prior approval from MOFCOM to invest in a restricted
industry.
Our PRC
subsidiaries are engaged in providing many different services, some
of which fall into the "encouraged" or "permitted" category under
the Foreign Investment Industry Catalog. Our PRC subsidiaries have
obtained all material approvals required for their 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
restricted to foreign investment through the operating subsidiaries
of our consolidated variable interest entities. See "Risk
Factors—Risks related to Our Corporate
Structure—Contractual arrangements in respect of certain
companies in the PRC may be subject to challenge by the relevant
governmental authorities and may affect our investment and control
over these companies and their operations."
Regulations on Foreign Investment in Value-Added Telecommunication
Services
In
December 2001, the State Council promulgated the Provisions on Administration of Foreign
Invested Telecommunications Enterprises, which became
effective on January 1, 2002 and were amended in 2008 and 2016,
respectively. The provisions 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 to have a good and
profitable record and operating experience in this industry. Since
2015, the Foreign Investment
Industry Catalog allows 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 the
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, which we refer
to as a VATS License, is prohibited from leasing, transferring or
selling the VATS 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 VATS License
holder must have the necessary facilities for its approved business
operations and to maintain the facilities in the regions covered by
its VATS License. If a license holder fails to comply with the
requirements in the MIIT Circular and cure such non-compliance, the
MIIT or its local counterparts have the discretion to take measures
against such license holder, including revoking its VATS
License.
In
light of the above restrictions and requirements, we conduct our
value-added telecommunications businesses through subsidiaries of
our consolidated variable interest entities. See "Risk
Factors—Risks Related to Our Corporate
Structure—Contractual arrangements in respect of certain
companies in the PRC may be subject to challenge by the relevant
governmental authorities and may affect our investment and control
over these companies and their operations." and "Risks Related to
Doing Business in China—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."
Regulations on Dividend Distribution by Foreign Invested
Enterprises
Under
our current corporate structure, our Cayman Islands holding company
may rely on dividend payments from our PRC subsidiaries, including
but not limited to a wholly foreign-owned enterprise and
a Sino-foreign equity joint venture enterprise, to fund any
cash and financing requirements we may have.
Under
the relevant laws and regulation, foreign invested enterprises in
China may pay dividends only out of their accumulated profits, if
any, determined in accordance with Chinese accounting standards and
regulations. In addition, wholly foreign-owned enterprises in China
are required to set aside at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve
funds as well as employee’s bonus and welfare fund, unless
such funds have reached 50% of their respective registered capital.
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. As for the Sino-foreign
equity joint venture, the allocations for reserve funds, employee
bonus and welfare funds and development funds of the joint venture,
as well as the proportion of the allocations to such funds, are
decided by the board of directors. Profit of a foreign-invested
enterprise shall not be distributed before the losses thereof for
the previous accounting years have been made up. Profits retained
from prior fiscal years may be distributed together with
distributable profits from the current fiscal year. See "Risk
Factors—Risks Related to Doing Business in China—We
rely on dividends and other distributions on equity paid by our PRC
subsidiaries to fund any cash and financing requirements we may
have, and any limitation on the ability of our PRC subsidiaries to
make payments to us could have a material adverse effect on our
ability to conduct our business."
Regulations Relating to Foreign Exchange Controls
Regulations on Foreign Exchange Outbound
Dividend Distribution
Foreign
currency exchange in the PRC is governed by a series of
regulations, including the Foreign
Currency Administrative Rules promulgated by the State
Council in January 1996 and amended in 2008, and the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange issued by
the PBOC in June 1996. Under these 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 the State
Administration of Foreign Exchange, or the SAFE, by complying with
certain procedural requirements.
In
January 2017, the SAFE issued the Circular on Further Improving Reform of
Foreign Exchange Administration and Optimizing Genuineness and
Compliance Verification, or 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.
Offshore Loans
In
response to the persistent capital outflow and RMB's depreciation
against the U.S. dollar in the fourth quarter of 2016, the PBOC and
the SAFE have implemented a series of capital control measures over
recent months, including stricter vetting procedures for
China-based companies to remit foreign currency for overseas
acquisitions, dividend payments and shareholder loan repayments.
For instance, in November 2016, the PBOC issued the Circular on Further Clarification of Relevant
Matters Relating to Offshore RMB Loans Provided by Domestic
Enterprises, or PBOC Circular 306, which provides that
offshore RMB loans provided by a domestic enterprise to offshore
enterprises that it holds equity interests in shall not exceed 30%
of such equity interests. PBOC Circular 306 may constrain our PRC
subsidiaries' ability to provide offshore loans to us. See "Risk
Factors—Risks related to Doing Business in China—We
rely on dividends and other distributions on equity paid by our PRC
subsidiaries to fund any cash and financing requirements we may
have, and any limitation on the ability of our PRC subsidiaries to
make payments to us could have a material adverse effect on our
ability to conduct our business."
Offshore Investment
In July
2014, the SAFE issued the Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic
Residents’ Offshore Investment and Financing and Round-trip
Investment through Special Purpose Vehicles, or SAFE
Circular 37, which replaced the former circular commonly known as
"SAFE Circular 75". SAFE Circular 37 requires PRC residents to
register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC
residents’ legally owned assets or equity interests in
domestic enterprises or offshore assets or interests, referred to
in SAFE Circular 37 as a "special purpose vehicle". SAFE Circular
37 further requires amendment to the registration in the event of
any significant changes with respect to the special purpose
vehicle, such as increase or decrease of capital contributed by PRC
individuals, share transfer or exchange, merger, division or other
material event. In the event that a PRC shareholder holding
interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special
purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent
cross-border foreign exchange activities.
In
February 2015, the SAFE issued the Notice on Further Simplifying and Improving
the Administration of the Foreign Exchange Concerning Direct
Investment, or SAFE Notice 13. This notice has amended
SAFE Circular 37 by 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.
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
subsidiaries, could subject us to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit
our PRC subsidiaries’ ability to make distributions or pay
dividends to us or affect our ownership structure, which could
adversely affect our business and prospects. See "Risk
Factors—Risks related to Doing Business in China—PRC
regulations relating to offshore investment activities by PRC
residents may limit our PRC subsidiaries' 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.
Regulations on Foreign Exchange Inbound
In
November 2012, the SAFE issued 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 by revoking the approval for (i)
the opening of various special purpose foreign exchange accounts,
such as pre-establishment expenses accounts, foreign exchange
capital accounts, and guarantee accounts asset realization accounts
under direct investment; (ii) the reinvestment of domestic
legitimate RMB proceeds derived by foreign investors in the PRC;
and (iii) remittance of foreign exchange profits and dividends by a
investee enterprise of a foreign-funded investment holding company
to the foreign-funded investment holding company. In addition,
multiple capital accounts for the same entity may be opened in
different provinces, which was not possible
previously.
In May
2013, the SAFE issued the Notice
of SAFE on Promulgation of the Provisions on Foreign Exchange
Control on Direct Investments in China by Foreign Investors and
Supporting Documents, which specifies that the
administration by the 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. Where a
foreign invested enterprise needs to remit funds overseas in the
event of capital reduction, liquidation, advance recovery of
investment, profit distribution, etc., the foreign investment
enterprise may do so upon completion of the related registration
for foreign exchange purchase.
In July
2014, the SAFE issued the Notice
of the State Administration of Foreign Exchange on the Pilot Reform
of the Administrative Approach Regarding the Settlement of the
Foreign Exchange Capitals of Foreign Invested Enterprises in
Certain Areas, or SAFE Circular 36, which was repealed in
2015 and 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.
In
February 2015, the SAFE issued the Notice on Further Simplifying and Improving
the Administration of the Foreign Exchange Concerning Direct
Investment, or SAFE Notice 13, which requires the entities
and individuals to apply for foreign exchange registrations of
foreign direct investment and overseas direct investment from
qualified banks instead of applying for such approvals from the
SAFE. The qualified banks, under the supervision of the SAFE, will
directly examine the applications and conduct the
registration.
In
March 2015, the SAFE issued the Notice of the SAFE on Reforming the
Administration of Foreign Exchange Settlement of Capital of Foreign
Invested Enterprises, or SAFE Circular 19, to expand the
reform nationwide. SAFE Circular 19 came into force and replaced
both SAFE Circular 142 and SAFE Circular 36 on June 1, 2015. SAFE
Circular 19 allows foreign invested enterprises to make equity
investments by using RMB funds converted from foreign exchange
capital. However, SAFE Circular 19 continues to prohibit foreign
invested enterprises from, among other things, using RMB funds
converted from its foreign exchange capitals for expenditure beyond
its business scope, providing entrusted loans or repaying loans
between non-financial enterprises.
In June
2016, the SAFE issued the Notice
of the State Administration of Foreign Exchange on Reforming and
Standardizing the Administrative Provisions on Capital Account
Foreign Exchange Settlement, or SAFE Circular 16, which
reiterates some of the rules set forth in SAFE Circular 19, but
compared to SAFE Circular 19, SAFE Circular 16 provides that
discretionary foreign exchange settlement applies to foreign
exchange capital, foreign debt offering proceeds and remitted
foreign listing proceeds, and the corresponding RMB capital
converted from foreign exchange is not restricted from being used
to extend loans to related parties or repay inter-company loans
(including advances by third parties). However, SAFE Circular 19
and SAFE Circular 16 continue to prohibit foreign invested
enterprises from, among other things, using RMB funds converted
from their foreign exchange capitals for expenditure beyond their
business scope, investment and financing (except for security
investment or guarantee products issued by bank), providing loans
to non-affiliated enterprises or constructing or purchasing real
estate not for self-use.
See
"Risk Factors—Risks Related to Doing Business in
China—PRC regulation of loans to and direct investment in PRC
entities by offshore holding companies and governmental control of
currency conversion may delay or prevent us from making loans to or
making additional capital contributions to our PRC subsidiaries,
which could materially and adversely affect our liquidity and our
ability to fund and expand our business."
Regulations Relating to Tax
Regulations on Enterprise Income Tax
In
March 2007, the National People’s Congress of the PRC
promulgated the Enterprise Income
Tax Law of the PRC, or the ETI Law, which became effective on January 1,
2008 and was amended in 2017. The EIT Law and its implementation
rules are the principal regulations governing enterprise income tax
in the PRC. The EIT Law imposes a uniform enterprise income tax
rate of 25% on all resident enterprises in the PRC, including
foreign invested enterprises.
Uncertainties
exist with respect to how the EIT Law applies to the tax residence
status of Fincera Inc. and our offshore subsidiaries. Under the EIT
Law, an enterprise established outside China with its "de facto
management bodies" located within China is considered a "resident
enterprise", which means that it is treated in a manner similar to
a PRC domestic enterprise for enterprise income tax purposes. The
implementation rules of the EIT Law define "de facto management
body" as a managing body that in practice exercises "substantial
and overall management and control over the production and
operations, personnel, accounting, and properties" of the
enterprise.
In
April 2009, the State Administration of Taxation, or the SAT,
issued Circular of the State
Administration of Taxation on Issues Concerning the Identification
of Chinese-Controlled Overseas Registered Enterprises as Resident
Enterprises in Accordance with the Actual Standards of
Organizational Management, or SAT Circular 82, which
provides certain specific criteria for determining whether the "de
facto management body" of a PRC-controlled enterprise that is
incorporated offshore is located in China. Further to SAT Circular
82, in July 2011, the SAT issued the Administrative Measures for Income Tax of
Chinese-Controlled Resident Enterprises Registered Abroad (For
Trial Implementation), or SAT Bulletin 45, to provide more
guidance on the implementation of SAT Circular 82.
According
to SAT Circular 82, a Chinese-controlled offshore incorporated
enterprise will be regarded as a PRC tax resident by virtue of
having a "de facto management body" in China and will be subject to
PRC enterprise income tax on its worldwide income only if all of
the following criteria are met:(a) the primary location of the
day-to- day operational management is in China; (b) decisions
relating to the enterprise’s financial and human resource
matters are made or are subject to approval by organizations or
personnel in China; (c) the enterprise’s primary assets,
accounting books and records, company seals, and board and
shareholders meeting minutes are located or maintained in China;
and (d) 50% or more of voting board members or senior executives
habitually reside in China.
Although
SAT Circular 82 and SAT Bulletin 45 only apply to
offshore-incorporated enterprises controlled by PRC enterprises or
PRC enterprise groups and not those controlled by PRC individuals
or foreign persons, the determination criteria set forth therein
may reflect the SAT’s general position on how the term "de
facto management body" could be applied in determining the tax
resident status of offshore enterprises, regardless of whether they
are controlled by PRC enterprises, individuals or
foreigners.
If we
meet all of the aforesaid criteria under SAT Circular 82, we would
be treated as a “resident enterprise” for PRC tax
purposes. As we do not believe that we meet all of the criteria, so we believe that
Fincera Inc. and our offshore subsidiaries should not be treated as
a "resident enterprise" for PRC tax purposes. However, as most of
our management members are based in China, it remains unclear how
the tax residency rule will apply to our case. As the tax residency
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" as applicable
to our offshore entities, we may be treated as a resident
enterprise for PRC tax purposes under the EIT Law, and we may
therefore be subject to PRC income tax on our global income. We are
actively monitoring the possibility of "resident enterprise"
treatment for the applicable tax years and are evaluating
appropriate organizational changes to avoid this treatment, to the
extent possible. See "Risk Factors—Risks Related to Doing
Business in China—If we are classified as a PRC resident
enterprise for PRC income tax purposes, such classification could
result in unfavorable tax consequences to us and our non-PRC
shareholders."
Regulations on Withholding Tax for Dividend
Distribution
According
to the ETI 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.
In
February 2009, the SAT issued the Notice of the State Administration of Taxation
on the Issues concerning the Application of the Dividend Clauses of
Tax Agreements, or SAT Circular 81, which stipulates 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 SAT issued the Announcement of the State Administration of
Taxation on Promulgation of the Administrative Measures for
Non-Resident Taxpayers to Enjoy Treatments under Tax
Treaties, or SAT Circular 60, which became effective on
November 1, 2015. SAT 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, Fancy Think Limited, our Hong Kong
subsidiary, may be able to enjoy the 5% withholding tax rate for
the dividends they receive from our PRC subsidiaries, if it
satisfies the conditions prescribed under SAT Circular 81 and other
relevant tax rules and regulations. However, according to SAT
Circular 81 and SAT 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, then we
shall not enjoy the tax treatment prescribed in the tax treaty, the
relevant tax authorities have the right to make adjustments. See
"Risk Factors—Risks Related to Doing Business in
China—We may not be able to obtain certain benefits under
relevant tax treaty on dividends paid by our PRC subsidiaries to us
through our Hong Kong subsidiary."
Regulations on Withholding Tax for Indirect Share
Transfer
According
to the following rules, if a non-resident enterprise transfers the
equity interests of a PRC resident enterprise indirectly by
transfer of the equity interests of an offshore holding company
(other than a purchase and sale of shares issued by a PRC resident
enterprise in public securities market) without a reasonable
commercial purpose, the PRC tax authorities have the power to
reassess the nature of the transaction and the indirect equity
transfer will be treated as a direct transfer:
(i)
Notice on Strengthening Administration of Enterprise Income Tax for
Share Transfers by Non-Resident Enterprises , or SAT
Circular 698, which was issued by the SAT in December 2009 and was
repealed in 2017;
(ii)
Announcement of the SAT on Several Issues Concerning the Enterprise
Income Tax on Indirect Property Transfer by Non-Resident
Enterprises , or SAT Circular 7, which was issued by the SAT
in February 2015 and amended in 2017; and
(iii)
Announcement of the SAT on Several Issues Relating to the
Administration of Income Tax on Non-resident Enterprises, or
SAT Circular 24, which was issued by the SAT in March 2011 and was
partially repealed in 2015 and 2017.
As a
result, the gain derived from such transfer, which means the equity
transfer price less the cost of equity, will be subject to PRC
withholding tax at a rate of up to 10%. In addition, if a non-PRC
resident enterprise indirectly transfers so-called PRC Taxable
Properties, referring to properties of an establishment or a place
of business in China, real estate properties in China and equity
investments in a PRC tax resident enterprise, by disposition of the
equity interests in an overseas non-public holding company without
a reasonable commercial purpose and resulting in the avoidance of
PRC enterprise income tax, the transfer will be re-characterized as
a direct transfer of the PRC Taxable Properties and gains derived
from the transfer may be subject to a PRC withholding tax of up to
10%.
Under
the terms of Circular 7, the transfer which meets all of the
following circumstances shall be directly deemed as having no
reasonable commercial purposes: (i) over 75% of the value of the
equity interests of the offshore holding company are directly or
indirectly derived from PRC taxable properties; (ii) at any time
during the year before the indirect transfer, over 90% of the total
properties of the offshore holding company are investments within
PRC territory, or in the year before the indirect transfer, over
90% of the offshore holding company's revenue is directly or
indirectly derived from PRC territory; (iii) the function performed
and risks assumed by the offshore holding company are insufficient
to substantiate its corporate existence; or (iv) the foreign income
tax imposed on the indirect transfer is lower than the PRC tax
imposed on the direct transfer of the PRC taxable properties. On
the other hand, indirect transfers falling into the scope of the
safe harbors under SAT Circular 7 may not be subject to PRC tax.
The safe harbors include qualified group restructurings, public
market trades and exemptions under tax treaties.
In
October 2017, the SAT issued the Bulletin of SAT on Issues Concerning the
Withholding of Non-resident Enterprise Income Tax at Source,
or SAT Bulletin 37, which, among others, repeals SAT Circular 698
and certain rules stipulated in SAT Circular 7. SAT Bulletin 37
further details and clarifies the tax withholding methods in
respect of income of non-resident enterprises.
Under
the EIT Law and other applicable PRC tax regulations, payers of
PRC-sourced income to non-PRC residents are generally obligated to
withhold PRC income taxes from the payment. In the event of a
failure to withhold, the non-PRC residents are required to pay such
taxes on their own. Failure to comply with the tax payment
obligations by the non-PRC residents will result in penalties,
including full payment of taxes owed, fines and default interest on
those taxes. Pursuant to SAT Circular 7 and other PRC tax
regulations, in the case of an indirect transfer, entities or
individuals obligated to pay the transfer price to the transferor
must act as withholding agents and are required to withhold the PRC
tax from the transfer price. If they fail to do so, the seller is
required to report and pay the PRC tax to the PRC tax authorities.
If neither party complies with the tax payment or withholding
obligations under SAT Circular 7, the tax authority may impose
penalties such as late payment interest on the seller. In addition,
the tax authority may also hold the withholding agents liable and
impose a penalty of 50% to 300% of the unpaid tax on them. The
penalty imposed on the purchasers may be reduced or waived if the
withholding agents have submitted the relevant materials in
connection with the indirect transfer to the PRC tax authorities in
accordance with SAT Circular 7. See "Risk Factors—Risks
Related to Doing Business in China—We face uncertainty with
respect to indirect transfers of equity interests in PRC resident
enterprises by their non-PRC holding companies."
Regulations on Transfer Pricing and Tax
In
China, the fundamental rules on transfer pricing are provided under
the EIT Law and its implementation rules. The SAT sets out more
detailed transfer pricing rules under the tax circular of
Implementation Measures for
Special Tax Adjustments which was issued in January 2009, or
SAT Circular 2, and was partially repealed by other regulations.
Under the EIT Law, if business dealings between an enterprise and
its related parties fail to comply with the arm's length principle,
and reductions are made to the taxable income or the amount of
income of the enterprise or its interested parties, the tax
authorities have a right to make adjustments according to a
reasonable method. Where intangible assets are jointly developed or
transferred by an enterprise and its related party, or labor
services are jointly provided or received by an enterprise and its
related party, costs shall be apportioned according to the arm's
length principle when computing the taxable amount of income. The
tax authorities also have right to make adjustments if the taxable
income or amount of income of an enterprise is reduced as a result
of arrangements with no reasonable commercial
objectives.
In
March 2017, the SAT issued the Administrative Measures on Special Tax
Investigation, Adjustment and Mutual Agreement Procedure, or
SAT Notice 6, which became effective on May 1, 2017 and supersedes
the relevant provisions in implementation measures of SAT Circular
2 and certain other regulations. It provides procedures for special
tax investigation adjustments. Moreover, SAT Notice 6 reinforces
the transfer pricing administration on intercompany intangibles and
services transactions, and provides certain methods and principles
for investigations and adjustments. Taxpayers are advised to review
and adjust, if necessary, their transfer pricing policies on such
transactions to ensure compliance with the new rules. See "Risk
Factors—Risks Related to Our Corporate
Structure—Contractual arrangements in relation to our
variable interest entity, may be subject to scrutiny by the PRC tax
authorities and they may determine that we, or our variable
interest entity and its subsidiaries, owe additional taxes, which
could negatively affect our financial condition and the value of
your investment.
Regulations on Value-Added Tax
Pursuant
to applicable PRC tax regulations, any entity or individual
conducting business in the service industry is generally required
to pay a business tax at the rate of 5% on the revenues generated
from providing such services. However, pursuant to the following
pilot plan and relevant notices, VAT of a rate of 6% applied to
revenue is generally imposed in lieu of business tax in the modern
service industries, including the value-added telecommunication
service industry and online information services, on a nationwide
basis:
(i)
Pilot Plan for Imposition of Value-Added Tax to Replace Business
Tax , issued by the Ministry of Finance and the SAT in
November 2011; and
(ii)
Notice on Fully Promoting the Pilot Plan for Replacing Business Tax
by Value-Added Tax , issued by the Ministry of Finance and
the SATI in March 2016 and amended in 2017.
Unlike
business tax, a taxpayer is allowed to offset the qualified input
VAT paid on taxable purchases against the output VAT chargeable on
the modern services provided.
Regulations Relating to Intellectual Property Rights
The PRC
has adopted comprehensive legislation governing intellectual
property rights, including copyrights, patents, trademarks and
domain names. Moreover, the PRC is a signatory to major
international conventions on intellectual property rights and is
subject to the Agreement on Trade
Related Aspects of Intellectual Property Rights as a result
of its accession to the World Trade Organization in December
2001.
Copyright
The
SCNPC, the State Council and the National Copyright Administration
have promulgated various rules and regulations relating to the
protection of copyright (including copyrighted software) in the
PRC, including without limitation the Copyright Law of the PRC, which was
promulgated in September 1990 and amended in 2001 and 2010,
respectively.
Pursuant
to the Copyright Law of the
PRC and its implementation rules, creators of protected
works enjoy personal and property rights, including, among others,
the right of disseminating the works through information networks.
Internet service providers will be jointly liable with the
infringer if they (i) participate in, assist in or abet infringing
activities committed by any other person through the internet, (ii)
are or should be aware of the infringing activities committed by
their website users through the internet, or (iii) fail to remove
infringing content or take other action to eliminate infringing
consequences after receiving a warning with evidence of such
infringing activities from the copyright holder. In addition, where
an internet service operator is clearly aware of the infringement
of certain content against another’s copyright through the
internet, or fails to take measures to remove relevant contents
upon receipt of the copyright owner’s notice, and as a
result, it damages the public interest, the internet service
operator could be ordered to stop the tortious act and be subject
to other administrative penalties such as confiscation of illegal
income and fines.
According
to the Copyright Law of the
PRC and the Regulations for
the Protection of Computer Software (promulgated by the
State Council in December 2001 and amended in 2011 and 2013,
respectively), copyrights of works of foreigners and Stateless
persons vested pursuant to the agreement entered into between the
home country or the country of habitual residence of the author and
China or the international treaty to which the home country or the
country of habitual residence of the author and China are
participants shall be protected by this law. We may violate
software copyright laws if any of our employees uses unauthorized
pirated software at work, such as an unauthorized Microsoft
product. Microsoft is an American legal person, China and the
United States are members of the Berne convention, and the PRC laws
should protect the works of member states. See "Risk
Factors—Risks Related to our Business—We may be subject
to intellectual property infringement claims, which may be
expensive to defend and may disrupt our business and
operations."
Patent
The
Patent Law of the PRC
(promulgated by the SCNPC in March 1984 and amended in 1992, 2000
and 2008, respectively) provides for patentable inventions, utility
models and designs, which must meet three conditions: novelty,
inventiveness and practical applicability. The State Intellectual
Property Office under the State Council is responsible for
examining and approving patent applications. 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.
Trademark
The
Trademark Law of the PRC
(promulgated by the SCNPC in August 1982 and amended in 1993, 2001
and 2013, respectively) and its implementation rules protect
registered trademarks. The Trademark Law of the PRC has adopted a
"first-to-file" principle with respect to trademark registration.
The Trademark Office under the SAIC is responsible for the
registration and administration of trademarks throughout the PRC,
and grants a term of ten years to registered trademarks and another
ten years if requested upon expiry of the initial or extended term.
Trademark license agreements must be filed with the Trademark
Office for record.
Domain Name
Domain
names are protected under the Administrative Measures on the China Internet
Domain Names issued by the MIIT in 2004, which was replaced
by the Administrative Measures on
the Internet Domain Names effective on November 1, 2017. The
MIIT is the major regulatory authority responsible for the
administration of the PRC internet domain names. The registration
of domain names in PRC is on a "first-apply-first-registration"
basis. A domain name applicant will become the domain name holder
upon the completion of the application procedure.
Regulations Relating to Employment
Regulations on Employment
The
Labor Law of the PRC and
the Labor Contract Law of the
PRC 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. In
addition, employers must establish a system for labor safety and
sanitation, strictly abide by state standards and provide relevant
education to its employees. Employees are also required to work in
safe and sanitary conditions.
Regulations on Employee Benefit Plans
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. According to the Social
Insurance Law of the PRC promulgated by the SCNPC in October
2010, an employer that fails to make social insurance contributions
may be ordered to rectify the non-compliance and pay the required
contributions within a stipulated deadline and be subject to a late
fee of up to 0.05% or 0.2% per day, as the case may be. If the
employer still fails to rectify the failure to make social
insurance contributions within the stipulated deadline, it may be
subject to a fine ranging from one to three times the amount
overdue. In addition, the Individual Income Tax Law of the PRC
requires companies operating in China to withhold individual income
tax on employees’ salaries based on the actual salary of each
employee upon payment.
We have
not made adequate contributions to employee benefit plans in the
past, as required by applicable PRC laws and regulations. Pursuant
to the Social Insurance Law of the
PRC, the social security authority may order an enterprise
to pay the outstanding contributions within a prescribed time
limit, and may impose penalties if there is a failure to do so,
such that some of our PRC subsidiaries may be required to pay
outstanding contributions and penalties to the extent they did not
make full contributions to the social security. See "Risk
Factors—Risks Related to Doing Business in
China—Increases in labor costs in the PRC may adversely
affect our profitability."
Regulations on Stock Incentive Plans
In
February 2012, the SAFE issued the Notice of the State Administration of Foreign
Exchange on the Relevant Issues Concerning the Administration of
Foreign Exchange for Domestic Individuals' Participation in Equity
Incentive Programs of Overseas Listed Companies, or the
Stock Option Rules, which replaced the Application Procedures of Foreign Exchange
Administration for Domestic Individuals Participating in Employee
Stock Ownership Plans or Stock Option Plans of Overseas
Publicly-Listed Companies issued by the SAFE in March
2007.
Under
the Stock Option Rules and other relevant rules and regulations,
individuals participating in any stock incentive plan of any
overseas publicly listed company who are PRC citizens or non-PRC
citizens who reside in China for a continuous period of not less
than one year, subject to a few exceptions, are required to
register with SAFE through a domestic qualified agent, which could
be a PRC subsidiary of such overseas listed company, and complete
certain other procedures. In addition, the PRC agent is required to
amend the SAFE registration with respect to the stock incentive
plan if there is any material change to the stock incentive plan,
the PRC agent or other material changes. The PRC agent must, on
behalf of the PRC residents who have the right to exercise the
employee share options, apply to SAFE or its local branches for an
annual quota for the payment of foreign currencies in connection
with the PRC residents' exercise of the employee share options. The
foreign exchange proceeds received by the PRC residents from the
sale of shares under the stock incentive plans granted and
dividends distributed by the overseas listed companies must be
remitted into the bank accounts in the PRC opened by the PRC agents
before their distribution to such PRC residents.
We have
adopted a share incentive plan, under which we have the discretion
to grant a broad range of equity-based awards to eligible
participants. See "ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES—B. Compensation—Fincera Inc. 2009 Equity
Incentive Plan, Fincera Inc. 2015 Omnibus Equity Incentive Plan."
However, we cannot assure you that the participants can
successfully register with SAFE in full compliance with the Stock
Option Rules. Any failure to complete the registration pursuant to
the Stock Option Rules and other foreign exchange requirements may
subject these PRC individuals to fines and legal sanctions, and may
also limit our ability to contribute additional capital to our PRC
subsidiaries, limit our PRC subsidiaries’ ability to
distribute dividends to us or otherwise materially adversely affect
our business. See "Risk Factors—General Risks Relating to
Conducting Business in China —Any failure to comply with PRC
regulations regarding the registration requirements for employee
stock incentive plans may subject the PRC plan participants or us
to fines and other legal or administrative sanctions."
In
addition, the Ministry of Finance and the SAT have issued certain
circulars concerning employee share options and restricted shares,
including the Notice of Taxation
on Issues relating to Collection of Individual Income Tax on
Personal Income from Shares and Options issued in March
2005, the Notice of Taxation on the Issues concerning
the Imposition of Individual Income Tax on Incomes from Stock
Appreciation Right and Restricted Stock issued in January
2009. Under these circulars, our employees working in China who
exercise share options will be subject to PRC individual income
tax. Our PRC subsidiaries have obligations to file documents
related to employee share options with relevant tax authorities and
to withhold individual income taxes of those employees who exercise
their share options. If our employees fail to pay or we fail to
withhold their income taxes according to relevant laws and
regulations, we may face sanctions imposed by the tax authorities
or other PRC governmental authorities.
Periodic Reporting and Audited Financial Statements
Fincera
has registered its securities under the Securities Exchange Act of
1934 and has reporting obligations, including the requirement to
file annual reports with the SEC. In accordance with the
requirements of the Securities Exchange Act of 1934,
Fincera’s annual report contains financial statements audited
and reported on by Fincera’s independent registered public
accounting firm.
As a
foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the
furnishing and content of proxy statements. In addition, we will
not be required under the Exchange Act to file current reports with
the SEC as frequently or as promptly as United States companies
whose securities are registered under the Exchange
Act.
C. Organizational
Structure.
See
Item 4.A. “Information on the Company — A. History and
Development of the Company.”
D. Property and
Equipment.
Our
headquarters are located in Shijiazhuang, China, where we own the
Kaiyuan Finance Center building and occupy a portion of it. This
space has served as our headquarters since April 2013. Fincera
leases out the unoccupied space, consisting of 56,092 square
meters. Our principal offices are located at 27/F, Kaiyuan Finance
Center, No. 5 East Main Street, Shijiazhuang, Hebei Province,
050011, People’s Republic of China, and its telephone number
is +86 311 8382 7688.
We
lease office space with an area of roughly 2,018 square meters in
Beijing for our product development and IT teams. We also rent
approximately 8,128 square meters of office space in Shijiazhuang
headquarter.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
OVERVIEW
Fincera
Inc. (“Fincera,” the “Company,” or
“we”) is a holding company whose business operations
are conducted through its wholly owned subsidiaries, AutoChina
Group Inc. (“ACG”) and Eastern Eagle International Ltd.
ACG’s operations consist of the internet-based business,
which provides financing and e-commerce services for small and
medium-sized businesses and individuals in China, and the property
lease and management business, which leases out office space.
Eastern Eagle’s operations consist of the hotel business,
which owns the Shijiazhuang Hilton Hotel in the Kaiyuan Finance
Center building.
We were
incorporated in the Cayman Islands on October 16, 2007 under the
name “Spring Creek Acquisition Corp.” as a blank check
company formed for the purpose of acquiring, through a stock
exchange, asset acquisition or other similar business combination,
or controlling, through contractual arrangements, an operating
business, that had its principal operations in greater
China.
On
April 9, 2009, we acquired all of the outstanding securities of
ACG, an exempt company incorporated in the Cayman Islands, from
Honest Best Int’l Ltd., resulting in ACG becoming our wholly
owned subsidiary.
Prior
to our acquisition of ACG, we had no operating
business.
Loan Performance Data
We
define 90+ Days Delinquency Rates, with respect to loans
facilitated during a specified time period, which we refer to as a
vintage, as the total balance of outstanding principal and accrued
interest of loans that become over 90 days delinquent less the
total amount of recovered past due payments of principal and
accrued interest with respect
to all
loans in the same vintage that have ever become over 90 days
delinquent, divided by the total initial principal of the loans
facilitated in such vintage.
The
following chart and table display the historical lifetime
cumulative 90+ Day Delinquency Rates through March 31, 2019,
by vintage, for 180-day term loans facilitated on our
platform:
|
Months Elapsed
|
2014Q4
|
2015Q1
|
2015Q2
|
2015Q3
|
2015Q4
|
2016Q1
|
2016Q2
|
2016Q3
|
2016Q4
|
2017Q1
|
2017Q2
|
2017Q3
|
2017Q4
|
2018Q1
|
|
9
|
0.00%
|
0.00%
|
0.11%
|
0.17%
|
0.09%
|
0.41%
|
0.16%
|
0.72%
|
0.04%
|
0.06%
|
0.27%
|
0.00%
|
0.00%
|
0.14%
|
|
10
|
0.00%
|
1.57%
|
0.74%
|
1.66%
|
1.68%
|
2.90%
|
2.22%
|
3.48%
|
2.71%
|
2.39%
|
2.89%
|
0.18%
|
2.13%
|
0.85%
|
|
11
|
0.14%
|
2.87%
|
1.80%
|
3.86%
|
2.40%
|
4.12%
|
4.07%
|
6.50%
|
4.32%
|
4.30%
|
7.20%
|
4.18%
|
2.94%
|
0.85%
|
|
12
|
2.96%
|
2.39%
|
3.35%
|
5.25%
|
5.15%
|
9.22%
|
5.17%
|
8.04%
|
5.67%
|
6.07%
|
7.20%
|
5.33%
|
0.90%
|
1.99%
|
|
13
|
2.83%
|
2.06%
|
3.17%
|
4.68%
|
5.08%
|
9.09%
|
5.00%
|
7.87%
|
5.67%
|
3.20%
|
7.20%
|
6.10%
|
3.75%
|
1.09%
|
|
14
|
2.61%
|
1.97%
|
3.04%
|
4.48%
|
5.08%
|
8.75%
|
4.99%
|
7.32%
|
5.66%
|
2.61%
|
6.49%
|
5.06%
|
1.66%
|
0.96%
|
|
15
|
2.39%
|
1.94%
|
2.90%
|
4.45%
|
5.08%
|
5.68%
|
4.92%
|
7.19%
|
4.99%
|
2.61%
|
4.33%
|
2.09%
|
0.88%
|
|
|
16
|
2.21%
|
1.83%
|
2.83%
|
4.33%
|
4.92%
|
5.66%
|
4.80%
|
7.19%
|
3.05%
|
2.52%
|
4.01%
|
0.22%
|
0.59%
|
|
|
17
|
1.64%
|
1.75%
|
2.74%
|
4.27%
|
4.89%
|
5.63%
|
4.74%
|
7.19%
|
2.42%
|
2.21%
|
3.44%
|
0.18%
|
0.38%
|
|
|
18
|
1.13%
|
1.75%
|
2.70%
|
4.23%
|
4.83%
|
5.53%
|
4.72%
|
6.26%
|
2.42%
|
0.80%
|
1.50%
|
0.16%
|
0.24%
|
|
|
19
|
1.13%
|
1.75%
|
2.70%
|
4.12%
|
4.82%
|
5.44%
|
4.72%
|
2.60%
|
2.37%
|
0.64%
|
0.27%
|
0.11%
|
|
|
|
20
|
1.05%
|
1.74%
|
2.70%
|
4.12%
|
4.82%
|
5.39%
|
4.69%
|
2.21%
|
2.12%
|
0.36%
|
0.19%
|
0.06%
|
|
|
|
21
|
1.05%
|
1.69%
|
2.70%
|
4.12%
|
4.82%
|
5.32%
|
4.25%
|
2.21%
|
0.65%
|
0.21%
|
0.17%
|
0.06%
|
|
|
|
22
|
1.05%
|
1.66%
|
2.59%
|
4.12%
|
4.79%
|
5.32%
|
2.19%
|
2.08%
|
0.49%
|
0.19%
|
0.14%
|
|
|
|
|
23
|
1.05%
|
1.65%
|
2.59%
|
4.11%
|
4.68%
|
5.32%
|
2.00%
|
1.66%
|
0.32%
|
0.17%
|
0.12%
|
|
|
|
|
24
|
1.05%
|
1.65%
|
2.59%
|
4.11%
|
4.66%
|
5.12%
|
2.00%
|
0.69%
|
0.10%
|
0.15%
|
0.11%
|
|
|
|
|
25
|
1.05%
|
1.51%
|
2.54%
|
4.08%
|
4.66%
|
1.56%
|
1.95%
|
0.47%
|
0.06%
|
0.14%
|
|
|
|
|
|
26
|
1.05%
|
1.51%
|
2.53%
|
4.02%
|
4.66%
|
1.49%
|
1.67%
|
0.20%
|
0.05%
|
0.14%
|
|
|
|
|
|
27
|
1.05%
|
1.51%
|
2.53%
|
3.96%
|
4.27%
|
1.49%
|
0.93%
|
0.15%
|
0.05%
|
0.13%
|
|
|
|
|
|
28
|
1.05%
|
1.51%
|
2.53%
|
3.95%
|
1.92%
|
1.41%
|
0.63%
|
0.15%
|
0.03%
|
|
|
|
|
|
|
29
|
1.05%
|
1.51%
|
2.53%
|
3.94%
|
1.65%
|
1.14%
|
0.23%
|
0.13%
|
0.02%
|
|
|
|
|
|
|
30
|
1.05%
|
1.51%
|
2.49%
|
3.67%
|
1.65%
|
0.69%
|
0.12%
|
0.12%
|
0.01%
|
|
|
|
|
|
|
31
|
1.05%
|
1.51%
|
2.49%
|
1.86%
|
1.51%
|
0.53%
|
0.10%
|
0.11%
|
|
|
|
|
|
|
|
32
|
1.05%
|
1.51%
|
2.49%
|
1.75%
|
1.17%
|
0.39%
|
0.07%
|
0.11%
|
|
|
|
|
|
|
|
33
|
1.05%
|
1.51%
|
2.12%
|
1.75%
|
0.72%
|
0.31%
|
0.07%
|
0.06%
|
|
|
|
|
|
|
|
34
|
1.05%
|
1.51%
|
0.81%
|
1.63%
|
0.63%
|
0.31%
|
0.05%
|
|
|
|
|
|
|
|
|
35
|
1.05%
|
1.51%
|
0.78%
|
1.33%
|
0.30%
|
0.27%
|
0.04%
|
|
|
|
|
|
|
|
|
36
|
1.05%
|
1.26%
|
0.78%
|
0.88%
|
0.26%
|
0.27%
|
0.04%
|
|
|
|
|
|
|
|
|
37
|
1.05%
|
0.54%
|
0.78%
|
0.76%
|
0.26%
|
0.23%
|
|
|
|
|
|
|
|
|
|
38
|
1.05%
|
0.54%
|
0.61%
|
0.44%
|
0.21%
|
0.23%
|
|
|
|
|
|
|
|
|
|
39
|
1.05%
|
0.54%
|
0.36%
|
0.39%
|
0.21%
|
0.22%
|
|
|
|
|
|
|
|
|
|
40
|
0.62%
|
0.46%
|
0.36%
|
0.39%
|
0.16%
|
|
|
|
|
|
|
|
|
|
|
41
|
0.62%
|
0.46%
|
0.27%
|
0.35%
|
0.11%
|
|
|
|
|
|
|
|
|
|
|
42
|
0.62%
|
0.17%
|
0.26%
|
0.35%
|
0.10%
|
|
|
|
|
|
|
|
|
|
|
43
|
0.62%
|
0.15%
|
0.24%
|
0.30%
|
|
|
|
|
|
|
|
|
|
|
|
44
|
0.51%
|
0.09%
|
0.22%
|
0.29%
|
|
|
|
|
|
|
|
|
|
|
|
45
|
0.49%
|
0.02%
|
0.19%
|
0.26%
|
|
|
|
|
|
|
|
|
|
|
|
46
|
0.49%
|
0.02%
|
0.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
0.20%
|
0.02%
|
0.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
0.20%
|
0.02%
|
0.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
0.17%
|
0.02%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
0.17%
|
0.02%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
0.17%
|
0.02%
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following chart and table display the historical lifetime
cumulative 90+ Day Delinquency Rates through December 31,
2018, by vintage, for 30-day credit line loans facilitated on our
platform:
|
Months
Elapsed
|
2014Q4
|
2015Q1
|
2015Q2
|
2015Q3
|
2015Q4
|
2016Q1
|
2016Q2
|
2016Q3
|
2016Q4
|
2017Q1
|
2017Q2
|
2017Q3
|
2017Q4
|
2018Q1
|
2018Q2
|
|
4
|
0.00%
|
0.00%
|
0.02%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
5
|
0.06%
|
0.17%
|
0.77%
|
0.91%
|
0.63%
|
0.74%
|
0.42%
|
0.33%
|
0.55%
|
0.89%
|
0.44%
|
0.34%
|
0.56%
|
0.32%
|
0.21%
|
|
6
|
0.25%
|
1.88%
|
1.19%
|
1.81%
|
1.17%
|
1.60%
|
0.83%
|
0.60%
|
1.10%
|
1.52%
|
0.71%
|
0.72%
|
1.12%
|
0.48%
|
0.34%
|
|
7
|
0.92%
|
3.64%
|
2.37%
|
2.94%
|
1.71%
|
2.04%
|
1.48%
|
1.38%
|
1.85%
|
2.01%
|
0.98%
|
1.18%
|
1.43%
|
0.43%
|
0.34%
|
|
8
|
0.76%
|
3.38%
|
2.28%
|
2.76%
|
1.59%
|
1.96%
|
1.45%
|
1.38%
|
1.83%
|
1.98%
|
0.98%
|
1.17%
|
0.77%
|
0.20%
|
0.34%
|
|
9
|
0.76%
|
3.09%
|
2.22%
|
2.71%
|
1.46%
|
1.89%
|
1.42%
|
1.37%
|
1.80%
|
1.94%
|
0.98%
|
1.12%
|
0.67%
|
0.18%
|
|
|
10
|
0.76%
|
2.94%
|
2.15%
|
2.66%
|
1.42%
|
1.82%
|
1.41%
|
1.35%
|
1.76%
|
1.92%
|
0.96%
|
1.02%
|
0.66%
|
0.18%
|
|
|
11
|
0.76%
|
2.90%
|
2.07%
|
2.62%
|
1.39%
|
1.79%
|
1.40%
|
1.34%
|
1.72%
|
1.91%
|
0.92%
|
0.48%
|
0.64%
|
0.18%
|
|
|
12
|
0.76%
|
2.83%
|
2.05%
|
2.52%
|
1.36%
|
1.75%
|
1.39%
|
1.33%
|
1.70%
|
1.90%
|
0.90%
|
0.42%
|
0.64%
|
0.18%
|
|
|
13
|
0.74%
|
2.71%
|
2.01%
|
2.48%
|
1.33%
|
1.72%
|
1.37%
|
1.31%
|
1.70%
|
1.87%
|
0.81%
|
0.42%
|
0.64%
|
|
|
|
14
|
0.74%
|
2.65%
|
1.99%
|
2.46%
|
1.31%
|
1.71%
|
1.37%
|
1.30%
|
1.69%
|
1.83%
|
0.41%
|
0.42%
|
0.64%
|
|
|
|
15
|
0.74%
|
2.63%
|
1.93%
|
2.43%
|
1.29%
|
1.70%
|
1.36%
|
1.28%
|
1.69%
|
1.78%
|
0.35%
|
0.42%
|
0.64%
|
|
|
|
16
|
0.74%
|
2.59%
|
1.91%
|
2.40%
|
1.27%
|
1.67%
|
1.35%
|
1.27%
|
1.58%
|
1.58%
|
0.35%
|
0.42%
|
|
|
|
|
17
|
0.74%
|
2.55%
|
1.87%
|
2.38%
|
1.27%
|
1.65%
|
1.33%
|
1.27%
|
1.57%
|
0.66%
|
0.35%
|
0.42%
|
|
|
|
|
18
|
0.74%
|
2.39%
|
1.86%
|
2.36%
|
1.26%
|
1.63%
|
1.32%
|
1.26%
|
1.51%
|
0.58%
|
0.35%
|
0.42%
|
|
|
|
|
19
|
0.74%
|
2.35%
|
1.81%
|
2.31%
|
1.25%
|
1.62%
|
1.32%
|
1.24%
|
1.31%
|
0.58%
|
0.35%
|
|
|
|
|
|
20
|
0.74%
|
2.33%
|
1.79%
|
2.30%
|
1.24%
|
1.60%
|
1.31%
|
1.23%
|
0.54%
|
0.58%
|
0.35%
|
|
|
|
|
|
21
|
0.74%
|
2.25%
|
1.77%
|
2.29%
|
1.23%
|
1.56%
|
1.31%
|
1.18%
|
0.47%
|
0.58%
|
0.35%
|
|
|
|
|
|
22
|
0.74%
|
2.17%
|
1.75%
|
2.26%
|
1.22%
|
1.54%
|
1.28%
|
1.06%
|
0.47%
|
0.58%
|
|
|
|
|
|
|
23
|
0.74%
|
2.16%
|
1.75%
|
2.24%
|
1.21%
|
1.53%
|
1.28%
|
0.41%
|
0.46%
|
0.58%
|
|
|
|
|
|
|
24
|
0.74%
|
2.12%
|
1.74%
|
2.23%
|
1.20%
|
1.53%
|
1.25%
|
0.36%
|
0.46%
|
0.58%
|
|
|
|
|
|
|
25
|
0.74%
|
2.11%
|
1.74%
|
2.22%
|
1.20%
|
1.52%
|
1.12%
|
0.36%
|
0.46%
|
|
|
|
|
|
|
|
26
|
0.74%
|
2.10%
|
1.73%
|
2.22%
|
1.19%
|
1.49%
|
0.62%
|
0.36%
|
0.46%
|
|
|
|
|
|
|
|
27
|
0.74%
|
2.10%
|
1.72%
|
2.20%
|
1.18%
|
1.45%
|
0.53%
|
0.36%
|
0.46%
|
|
|
|
|
|
|
|
28
|
0.74%
|
2.08%
|
1.71%
|
2.20%
|
1.13%
|
1.31%
|
0.53%
|
0.36%
|
|
|
|
|
|
|
|
|
29
|
0.74%
|
2.08%
|
1.70%
|
2.19%
|
1.13%
|
0.62%
|
0.53%
|
0.36%
|
|
|
|
|
|
|
|
|
30
|
0.74%
|
2.05%
|
1.69%
|
2.18%
|
1.09%
|
0.50%
|
0.53%
|
0.36%
|
|
|
|
|
|
|
|
|
31
|
0.74%
|
2.05%
|
1.68%
|
2.15%
|
0.96%
|
0.50%
|
0.53%
|
|
|
|
|
|
|
|
|
|
32
|
0.74%
|
2.02%
|
1.68%
|
2.14%
|
0.51%
|
0.50%
|
0.53%
|
|
|
|
|
|
|
|
|
|
33
|
0.74%
|
2.01%
|
1.67%
|
2.09%
|
0.43%
|
0.50%
|
0.53%
|
|
|
|
|
|
|
|
|
|
34
|
0.74%
|
2.01%
|
1.65%
|
1.73%
|
0.43%
|
0.50%
|
|
|
|
|
|
|
|
|
|
|
35
|
0.74%
|
2.01%
|
1.64%
|
1.17%
|
0.43%
|
0.50%
|
|
|
|
|
|
|
|
|
|
|
36
|
0.74%
|
2.00%
|
1.59%
|
1.12%
|
0.43%
|
0.50%
|
|
|
|
|
|
|
|
|
|
|
37
|
0.74%
|
1.98%
|
1.46%
|
1.12%
|
0.43%
|
|
|
|
|
|
|
|
|
|
|
|
38
|
0.74%
|
1.98%
|
1.21%
|
1.12%
|
0.43%
|
|
|
|
|
|
|
|
|
|
|
|
39
|
0.74%
|
1.95%
|
1.20%
|
1.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
0.74%
|
1.57%
|
1.20%
|
1.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
0.74%
|
1.03%
|
1.20%
|
1.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
0.74%
|
0.96%
|
1.20%
|
1.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
0.74%
|
0.94%
|
1.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
0.74%
|
0.94%
|
1.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
0.74%
|
0.94%
|
1.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
0.74%
|
0.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
0.74%
|
0.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
0.74%
|
0.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
0.74%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
0.74%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
0.74%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following chart and table display the historical lifetime
cumulative 90+ Day Delinquency Rates through December 31,
2018, by vintage, for 12-month installment loans facilitated on our
platform:
RESULTS OF OPERATIONS
2018 Compared to 2017
Overview
The
year 2018 marked the fourth full-year of operations for our new
internet-based business segment and two years of continued
transition. We continued winding down our legacy commercial vehicle
sales, leasing and support business and insurance agency business,
which have been classified as discontinued operations. In July
2017, we completed significant changes to our loan transaction
process to comply with online lending regulations and in June 2018
we made slight adjustments to 180-day
term loans and installment loan products in order to bring them
into compliance with China’s regulations regarding P2P
lending. Our revenues increased during the period as we
continued to ramp-up our internet-based businesses. Although our
operating expenses increased, we still achieved a significant
profit increase in 2018. Prior period amounts have been adjusted to
exclude discontinued operations (refer to Note 4 to the
Consolidated Financial Statements for additional
information).
Our
internet-based businesses continued to grow during 2018. In July
2017, although we made significant changes to our loan transaction
process and launched three new investment products on our
peer-to-peer lending platform, the loan types that we offer to
borrowers have not changed since inception and therefore we have
decided to present our business volume data in the following
categories for continuity despite any changes in the underlying
loan transaction logic. As shown in the table below, transaction
volume of 180-day term loans increased during 2018 as compared to
the prior year, while transaction volume of 30-day credit lines and
installment loans fell.
30-day
credit line loan volume fell by 23.8% and installment loan volume
fell by 27.1% during the year ended 2018 as compared to the prior
year due to our active promotion on the 180-day loan product during
the year. 180-day loan volume increased by 106.2% during the year
ended 2018 as compared to the prior year due to increased loan
volume for truck purchases as well as for restructuring delinquent
loans.
Income
The
table below sets forth certain line items from the Company’s
Consolidated Statement of Income as a percentage of
income:
|
(in
thousands)
|
Year
ended December
31, 2018
|
Year
ended December
31, 2017
|
|
||
|
|
Amount
|
% of
Revenue
|
Amount
|
% of
Revenue
|
Y-O-Y %
CHANGE
|
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
Facilitation
fee
|
658,686
|
46.6%
|
231,709
|
22.6%
|
184.3%
|
|
Interest
income
|
194,855
|
13.8%
|
310,289
|
30.3%
|
(37.2%)
|
|
Service
charges
|
19,396
|
1.4%
|
201,386
|
19.7%
|
(90.4%)
|
|
Property lease and
management
|
212,026
|
15.0%
|
192,221
|
18.8%
|
10.3%
|
|
Other
income
|
123,644
|
8.8%
|
72,600
|
7.1%
|
70.3%
|
|
Debt assignment
income
|
203,409
|
14.4%
|
15,646
|
1.5%
|
1200.1%
|
|
Total
income
|
1,412,016
|
100.0%
|
1,023,851
|
100.0%
|
37.9%
|
Income
for the year ended December 31, 2018 was RMB1,412 million, an
increase of RMB388.1 million from RMB1,023.9 million in the prior
year period, as a result of the ramp-up of our internet-based
business segment and the significant increasing sales of delinquent
loans to third parties.
Facilitation
fee, which represent fees we charge for matching borrowers with
investors on our CeraVest platform, totaled RMB658.7 million in the
year ended December 31, 2018, an increase of RMB427 million
compared to the prior year mainly due to the growing transaction
volume and no reorganization of facilitation fee before July 2017
when we re-developed our loan transaction process to comply with
online lending regulations.
Interest
income, which mainly represents interest earned on loans to
CeraVest borrowers and loans to other borrowers, totaled RMB194.9
million in the year ended December 31, 2018, a decrease of RMB115.4
million compared to the prior year mainly due to the reduction of
origination fee. During year 2017, interest income included loan
origination fee which was collected from borrowers. Origination
fees were deducted from the loan balance and amortized as interest
income over the contract term. We no longer have such revenue after
the change of loan transaction process in July 2017.
Service
charges, which represents CeraPay’s transaction fees, totaled
RMB19.4 million in the year ended December 31, 2018, a decrease of
RMB182.0 million compared to the prior year. Since July 2017,
CeraPay loan transactions are facilitated through our peer-to-peer
lending platform; as a result, the service charges under the
previous transaction process are now allocated instead as
facilitation fee to the Company and as interest payable to
investors of each loan once the facilitation is successful.
Accordingly, service charges have been
phased out and the Company does not have this revenue item to
report since the third quarter of 2018.
Other
income, which mainly consists of penalty and late fees across all
loan types and is reduced by redeemed cash incentives that the
Company provided to the
investors, totaled RMB123.6 million in the year ended December 31,
2018, an increase of RMB51.0 million compared to the prior year,
which was due to the strengthening of
collection efforts and offset by the increase of redeemed
cash incentives during
2018.
Debt
assignment income, which represents the receipts of fees when
delinquent loans are sold to third parties, totaled RMB203.4
million in the year ended December 31, 2018, an increase of RMB
187.8 million when compared to 2017,
which was due to the significant increase in sales of delinquent
loans to third parties.
Property
lease and management revenues, which represent the revenues of the
property lease and management business, consist of revenue derived
from the Kaiyuan Finance Center, which includes the Shijiazhuang
Hilton Hotel and office leasing operations, totaled RMB212.0
million in the year ended December 31, 2018. This represents an
increase of 10.3% compared to the prior year. During the year ended
December 31, 2018, revenues of the Shijiazhuang Hilton Hotel were
approximately RMB137.0 million, compared to RMB133.7 million during
the prior year, representing an increase of 2%. Office leasing
revenues were approximately RMB75.0 million, compared to RMB58.5
million during the prior year, representing an increase of 28%, due
to higher occupancy rates of 95% the Kaiyuan Finance Center during
the year ended December 31, 2018, as compared to 78% during the
year ended December 31, 2017 as the Company continued improving the
property management service and providing more competitive lease
rate.
Operating Costs and Expenses
The
table below sets forth the components of our operating costs and
expenses as a percentage of income, for the periods indicated (in
thousands):
|
(in
thousands)
|
Year
ended
December
31,
2018
|
Year
ended
December
31,
2017
|
|
||
|
|
Amount
|
%
of
Revenues
|
Amount
|
%
of
Revenues
|
Y-O-Y
%
Change
|
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
73,206
|
5.2%
|
307,191
|
30.0%
|
(76.2%)
|
|
Interest expense,
related parties
|
156,775
|
11.1%
|
162,041
|
15.8%
|
(3.2%)
|
|
Provision for
credit losses
|
354,711
|
25.2%
|
(13,443)
|
(1.3%)
|
(2738.6%)
|
|
Product development
expense
|
80,057
|
5.7%
|
82,375
|
8.0%
|
(2.8%)
|
|
Property and
management cost
|
117,006
|
8.3%
|
112,030
|
10.9%
|
4.4%
|
|
Marketing
expense
|
(178,650)
|
(12.7%)
|
51,284
|
5.0%
|
(448.4%)
|
|
Selling and
marketing
|
237,128
|
16.8%
|
129,892
|
12.7%
|
82.6%
|
|
General and
administrative
|
193,187
|
13.7%
|
204,077
|
19.9%
|
(5.3%)
|
|
Total operating
costs and expenses (income)
|
1,033,420
|
73.20%
|
1,035,447
|
101.1%
|
(5.3%)
|
Interest Expense
Interest
expense totaled RMB230.0 million for the year ended December 31,
2018, of which RMB156.8 million of interest expense was incurred to
related parties: Beiguo Mall Xinji Branch, Beiguo Mall Luquan
Outlets, Hebei Kaiyuan, Hebei Ruituo Auto Trading Co., Ltd.
(“Ruituo”), and Mr. Li. It includes interest of RMB1.8
million and RMB1.7 million incurred for loans advanced from Hebei
Kaiyuan and Mr. Li respectively. It also included interest of
RMB72.4 million, RMB69.9 million and RMB10.9 million incurred for
the internet-based financing from Beiguo Mall Xinji Branch, Beiguo
Mall Luquan Outlets and Ruituo, respectively.
Other
interest expenses decreased to RMB73.2 million during fiscal 2018
from 307.2 million during the prior period, which was primarily a result of the change to
our new business model in July
2017
in response to new
regulations in China. Under the new business model, loans that are
successfully subscribed by investors on the Company’s
peer-to-peer lending platform are derecognized from the
Company’s balance sheet. Therefore, interest due to these
investors is also not recognized by the
Company.
Provision for credit losses
From
December 31, 2017 to December 31, 2018, the provision for credit
losses increased from reversing RMB13.4 million to charging
RMB354.7 million. The increase was mainly due to an increased provision being taken for
certain loans to some large offline borrowers as they became
delinquent. The Company is negotiating repayment
schedule concerning real estate collateral with those
borrowers.
Product development expense
Product
development expense totaled RMB80.1 million for the year ended
December 31, 2018 as compared to RMB82.4 million for the prior
year. The decrease was primarily a result of the decrease of staffs
of R&D center as with the gradual development and maturity of
system.
Property and management cost
Property
and management cost, which consists of depreciation of the Kaiyuan
Finance Center and costs associated with operating the Shijiazhuang
Hilton Hotel, totaled RMB117.0 million for the year ended December
31, 2018 as compared to RMB112.0 million for the prior year. The
primary reason for the slight increase in cost was due to an
increase in variable costs from operating the Shijiazhuang Hilton
Hotel which accompanied its increase in revenues.
Marketing expense
Marketing
expense for the year ended December 31, 2018 was reversing RMB178.7
million. This was mainly due to the decrease of loans held by third
party investors and thus the provision for credit losses of those
loans reversed a lot during 2018 when a huge turbulence happened in
peer-to-peer financing market. The Company began to report this
item since the year 2018 due to the significance of this
reversal.
Selling and marketing
Selling
and marketing expenses for the year ended December 31, 2018 were
RMB237.2 million, an increase of RMB107.2 million as compared to
the same period of 2017. This was mainly due to a reclassification
to marketing expense as analyzed above and the expense occurred for
the brokers under the new brokers network business
model.
General and administrative
General
and administrative expenses for the year ended December 31, 2018
were RMB193.2 million, a decrease of RMB 10.9 million as compared
to the same period of 2017. The decrease was primarily due to the
conversion from our previous
wholly-owned store distribution network into a broker distribution
network that is not owned by the Company. With this new
business network, the Company no longer bears the salaries of the
administrative personnel who were working for previously
wholly-owned stores, and the
related operating expenses.
Income tax provision (benefit)
In the
year ended December 31, 2018, the Company recorded an income tax
expense of RMB103.8million, as compared to an income tax benefit of
RMB 0.9 million in the year ended December 31, 2017. This occurred
because the Company generated a net profit in 2018, but a net loss
in the prior year.
Income (loss) from continuing operations
Income
from continuing operations in the year ended December 31, 2018 was
RMB274.8 million, as compared to a loss from continuing operations
of RMB10.7 million in year ended December 31, 2017. The increase
was primarily because the Company’s internet-based businesses
continues ramping up and generated more revenues during the year
2018.
Income (loss) from discontinued operations, net of
taxes
Discontinued
operations consist of the Company’s commercial vehicle sales,
leasing and support business and insurance agency business (see
Note 4 to the financial statements included herewith). Income from
discontinued operations in the year ended December 31, 2018 was
RMB0.01 million, as compared to income of RMB2.3 million in the
year ended December 31, 2017, which was mainly due to the Company
collecting more overdue amounts of delinquent accounts from
discontinued operations and thus its provision for credit losses
reversed during 2017. The Company continued the winding down of its legacy
truck-leasing business during 2018.
Net income (loss)
Net
income in the year ended December 31, 2018 was RMB274.8 million, as
compared to a net loss of RMB8.4 million in the year ended December
31, 2017. The increase was caused by the significant increase of
business revenues.
2017 Compared to 2016
Overview
The
year 2017 marked the third full-year of operations for our new
internet-based business segment and a year of continued transition.
We continued winding down our legacy commercial vehicle sales,
leasing and support business and insurance agency business, which
have been classified as discontinued operations. In July 2017 we
also completed significant changes to our loan transaction process
to comply with online lending regulations. Our revenues increased
during the period as we continued to ramp-up our internet-based
businesses. Our operating expenses also increased, leading to a
loss from operations. Prior period amounts have been adjusted to
exclude discontinued operations (refer to Note 4 to the
Consolidated Financial Statements for additional
information).
Our
internet-based businesses continued to grow during 2017. In July
2017 we made significant changes to our loan transaction process
and launched three new investment products on our peer-to-peer
lending platform. However, the loan types that we offer to
borrowers have not changed since inception and therefore we have
decided to present our business volume data in the following
categories for continuity despite any changes in the underlying
loan transaction logic. As shown in the table below, transaction
volume of 180-day term loans and installment loans increased during
2017 over the prior year, while transaction volume of 30-day credit
lines fell.
30-day
credit line loan volume fell by 13.8% during the year ended 2017 as
compared to the prior year due to our strategic focus on growing
the installment loan product during the year.180-day loan volume
increased by 22.1% during the year ended 2017 as compared to the
prior year due to increased loan volume for truck purchases as well
as for restructuring delinquent loans. Installment loans, which was
first introduced in late 2016, became an established product during
2017.
Income
The
table below sets forth certain line items from the Company’s
Consolidated Statement of Income as a percentage of
income:
Income
for the year ended December 31, 2017 was RMB1,023.9 million, an
increase of RMB147.9 million from RMB875.9 million in the prior
year period, as a result of the ramp-up of our internet-based
business segment.
Facilitation
fee, which represent fees we charge for matching borrowers with
investors on our CeraVest platform, totaled RMB231.7 million in the
year ended December 31, 2017. Facilitation fee began in July 2017
when we re-developed our loan transaction process to comply with
online lending regulations.
Interest
income, which mainly represents CeraVest origination fees, and
interest earned on loans to CeraVest borrowers and loans to other
borrowers, totaled RMB310.3 million in the year ended December 31,
2017, an increase of RMB67.1 million compared to the prior year.
This was due to the increase of origination fee charge rate and
transactions of loans to other borrowers since the second quarter
of 2017.
Service
charges, which represents CeraPay’s transaction fees, totaled
RMB201.4 million in the year ended December 31, 2017, a decrease of
RMB245.8 million compared to the prior year. Since July 2017,
CeraPay loan transactions are facilitated through our peer-to-peer
lending platform; as a result, the service charges under the
previous transaction process are now allocated instead as
facilitation fee to the Company and as interest payable to
investors of each loan once the facilitation is successful. Thus,
service charges have declined drastically in 2017 and we anticipate
discontinuing reporting this revenue item in future financial
reports.
Other income, which mainly consists of government subsidies,
penalty and late fees across all loan types, totaled
RMB72.6 million in the year
ended December 31, 2017, an increase of RMB57.4 million compared to the prior
year.
Debt assignment income, which represents the receipts of the fees
when delinquent loans are sold to third parties, totaled RMB15.6
million in the year ended December 31, 2017, increased by RMB15.6
million when compared 2016, which was
due to the increasing sales of delinquent loans to third
parties.
Property
lease and management revenues, which represent the revenues of the
property lease and management business, consist of revenue derived
from the Kaiyuan Finance Center, which includes the Shijiazhuang
Hilton Hotel and office leasing operations, totaled RMB192.2
million in the year ended December 31, 2017. This represents an
increase of 13.2% compared to the prior year. During the year ended
December 31, 2017, revenues of the Shijiazhuang Hilton Hotel were
approximately RMB133.7 million, compared to RMB109.7 million during
the prior year, representing an increase of 21.9%. Office leasing
revenues fell slightly primarily due to lower occupancy rates at
the Kaiyuan Finance Center during the beginning of 2017 as compared
to 2016. However, overall occupancy rebounded during the rest of
2017 and as a result the average occupancy rate of the Kaiyuan
Finance Center was 78% during the year ended December 31, 2017, as
compared to 74% during the year ended December 31,
2016.
Operating Costs and Expenses
The
table below sets forth the components of our operating costs and
expenses as a percentage of income, for the periods indicated (in
thousands):
Interest Expense
Interest
expense totaled RMB469.2 million for the year ended December 31,
2017, of which RMB162 million of interest expense was incurred to
related parties: Alliance Rich, Beiguo Mall Xinji Branch, Hebei
Kaiyuan, Hebei Ruituo Auto Trading Co., Ltd.
(“Ruituo”), Mr. Li, Hebei Xuyuan Investment Company and
Shijiazhuang Xuheng Trade Company. It includes interest of RMB0.3
million, RMB0.4 million, RMB1.8 million and RMB1.7 million incurred
for loans advanced from Shijiazhuang Xuheng Trade Company, Hebei
Xuyuan Investment Company, Hebei Kaiyuan and Mr. Li respectively.
It also included interest of RMB139 million and RMB16.1 million
incurred for the internet-based financing from Beiguo Mall Xinji
Branch and Ruituo, respectively. In addition, RMB0.8 million of
interest expense was incurred to Alliance Rich for amounts from the
acquisition of Heat Planet, and interest of RMB1.8 million for the
CeraVest investors, related parties. The increase in interest
expense during the year ended December 31, 2017 as compared to the
prior year was primarily due to increased borrowings to support the
growth of the internet-based businesses.
Interest
expense totaled RMB304.1 million for the year ended December 31,
2016, of which RMB41.3 million of interest expense was incurred to
related parties. Other interest expenses increased to RMB307.2
million during fiscal 2017 from RMB262.8 million during the prior
period due primarily to interest paid to CeraVest
investors.
Provision for credit losses
From
December 31, 2016 to December 31, 2017, the provision for credit
losses decreased from charging RMB116.0 million to reversing
RMB13.4 million. The decrease was mainly due to the loans and other
receivables held by the Company decreased significantly under
re-developed internet-based business process from July 2017, and
recovering significant amounts of overdue balances by selling
delinquent loans to third parties, resulting in reducing the
Company’s provision for credit losses for these loans
accordingly in 2017.
Product development expense
Product
development expense totaled RMB82.4 million for the year ended
December 31, 2017 as compared to RMB62.6 million for the prior
year. The increase was primarily a result of an increase in the
headcount of technical staff as compared to the prior year
period.
Property and management cost
Property
and management cost, which consists of depreciation of the Kaiyuan
Finance Center and costs associated with operating the Shijiazhuang
Hilton Hotel, totaled RMB112.0 million for the year ended December
31, 2017 as compared to RMB109.6 million for the prior year. The
primary reason for the slight increase in cost was due to an
increase in variable costs from operating the Shijiazhuang Hilton
Hotel which accompanied its increase in revenues, but a decrease in
depreciation expense since parts of the equipment were fully
depreciated.
Marketing expense
Marketing
expense represents the provision for credit losses of the loans
held by CeraVeat investors, an increase of RMB51.2 million as
compared to the same period of 2016, mainly due to increased
accrued marketing expense during 2017 which represented the
estimation of future cash out-flow for purchase of delinquent
CeraVest loans from CeraVest investors, net off the future cash
in-flow collectible from such loans.
Selling and marketing
Selling
and marketing expenses for the year ended December 31, 2017 were
RMB129,892 million, an increase of RMB40.2 million as compared to
the same period of 2016, due to increased sales efforts to promote
the Company’s internet-based businesses during 2017 also
contributed to the fluctuation. These costs include but are not
limited to sales commissions and salaries for sales
staff.
General and administrative
General
and administrative expenses for the year ended December 31, 2017
were RMB 204.1 million, an increase of RMB 5.3 million as compared
to the same period of 2016. The increase was primarily due to costs
associated with ramping up and running the Company’s
internet-based businesses. These costs include but are not limited
to salaries for administrative personnel and fees from third-party
payment providers.
Income tax provision (benefit)
In the
year ended December 31, 2017, the Company recorded an income tax
benefit of RMB 0.9 million, as compared to an income tax expense of
RMB 8.5 million in the year ended December 31, 2016. This occurred
because more operating expenses incurred to support the
Company’s internet-based businesses and more taxpaying
entities generated a greater loss from continuing operations before
income taxes during the year 2017 while more taxpaying entities
generated gain during 2016.
Income (loss) from continuing operations
Loss
from continuing operations in the year ended December 31, 2017 was
RMB 10.7 million, as compared to a loss from continuing operations
of RMB 13.4 million in year ended December 31, 2016. Greater loss
was generated from increased operating expenses incurred to support
the Company’s internet-based businesses during the year 2017.
But due to the significant income tax expense occurred in 2016
while it was income tax benefits in 2017, loss from continuing
operations decreased after the combined effects.
Income (loss) from discontinued operations, net of
taxes
Discontinued
operations consist of the Company’s commercial vehicle sales,
leasing and support business and insurance agency business (see
Note 4 to the financial statements included herewith). Income from
discontinued operations in the year ended December 31, 2017 was RMB
2.3 million, as compared to RMB 1.1 million in the year ended
December 31, 2016, which was mainly due to the Company collecting
more overdue amounts of delinquent accounts from discontinued
operations and thus its provision for credit losses reversed during
2017.
Net (loss) income
Net
loss in the year ended December 31, 2017 was RMB8.4 million, as
compared to a net loss of RMB12.3 million in the year ended
December 31, 2016. The decrease was caused by the increase of
operating expense and decrease of income tax
provision.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern
The Company reported a net gain of RMB274,801 and a net loss of
RMB10,718 from continued operations for the years ended December
31, 2018 and 2017 respectively. Although the Company’s
operating results for future periods might be subject to numerous
uncertainties and some adverse conditions like recurring losses for
2015, 2016 and 2017 and the Company’s consolidated current
liabilities exceeded its consolidated current assets by
approximately RMB 689,832 as of December 31, 2018, the Company
believe they could meet presently anticipated cash needs for at
least the next 12 months after the date that the financial
statements are issued and keep profit in the foreseeable
years.
The Company’s principal sources of liquidity have been cash
provided by related parties and revenues generated from loan
facilitation. The Company reported a net decrease in cash, cash
equivalent and restricted cash of RMB255,855 for the year ended
December 31, 2018 and a net increase in cash, cash equivalent and
restricted cash of RMB486,240 and RMB294,558 for the year ended
December 31, 2017 and 2016. As of December 31, 2018, the Company
had RMB994,489 in unrestricted cash and cash equivalents. The
Company’s cash and cash equivalents are unrestricted as to
withdrawal or use, and are placed with banks and other financial
institutions. The Company’s consolidated current liabilities
exceeded its consolidated current assets by approximately RMB
689,832 as of December 31, 2018. The Company’s consolidated
net assets amounted to RMB363,624 as of December 31,
2018.
Management Plan and Actions
The Company has addressed liquidity requirements through a series
of cost reduction initiatives, financing from both banks and
related parties, and the sale of non-performing
assets.
The Company continued to sell the non-performing loans to the third
parties in the year 2018. As of December 31, 2018, certain
non-performing loans with a total amount of RMB 2,724 million have
been sold to several third parties at a total consideration of RMB
2,941 million. This action reduces the working capital
needs.
From July 2017 and onwards, the Company re-developed the loan
transaction process for all of its loan products, which reduces the
need for working capital. Under the prior business model, the
Company would be required to first fund loans and then seek
investment for them. However, under the new model, loans are
facilitated directly with investors on the Company’s
peer-to-peer lending platform. This eliminates the need for the
Company to use its own working capital for the initial loan
funding. And in June 2018, the Company had another development on
the loan transaction process of its loan products. This eliminated
the time gap between investor receiving the investment and
borrowers repaying the loans, which decreases the amount of payable
to investors and therefore reduces the need for working
capital.
Since the third quarter of 2018, Fincera began converting its
existing wholly-owned store distribution network into a broker
distribution network that is not owned by the Company. The new
broker distribution network will operate under a revenue sharing
arrangement where predetermined amounts of revenues will be shared
with the brokers. In addition, since the new distribution network
will be owned by third-parties, Fincera will no longer be
responsible for funding its operating costs.
The Company will continue to focus on developing the internet-based
business, improving operating efficiency and reducing costs, and
enhancing its marketing function. Although the Company’s
operating results for future periods might be subject to numerous
uncertainties and/or adverse conditions like negative cash flow,
working capital deficiency that may raise substantial doubt about
the Company’s ability to continue as a going concern, after
considering above factors and valuations, as of the filing date of
the 20-F hereof, the Company is able to fulfill its current
obligations.
Mr. Li signed off a Financial Support Letter that he and the
entities directly or indirectly controlled by him will provide the
necessary financial support to the Company, so as to enable the
company to meet its liabilities as and when they fall due and to
carry on its business without a significant curtailment of
operations for the foreseeable future, which will remain in force
till December 31, 2020.
The Company has addressed liquidity requirements through a series
of cost reduction initiatives, financing from both banks and
related parties, and the sale of non-performing assets. From July
2017 and onwards, the Company also re-developed the loan
transaction process for all of its loan products, which reduces the
need for working capital. For example, under the prior business
model, the Company would be required to first fund loans and then
seek investment for them. However, under the new model, loans are
facilitated directly with investors on the Company’s
peer-to-peer lending platform. This eliminates the need for the
Company to use its own working capital for the initial loan
funding. In addition, the Company will continue to focus on
developing the internet-based business, improving operating
efficiency and reducing costs, and enhancing its marketing
function. Actions included continuously selling non-performing
loans to third parties and obtaining the continuous financial
support letter from Mr. Li.
The Company believes that available cash and cash equivalents,
future cash provided by operating activities under new business
model, together with the efforts from aforementioned management
plan and actions, should enable the Company to meet presently
anticipated cash needs for at least the next 12 months after the
date that the financial statements are issued and the Company has
prepared the consolidated financial statements on a going concern
basis. However, the Company continues to have ongoing obligations
and it expects that it will require additional capital in order to
execute its longer-term business plan. If the Company encounters
unforeseen circumstances that place constraints on its capital
resources, management will be required to take various measures to
conserve liquidity, which could include, but not necessarily be
limited to, curtailing the Company’s business development
activities, suspending the pursuit of its business plan,
controlling operating expenses and seeking to further dispose of
non-core assets. Management cannot provide any assurance that the
Company will raise additional capital if needed.
Financing arrangements
Prior to July 2017, the Company’s operations have been
financed primarily through short-term funding provided by CeraVest
investors, and short-term bank borrowings from financial
institutions and related parties. For loans facilitated in July
2017 and onwards, since loan facilitation occurs only through our
peer-to-peer lending platform, we no longer directly rely on
funding provided by CeraVest investors since this funding now goes
directly to the borrowers, Therefore, our operations are now
financing primarily only through short-term bank borrowings from
financial institutions and related parties. The interest rates of
the Company’s short-term borrowings during the periods have
ranged from 4.35% to 4.99% per annum.
As of December 31, 2018, the Company’s outstanding borrowings
from related parties amounted to RMB43.5 million, RMB33.7 million,
RMB12.4 million, RMB1,906 million, RMB0.08 million, RMB223.2
million and RMB0.02 million from Mr. Li, Hebei Kaiyuan, Smart
Success Investment Limited (“Smart Success”), Beiguo
Mall, Honest Best Int’l Ltd., Ruituo and Alliance Rich,
respectively. Smart Success, Honest Best Int’l Ltd. and
Alliance Rich are controlled by Mr. Li. Hebei Kaiyuan, Ruituo is
controlled by Mr. Li’s brother.
Each of
these loans was entered into to satisfy the Company’s capital
needs. The amounts due to Smart Success and Alliance Rich are
non-interest bearing, unsecured and due on demand by the
lenders.
The amount due to Hebei Kaiyuan was charged interest at 8.00% per
annum on amounts owed to it. The amount due to Honest Best
Int’l Ltd. were non-interest bearing, unsecured and due on
demand by the lenders. The amount due to Mr. Li was charged
interest at 3.9% per annum on amounts owed to it. The Company pays
a financing charge to Beiguo Mall Xinji Branch and Beiguo Mall
Luquan Outlets for the funds obtained. The financing charge is
approximately 9.2% per annum if funds are repaid in full within 6
months and 12% per annum after 6 months but within 7 months. If the
funds are still unpaid after 7 months, the financing charge rate
increases to 18% per annum. During the fiscal year 2018, the
Company paid a financing charge of approximately 9.2% per annum to
Beiguo Mall Xinji Branch and Beiguo Mall Luquan Outlets for the
funds obtained.
The Company entered into an interest-bearing borrowing with Ruituo
during 2018. As of December 31, 2018, about RMB223.2 million was
provided by Ruituo to the Company. The amount due to Ruituo is
unsecured and due on demand by Ruituo and bore an interest at
approximately 8.00% based on the weighted average outstanding
payable balances at month end.
As of
December 31, 2018, the Company had short-term bank borrowings of
RMB678.8 million, represented by loans from various Chinese banks,
which have terms within one year. The Company had long-term
borrowings of 505 million represented by loans from two Chinese
banks, which mature in October 2023 and in December 2028. The
Company also had RMB86.0 million of long-term bank borrowings,
current portion, which represents the current portion of long-term
loans from two banks in the PRC.
After
taking into consideration our financing arrangements and our
existing cash resources, we believe we have adequate sources of
liquidity to meet our short-term obligations and working capital
requirements for at least the next 12 months following the filing
of this annual report. However, the Company may elect to obtain
addition funding to expand and grow its operations, which may
include borrowings from financial institutions, related parties
and/or the sale of equity.
Working Capital
As of
December 31, 2018 and 2017, the Company had a working capital
deficit of RMB689.8 million and RMB895.5 million,
respectively.
During the year ended December 31, 2018, the Company decreased its
total short-term borrowings, which includes its short-term bank
borrowings, current portion of long-term bank borrowings, financing
payables, related parties, other payables and accrued liabilities
and borrowed funds from CeraVest investors, repaying net funds
amounting to RMB1,852.6 while also decreased its total loans,
net, other financing
receivables, net and prepaid expenses and other current assets
amounting to RMB1,472.9 million.
The
Company anticipates that it will have adequate sources of working
capital in the next 12 months. However, the Company may elect to
obtain addition funding to expand and grow its operations, which
may include offering debt, borrowing from financial institutions,
related parties and/or the sale of equity.
Financial Condition
The
following table sets forth our major balance sheet accounts at
December 31, 2018 and 2017 (in thousands):
Other
financing receivables, net began in November 2014 as a result of
the launch of the CeraPay credit transaction business under which
the Company provides SMBs and individual with a 30-day and a
12-month installment line of credit payment product with features
similar to a credit card. In July 2017, the 30-day and a 12-month
installment line of credit product was redeveloped and launched
with a revised transaction process in order to comply with
regulations. Under the revised transaction process where loans are
facilitated on our peer-to-peer lending platform, we now no longer
recognize other financing receivables, net on the Company’s
balance sheet. Therefore, the balance for other financing
receivables, net decreased significantly during 2018 due to this
change in loan transaction process.
Loans,
net began in November 2014 as a result of the launch of the
CeraVest peer-to-peer lending platform business under which the
Company provides 180-day term loans to SMBs which were partially
funded by investors through the platform. Beginning in July 2017,
the loan transaction process of the lending platform was revised so
the loans are now funded by investors through facilitation on the
Company’s peer-to-peer lending platform in order to comply
with regulations. During the period when a great number of
investors withdrew from peer-to-peer financial market in the year
2018, the Company started buying a large amount of unfunded loans
to continue satisfying the borrowers’ requests on the
CeraVest peer-to-peer lending platform business. Thus, the balance
for loans, net increased significantly during 2018 due to this
fluctuation in the Chinese peer-to-peer financial
market.
Assets
of discontinued operations represent the current and non-current
assets of the commercial vehicle sales, leasing and support
business and insurance agency business. (see Note 4 to the
Consolidated Financial Statements for additional
information).
Property,
equipment and improvements were RMB1,301.1 million as of December
31, 2018, a decrease of RMB49.7 million, as compared with December
31, 2017. The decrease mainly relates to depreciation on property
and equipment.
Short-term
bank borrowings represent loans from various banks in the PRC.
Short-term bank borrowings were used for working capital and
capital expenditure purposes. The borrowings increased to RMB678.8
million as of December 31, 2018, from RMB520.0 million as of
December 31, 2017. The terms of the remaining outstanding bank
borrowings range from 6 months to 12 months and begin to expire in
November 2018.
Long-term
bank borrowings, current portion represents the current portion of
long-term loans from two banks in the PRC. The loans were used for
working capital and capital expenditure purposes. The current
portions of the loans are due in December 2019.
Other
payables and accrued liabilities consist of CeraVest loan
investors’ un-invested funds on deposit, advance payment
deposited on the platform’s account by borrowers, interest
payable to investors, security deposits received from CeraVest
borrowers upon the funding of their respective loans, accrued
marketing expense, other current liabilities, salaries payable,
payables to merchants and brokers, advance of debt assignment and
other tax payables. Other payables and accrued liabilities
decreased to RMB973.1 million
as of December 31, 2018 from RMB2,635.6 million as of December 31,
2017, which was mainly due to the decrease of repayments in advance
by the borrowers from our revised transaction process.
Borrowed
funds from CeraVest investors began in November 2014 from the
inception of our peer-to-peer lending business. Prior to July 2017,
borrowed funds from CeraVest investors represented the amounts
invested by and therefore owed to CeraVest investors. After July
2017, the Company changed the loan transaction process on the
platform, the result being that loans facilitated on the platform
are no longer recognized as borrowed funds from the loan investors.
As a result, the Company no longer has the balance of borrowed
funds from CeraVest investors as of December 31, 2018.
Financing
payables, related parties are related to the financing arrangement
for the purchase of commercial vehicles by CeraVest customers and
borrowings from related parties of the Company. Financing payables,
related parties increased from RMB1,836.2 million to
RMB2,219 million as of December
31, 2018, an increase of RMB382.8 million, as compared with
December 31, 2017. Such amounts were primarily related to the
payables to our related parties: Mr. Li, Alliance Rich, Hebei
Kaiyuan, Honest Best Int’l Ltd., Smart Success, Ruituo and
Beiguo Mall.
Long-term financing payables, related party represented the loans
provided by Ruituo for working capital purposes. Long-term
financing payables, related parties decreased from RMB235.5 to zero
as of December 31, 2018, due to a repayment in full to Ruituo, as
compared with December 31, 2017.
Liabilities
of discontinued operations represent the current and non-current
liabilities of the commercial vehicle sales, leasing, and support
business and insurance agency business (see Note 4 to the financial
statements attached herewith).
The
following table sets forth certain historical information with
respect to the Company’s statements of cash flows (in
thousands):
Operating Activities. Net cash provides by operating
activities for the year ended December 31, 2018 was RMB1,034.8
million, as compared to RMB2,181.4 million and RMB240.4 million of
net cash provided by operating activities for the years ended
December 31, 2017 and December 31, 2016, respectively. The cash
flows provided by operating activities during fiscal 2018 was
attributable primarily to the cash provided by the increase of our
internet financing business and the decrease in other financing
receivables as we improved the business transaction of CeraVest
loan products and are holding fewer loans by using company-own
capital.
In the
year ended December 31, 2018, operating activities provided
RMB1,034.8 million of cash. During 2018, the Company had net income
of RMB274.8 million. In addition, the Company had depreciation and
amortization of RMB52.7 million, an increase of provision for
credit losses of RMB354.7 million, a reverse of accrued marketing
expense of RMB178.7 million, a decrease of RMB1,484.4 million of
other payables and accrued liabilities, an increase of prepaid
expense and other current assets of RMB17.3 million, a decrease in
accounts receivable of RMB11.5 million, a decrease of inventory of
RMB0.8 million and a decrease of other financing receivables of
RMB1,932.2 million. The remaining balance arises from changes in
deferred income taxes, income tax payable, and other
items.
In the
year ended December 31, 2017, operating activities generated
RMB2,381.4 million of cash. During 2017, the Company had net loss
of RMB8.4 million. In addition, the Company had depreciation and
amortization of RMB54.5 million, a reverse of provision for credit
losses of RMB34.5 million, an increase of accrued marketing expense
of RMB51.3 million, an increase of RMB2,024.1 million of other
payables and accrued liabilities, an increase of prepaid expense
and other current assets of RMB15.2 million, a decrease in accounts
receivable of RMB47.1 million, a decrease of inventory of RMB9.0
million. The remaining balance arises from changes in deferred
income taxes, income tax payable, and other items.
In the
year ended December 31, 2016, operating activities generated
RMB240.4 million of cash. During 2016, the Company had net income
of RMB12.3 million. In addition, the Company had depreciation and
amortization of RMB59.4 million, an increase of provision for
credit losses of RMB138.3 million, an increase of RMB98.0 million
of other payables and accrued liabilities, an increase of prepaid
expense and other current assets of RMB14.2 million, a decrease in
accounts receivable of RMB102.8 million, a decrease of short-term
net investment of RMB37.0 million, a decrease of inventory of
RMB21.5 million and a decrease of long term net investment in
sale-type leases of RMB398.4 million. The remaining balance arises
from changes in deferred income taxes, income tax payable, and
other items.
Investing Activities. Net cash used in investing activities
was RMB798.5 million in the year ended December 31, 2018 and was
mainly attributed to an increase of loans, net of RMB795.5 million.
Net cash provided by investing activities was RMB728.4 million in
the year ended December 31, 2017 and was mainly attributed to a
decrease of loans, net of RMB731.9 million. Net cash used in
investing activities was RMB1,015.5 million in the year ended
December 31, 2016 and was mainly attributed to an increase of
loans, net of 966.4 million and purchase of property, equipment and
leasehold improvements of RMB52.1 million.
Financing Activities.
Net
cash used in financing activities was RMB492.2 million in the year
ended December 31, 2018, and net cash used in financing activities
was RMB2,623.5 million in the year ended December 31, 2017 and
provided by financing activities was RMB1,069.7 million in the year
ended December 31, 2016. In the year ended December 31, 2018, the
Company repaid net proceeds of RMB744.7 million to CeraVest
investors, received proceeds of RMB5,692.3 million from its related
parties, repaid RMB5,525.6 million to its related parties and had
net repayments of bank borrowings of RMB85.8 million.
In the
year ended December 31, 2017, the Company repaid net proceeds of
RMB2,321.1 million to CeraVest investors, received proceeds of
RMB5,867.4 million from its related parties, repaid RMB5,936.3
million to its related parties and had net repayments of bank
borrowings of RMB122.0 million. The Company also had a dividend of
RMB141.3 million.
In the
year ended December 31, 2016, the Company received net proceeds of
RMB1,731.7 million from CeraVest investors, received proceeds of
RMB5,783.6 million from its related parties, repaid RMB5,100.5
million to its related parties and had net repayments of bank
borrowings of RMB304.6 million. The Company also had a capital
distribution of RMB1,040.5 million.
Historically,
most or all available cash is used to fund the loans, investment in
direct financing and sales-type leases, other financing
receivables, short-term net investment and for capital
expenditures. To the extent the investment in loans, direct
financing, sales-type leases, other financing receivables,
short-term net investment, and capital expenditures exceed income
from operations, the Company generally increases the bank
borrowings under its financing facilities and from related parties
and CeraVest investors.
The
Company currently leases the property where its Beijing office is
located. Under the new broker business model, the Company no longer
leases the properties where its previous branch offices were
located.
At
December 31, 2018, the Company had RMB994.5 million of cash on
hand. On a short-term basis, the Company’s principal sources
of liquidity include income from operations, short-term borrowings
from financial institutions including other payables, related
parties and borrowings from related parties. On a longer-term
basis, the Company expects its principal sources of liquidity to
consist of income from operations, borrowings from financial
institutions, related parties and/or fixed interest term loans.
Furthermore, the Company believes, if necessary, it could raise
additional capital through the issuance of debt and equity
securities. The Company expects to use cash primarily to increase
its loans, net and other financing receivables in line with its
revenue growth. We believe that we have adequate liquidity to
satisfy our capital needs for the near term; however, we may need
to raise additional capital to maintain our high rate of
growth.
Fincera’s
borrowings primarily consisted of: (i) Short-term bank borrowings;
(ii) Long-term bank borrowings; (iii) Financing payables, related
parties; and (iv) Long-term financing payables, related
parties.
Short-term bank borrowings. Short-term bank borrowings
represented loans from various financial institutions that were
used for working capital and capital expenditures purposes. The
loans from various financial institutions bear interest at rates
ranging from 4.35% to 5.22% as of December 31, 2018 and have terms
of up to one year.
Long-term bank borrowings. Long-term bank borrowings
represented loans from two financial institutions that were used
for working capital and capital expenditures purposes. The loans
bear interest at 5.0% as of December 31, 2018, have an original
term of 14 years and are due in December 2028.
Financing payables, related parties. Financing payables from
related parties was primarily related to 1) the received
internet-based financings from Ruituo, a company controlled by Mr.
Li’s brother; 2) the internet-based financings from Beiguo
Mall Xinji Branch and Beiguo Mall Luquan Outlets during 2018,
companies affiliated with Mr. Li; 3) the amount due to Alliance
Rich, a company controlled by Mr. Li; 4) the amount due to Hebei
Kaiyuan, a company controlled by Mr. Li; 5) the amount due to Mr.
Li; and 6) the amount due to Smart Success, a company controlled by
Mr. Li.
The
amount due to Ruituo is unsecured and due on demand by Ruituo and
bore interest at approximately 8.00% per annum, based on the
weighted average outstanding payable balances at month
end.
Mr. Li
holds 20.92% of indirect beneficial ownership in Beiguo Mall. The
Company pays a financing charge to Beiguo Mall Xinji Branch and
Beiguo Mall Luquan Outlets for the funds obtained due to this
financing arrangement. The financing charge is approximately 4.6%
per annum if funds are repaid in full within 6 months and 12% per
annum after 6 months but within 7 months. If the funds are still
unpaid after 7 months, the financing charge rate increase to 18%
per annum. The financing arrangement is personally guaranteed by
Mr. Li, who has a long-term business relationship with Beiguo, on
behalf of the Company. In addition, the payable balances of each
loan are unsecured and due in 180 days.
The
amount due to Hebei Kaiyuan was charged interest at 8.00% per
annum, and unsecured and due on demand by the lender.
The
Company expects to continue relying on the financing from the
related parties and believes the related parties have sufficient
capital to continue providing such financing to us in the
foreseeable future.
The
Company’s borrowings fluctuate based upon a number of
factors, including (i) income, (ii) changes in: other financing
receivables and loans, net and (iii) capital expenditures.
Historically, income from operations, as well as borrowings on the
revolving credit facilities have driven accounts and notes
receivable growth, inventory growth and capital
expenditures.
We
believe that our available cash and cash equivalents and cash
provided by operating activities, together with cash available from
borrowings, will be adequate to meet presently anticipated cash
needs for at least the next twelve months.
Cash
and cash equivalents as of December 31, 2018 are mainly held by the
Company’s subsidiaries and VIEs. These cash balances cannot
be transferred to the Company by loan or advance according to
existing PRC laws and regulations. However, these cash balances can
be utilized by the Company for its normal operations pursuant to
the Enterprise Agreements.
Regulations on Dividend Distribution
The
principal laws and regulations in China governing distribution of
dividends by foreign-invested companies include:
●
The
Sino-foreign Equity Joint Venture Law (1979), as
amended;
●
The
Regulations for the Implementation of the Sino-foreign Equity Joint
Venture Law (1983), as amended;
●
The
Sino-foreign Cooperative Enterprise Law (1988), as
amended;
●
The
Detailed Rules for the Implementation of the Sino-foreign
Cooperative Enterprise Law (1995), as amended;
●
The
Wholly Foreign Owned Enterprise Law (1986), as amended;
and
●
The
Regulations of Implementation of the Wholly Foreign Owned
Enterprise Law (1990), as amended.
Under
these regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined
in accordance with Chinese accounting standards and regulations. In
addition, wholly foreign-owned enterprises in China are required to
set aside at least 10% of their respective accumulated profits each
year, if any, to fund certain reserve funds unless such reserve
funds have reached 50% of their respective registered capital. As
for the Sino-foreign equity joint venture, the allocations for
reserve funds, employee’s bonus and welfare fund and
development funds of the joint venture and the proportion of
allocations are decided by the board of directors. These reserves
are not distributable as cash dividends. Each of our PRC
subsidiaries is continuing to make contributions to their
respective reserve funds as they have not reached the 50%
threshold. We record these as contributions to equity.
Off-Balance Sheet Arrangements
We have
not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any off-balance sheet derivative instruments.
Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not
have any variable interest in any unconsolidated entity that
provides financing, liquidity, market risk or credit support to us
or engages in leasing, hedging or research and development services
with us.
Contractual Payment Obligations
The
following is a summary of the Company’s contractual
obligations for operations as of December 31, 2018 (in
thousands):
|
|
Payments due by
period
|
||||
|
|
Total
|
Less
than
1
Year
|
1 to
3
Years
|
3 to
5
Years
|
More
than
5
Years
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
|
|
|
|
|
|
|
|
Operating
leases
|
6,594
|
2,029
|
4,565
|
—
|
—
|
|
Short-term bank
borrowings
|
678,772
|
678,772
|
—
|
—
|
—
|
|
Long-term bank
borrowings
|
591,000
|
86,000
|
300,000
|
153,000
|
52,000
|
|
Financing payables,
related parties
|
2,218,974
|
2,218,974
|
—
|
—
|
—
|
|
Total
|
3,495,340
|
2,985,775
|
304,565
|
153,000
|
52,000
|
The
Company leases certain facilities under long-term, non-cancelable
leases and month-to-month leases. These leases are accounted for as
operating leases.
Recently Issued Accounting Standards
See
Note 3 to the Consolidated Financial Statements included
herewith.
Critical Accounting Policies and Estimates
See
Note 3 to the Consolidated Financial Statements included
herewith.
Quantitative and Qualitative Disclosures about Market
Risk
Interest Rate Risk
Fincera’s
exposure to interest rate risk primarily relates to its outstanding
debts and interest income generated by excess cash, which is mostly
held in interest-bearing bank deposits. In addition, fixed rate
securities such as the Company’s CeraVest loans may have
their fair market value adversely impacted due to a rise in
interest rates. As of December 31, 2018, Fincera’s total
outstanding interest-bearing borrowings amounted to 3,488.7 million
with interest rates ranging from 3.9% to 8.00% per annum. The
interest rates on our outstanding debts are fixed, which limits our
exposure to material risks due to changes in market interest rates,
and we have not used any derivative financial instruments in our
investment portfolio. However, we cannot provide assurance that we
will not be exposed to material risks due to changes in market
interest rate in the future. We may invest our cash in both fixed
rate and floating rate interest earning instruments that carry a
degree of interest rate risk. Fixed rate securities may have their
fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than
expected if interest rates fall.
Credit Risk
Fincera
is exposed to credit risk from its cash and cash equivalents,
accounts receivable, loans, other finance receivables. The credit
risk on cash and cash equivalents is limited because the
counterparties are recognized financial institutions. Accounts
receivable, loans and other finance receivables are subjected to
credit evaluations and evaluation analysis on the residual value of
the relevant collateral, if any. An allowance would be made, if
necessary, for estimated irrecoverable amounts by reference to past
default experience and other credit risks, if any, and by reference
to the current economic environment.
Foreign Currency Risk
Substantially
all of Fincera’s revenues and expenditures are denominated in
Renminbi. Our reporting currency was the U.S. dollar prior to April
1, 2017. In our consolidated financial statements prepared before
April 1, 2017, our financial information that used RMB as the
functional currency had been translated into U.S. dollars.
Effective from April 1, 2017, we changed our reporting currency
from U.S. dollar to RMB. Appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of
operations.
The
conversion of RMB into foreign currencies, including U.S. dollars,
is based on rates set by the People’s Bank of China. The PRC
government allowed the RMB to appreciate by more than 20% against
the U.S. dollar between July 2005 and July 2008. 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 RMB has fluctuated against the U.S. dollar, at
times significantly and unpredictably, and in recent years the RMB
has depreciated significantly against the U.S. dollar. Since
October 1, 2016, the RMB has joined the International Monetary Fund
(IMF)’s basket of currencies that make up the Special Drawing
Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen
and the British pound. With the development of the foreign exchange
market and progress towards interest rate liberalization and
Renminbi internationalization, the PRC government may in the future
announce further changes to the exchange rate system and there is
no guarantee that the RMB will not appreciate or depreciate
significantly in value against the U.S. dollar in the future. 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.
Very
limited hedging transactions are available in China to reduce
Fincera’s exposure to exchange rate fluctuations. To date,
Fincera has not entered into any hedging transactions in an effort
to reduce its exposure to foreign currency exchange risk. While
Fincera may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedging
transactions may be limited and it may not be able to successfully
hedge its exposure at all. In addition, Fincera’s currency
exchange losses may be magnified by PRC exchange control
regulations that restrict its ability to convert Renminbi into
foreign currency.
Seasonality
Our
first quarter (January through March) is expected to be slower for
CeraVest and CeraPay than the other quarters. This is due to the
Chinese New Year holiday, which occurs in January or February
depending on the year, and generally has an adverse effect on
business activity in the transportation sector. We expect this
trend to continue in future periods. If conditions arise that
impair transportation sector business activity during the second to
fourth quarters, the adverse effect on our revenues and operating
profit for the year could be disproportionately large.
Impact of Inflation
Inflation
has not historically been a significant factor impacting the
Company’s results.
ITEM 6. DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES
A. Directors and Senior
Management.
Fincera’s
current directors, executive officers and key employees are as
follows:
|
Name
|
|
Age
|
|
Position
|
|
Yong
Hui Li
|
|
56
|
|
Chairman,
Chief Executive Officer and Director
|
|
Jason
Chia-Lun Wang
|
|
43
|
|
Chief
Financial Officer
|
|
Zijian
Zhou
|
|
34
|
|
Chief
Technology Officer
|
|
Spencer
Ang Li
|
|
30
|
|
Vice
President of Operations
|
|
Xiu
Wen
|
|
34
|
|
Vice
President of Product
|
|
James
Cheng-Jee Sha
|
|
68
|
|
Director
|
|
Diana
Chia-Huei Liu
|
|
55
|
|
Director
|
|
Leon
Ling Chen
|
|
55
|
|
Director
|
|
Hui
Shen
|
|
46
|
|
Director
|
Yong Hui Li has served as Fincera’s Chairman and Chief
Executive Officer and as a member of Fincera’s Board of
Directors since April 9, 2009. Mr. Li is the founder, Chairman and
Chief Executive Officer of ACG and Hebei Kaiyuan Real Estate
Development Co., Ltd. (“Hebei Kaiyuan”) which was
previously the second largest shareholder of Shijiazhuang
International Building, a construction company traded on the
Shenzhen Stock Exchange under the ticker symbol CN: 000600. Mr. Li
founded Hebei Kaiyuan in November 1998, and ACG in July 2007. Mr.
Li has also served as the Chairman of Prime Acquisition Corp., a
blank check company, since its inception in February 2011 until
September 2013. From February 2001 to May 2006, Mr. Li helped
oversee Hebei Kaiyuan’s development of the largest
steel-framed construction project in Hebei Province, consisting of
residential complexes, office towers and an upscale shopping mall,
which covered over one million square feet. In 1994, Mr. Li founded
Shijiazhuang Hi-tech Zone Kaiyuan Auto Trade Co., which was a
pioneer in the commercial vehicle leasing business in Hebei
Province. He graduated from Tianjin University in June 1985 with a
bachelor degree in Optical Physics. Yong Hui Li is Spencer Ang
Li’s father.
Jason Chia-Lun Wang has served as Fincera’s Chief
Financial Officer since July 2009. Mr. Wang has also served as an
independent director of Prime Acquisition Corp., a blank check
company, since its inception in February 2011 until September 2013.
From December 2007 until joining Fincera, Mr. Wang served as
Director of Research and Analytics at Private Equity Management
Group Inc. where he was responsible for analysis of prospective
investments, credit and cash flow analysis, and valuations. From
July 2005 until December 2007, Mr. Wang worked at QUALCOMM Inc., a
developer and innovator of advanced wireless technologies, products
and services, where his responsibilities included all phases of
venture capital investing, from target company identification to
portfolio management. From July 2004 until July 2005, Mr. Wang was
an investment banking associate at Relational Advisors LLC, where
he specialized in mergers and acquisitions and debt and equity
fundraising. From March 2000 until July 2002, Mr. Wang was the
Director of Corporate Development and Planning at 24/7 Real Media
Inc., a global digital marketing company. Prior to that, Mr. Wang
was an investment banking analyst in the Global Mergers and
Acquisitions Group at Chase Securities Inc. Mr. Wang received his
MBA from the UCLA Anderson School of Management in June 2004 and
bachelor degrees from both the Wharton School and the School of
Engineering and Applied Science at the University of Pennsylvania
in May 1998. Mr. Wang is a CPA licensed in Virginia.
Zijian “AJ” Zhou has served as Fincera’s
Chief Technology Officer since May 10, 2017. Mr. Zhou oversees all
development and operations of the Company’s internet
platforms and information systems. Prior to joining Fincera, from
June 2012 to May 2017, Mr. Zhou was the Development Manager for the
video search department at Baidu (NASDAQ: BIDU), the leading
Chinese online search company. At Baidu, Mr. Zhou was involved in
all aspects of the Baidu Video product development and development
team management, reporting directly to the department head. From
July 2010 to June 2012, Mr. Zhou was a Senior Software Developer at
Hanwang Technologies (SHE: 002362), a leading Chinese provider of
OCR and other image recognition technologies. Mr. Zhou received a
Bachelor’s degree in Computer Science from China University
of Mining and Technology in 2007 and a Master’s degree in
Software Engineering from Tsinghua University in 2010.
Spencer Ang Li has served as Fincera’s Vice President
of Operations since March 2018 and has served as a member of
Fincera’s Board of Directors since June 26, 2014. Previously,
Mr. Li served as Fincera’s Vice President of Product from
June 2015 to March 2018. As Vice President of Product, Mr. Li
oversaw the development and launch of all of Fincera’s
internet platforms, including CeraPay, CeraVest, TruShip,
AutoChekk, PingPing, and Qingyifenqi. Prior to joining Fincera,
from July 2011 to January 2014 Mr. Li was an Investment Banking
Analyst at Cogent Partners in New York, an advisor for private
equity secondary transactions. Mr. Li received a BS in Economics
and BA in Psychology from Duke University in 2011. Spencer Ang Li
is Yong Hui Li’s son.
Xiu “Gary” Wen has served as Fincera’s
Vice President of Product since March 2018. Previously, Mr. Wen
served as a Product Director for Fincera’s internet finance
products from January 14, 2016 to March 2018. As Product Director,
Mr. Wen managed the product design processes for the CeraVest and
CeraPay platforms. Prior to joining Fincera, from June 2015 to
January 2016, Mr. Wen was a Senior Product Manager at Tianhong
Asset Management, a firm controlled by Ant Financial and Alibaba
(NYSE: BABA) that operates the popular money market fund,
Yu’ebao. At Tianhong, Mr. Wen was responsible for leading
various product feature developments for Yu’ebao. From July
2014 to June 2015, Mr. Wen was Co-Founder and Vice President of
Product for Yangguang Haitao, a cross-border e-commerce platform
focused on selling imported consumer goods in China. From July 2011
to July 2014, Mr. Wen was a Senior Product Manager in the Internet
Product Department at Samsung Electronics in China. At Samsung, Mr.
Wen focused on feature development for Samsung smartphones and
wearables and led collaboration projects with Chinese internet
companies. From July 2008 to July 2011, Mr. Wen was a Product
Manager at Hanwang Technologies (SHE: 002362), a leading Chinese
provider of OCR and other image recognition technologies. Mr. Wen
received a Bachelor’s in Computer Science from Harbin
Engineering University in 2006 and a Master’s in Computer
Science from Harbin Institute of Technology in 2008
James Cheng-Jee Sha has served as a member of
Fincera’s Board of Directors since its inception. Mr. Sha
served as Chairman of Fincera’s Board of Directors and Chief
Executive Officer from its inception to April 9, 2009. Mr. Sha
founded and has been a partner of Spring Creek Investments since
December 1999. Spring Creek Investments is a private investment
firm specializing in principal investments and business
consultations with internet and infrastructure companies. Mr. Sha
also has served as the Chief Executive Officer of Optoplex
Corporation, a communication networks company, since 2001. From
September 2005 to February 2007, Mr. Sha served as Chief Executive
Officer of AppStream, a software application virtualization
company. From February 1999 to September 1999, Mr. Sha served as
the Chief Executive Officer for Sina.com (NASDAQ: SINA), a global
Chinese on-line media company and value added information service
provider. From July 1996 to August 1998, Mr. Sha served as the
Chief Executive Officer of Actra Business Systems, a joint venture
between Netscape Communications Corporation and GE Information
Services (GEIS), providing next-generation internet commerce
application solutions for both business-to-consumer and
business-to-business commerce markets. From August 1994 to August
1998, Mr. Sha served as Senior Vice President and General Manager
of Netscape Communications Corporation, a computer services company
until its merger with AOL. From May 1990 to August 1994, Mr. Sha
was a Vice President at Oracle Corporation (NASDAQ:ORCL), a
database management and development systems software company. From
June 1986 to May 1990, Mr. Sha was a Vice President at Wyse
Technology, Inc., a hardware, software and services computing
company. Mr. Sha currently serves as a member of the audit
committee and the Board of Directors of Tom.com (HK: 8282), a
wireless internet company in the PRC providing value-added
multimedia products and services. Mr. Sha also currently serves as
a director of Armorize Corp. From 1998 to 2000, Mr. Sha also served
on the board of Abovenet. Mr. Sha also serves as a trustee of the
University of California at Berkeley Foundation and is a Board
member of the Berkeley Chinese Alumni International Association.
Mr. Sha graduated from National Taiwan University with a BS in
Electrical Engineering, the University of California at Berkeley
with an MS in EECS and from Santa Clara University with an
MBA.
Diana Chia-Huei Liu has served as a member of
Fincera’s Board of Directors since its inception. Ms. Liu
served as President of Fincera from its inception to April 9, 2009.
Ms. Liu has also served as the Chief Executive Officer and a
director of Prime Acquisition Corp., a blank check company, since
its inception in February 2011. Ms. Liu has served as the President
and Managing Director of Cansbridge Capital, a private investment
firm specializing in early stage investments along the west coast
of North America (namely U.S. and Canada) and Asia, since August
1998. Prior to Cansbridge, Ms. Liu served as the Executive
Vice-President at Polaris Securities Group (TW: 6011), an
investment firm in Taiwan, where she founded and managed its North
American operations from April 1994 to August 1998. From August
1991 to April 1994, Ms. Liu was an account portfolio manager in
global private banking at the Royal Bank of Canada (NYSE:RY), a
full-service banking firm. From October 1988 to August 1991, Ms.
Liu served as the regional sales manager for the province of
British Columbia, Canada, at CIBC Securities, a subsidiary of CIBC
(NYSE:CM), a full- service banking firm, where she founded and
managed the mutual funds promotion division. Ms. Liu has served
since March 2006 as a member of the Executive Committee and the
Chair of the Investment Committee at the Asia Pacific Foundation, a
Canadian federal government created think tank and policy advisory
board where she works closely with the co-CEOs on operational
issues and investment of its endowment funds. In addition, she also
currently serves as a director of the Vancouver Goh Ballet Society
and BaySpec, Inc., a supplier of optical components. Ms. Liu
graduated with a BA in economics from the University of British
Columbia in Canada. Ms. Liu is the spouse of Mr. William Yu,
Fincera’s prior Chief Financial Officer.
Leon Ling Chen has served as a member of Fincera’s
Board of Directors since December 29, 2011. Mr. Chen is the
Managing Director of Graham Vacuum and Heat Transfer Technology
(Suzhou) Co., Ltd., the Chinese subsidiary of Graham Corporation
(NYSE Amex: GHM), where he manages China operations, oversees
financial control and accounting activities, and leads the
expansion of sales and distribution networks within China. Mr. Chen
joined Graham Vacuum and Heat Transfer Technology (Suzhou) Co.,
Ltd. in January of 2006, and also serves as a member of the board
of directors of the company. Prior to his tenure at Graham, Mr.
Chen was President and CEO of Bayspec Inc., a vertically integrated
spectral sensing company. Mr. Chen received a BS in engineering
from Tianjin University in China, and a BA in Economics from
University of International Business & Economics in Beijing,
China.
Hui “Tom” Shen, 46 has served a member of
Fincera’s Board of Directors since August 30, 2018. Mr. Shen
has served as the Head of Operations for Fincera since August 2015.
Concurrently, he has served as Executive Director for
Fincera’s online lending subsidiary, Qingyi Technology, since
July 2015. Since 2008, Mr. Shen has served in various roles at
Fincera headquarters, including General Manager of Administration,
Head of IT Operations, and Head of Human Resources. Before joining
Fincera, from 1998 to 2007, Mr. Shen was a Sales Manager at Hebei
Kaiyuan Real Estate Development where he managed and executed the
sales and marketing strategy. Mr. Shen received a Bachelor’s
degree in Agricultural Trade from Hebei Agricultural University in
1997.
The
term of each director is until the next election of directors or
their earlier resignation or removal. The term of Yong Hui Li as
Chief Executive Officer is until June 6, 2021, unless terminated or
extended pursuant to his employment contract with Fincera. The term
of Jason Wang as Chief Financial Officer is until March 1, 2022,
unless terminated or extended pursuant to his employment contract
with Fincera.
Pursuant
to the share exchange agreement entered into on February 4, 2009
and amended on March 11, 2009, James Cheng-Jee Sha and Diana
Chia-Huei Liu were nominated as members of Fincera’s Board of
Directors by the SCAC Shareholders’ Representative (as
defined in the share exchange agreement) and Yong Hui Li and Hui
Shen were nominated as members of Fincera’s Board of
Directors by the Fincera Shareholders’ Representative (as
defined in the share exchange agreement). Leon Ling Chen was
nominated upon the mutual agreement of the SCAC Shareholders’
Representative and the Fincera Shareholders’ Representative,
pursuant to the share exchange agreement.
The
business address of each party described above is 27/F, Kaiyuan
Finance Center, No. 5, East Main Street, Shijiazhuang, Hebei,
People’s Republic of China.
B. Compensation
Compensation Committee Interlocks and Insider
Participation
During
the last fiscal year, no officer and employee of Fincera, and no
former officer of Fincera participated in deliberations of
Fincera’s Board of Directors concerning executive officer
compensation.
Fincera Director Compensation
The
company pays an annual cash retainer of $30,000 to Leon Chen, James
Sha and Diana Liu, its independent directors.
Fincera’s Executive Officers and Employees
Executive Officers
The
Company has entered into employment agreements with each of the
executive officers. Yong Hui Li’s and Spencer Ang Li’s
employment agreements were renewed on June 6, 2018 until June 6,
2021, Mr. Wang’s employment agreement was renewed on March 1,
2019 until March 1, 2022, and Mr. Wen’s and Mr. Zhou’s
employment agreements were renewed on June 15, 2018 until June 15,
2021;
●
Yong
Hui Li does not receive compensation for serving as Chief Executive
Officer, Jason Wang receives $240,000 per year as base salary for
serving as Chief Financial Officer, Spencer Li receives $100,000
per year as base salary for serving as Vice President of
Operations, Xiu Wen receives RMB 785,000 per year as base salary
for serving as Vice President of Product, and Zijian Zhou receives
RMB 940,000 per year as base salary for serving as Chief Technology
Officer. No executive officer is entitled to a bonus, unless
otherwise approved by the board of directors, with the exception of
Xiu Wen and Zijian Zhou who may receive a bonus based on
semi-annual performance evaluations;
●
the
employment agreements may be terminated by the Company (i) upon
termination of the executive “for cause”, which is
defined as (A) the failure of the executive to properly carry out
his duties after notice by the Company of the failure to do so and
a reasonable opportunity for the executive to correct the same
within a reasonable period specified by the Company; (B) any breach
by the executive of one or more provisions of any written agreement
with, or written policies of, the Company or his fiduciary duties
to the Company likely to cause material harm to the Company and its
related parties, at the Company’s reasonable discretion, or
(C) any theft, fraud, dishonesty or serious misconduct by the
executive involving his duties or the property, business,
reputation or affairs of the Company and its related parties, (ii)
due to the executive’s death, (iii) in the event the
executive becomes eligible for the Company’s long-term
disability benefits or if the executive is unable to carry out his
responsibilities as a result of a physical or mental impairment for
more than 90 consecutive days or for more than 120 days in any
12-month period, subject to applicable laws, and (iv) without cause
upon one month written notice, in which case the executive will be
entitled to 3 months’ base salary severance to the extent the
executive is not otherwise employed during the severance
period;
●
the
employment agreements may be terminated by the respective
executives: (i) for any reason or no reason at all upon 3
months’ advanced notice, or (ii) for “good
reason” upon notice of the reason within 3 months of the
event causing such reason and subject to a 20-day cure period for
the Company. “Good reason” is defined as: a material
reduction in the executive’s base salary, except for
reductions that are comparable to reductions generally applicable
to similarly situated executives of Fincera if (i) such reduction
is effected by the Company without the consent of the executive and
(ii) such event occurs within 3 months after a change in control.
If the agreement is terminated by the executive for “good
reason” then the executive is entitled to 1 month’s
base salary severance to the extent the executive is not otherwise
employed during the severance period;
●
each
executive is subject to the non-compete, non-solicitation
provisions of the agreement for a term of one year following
termination of the employment agreement;
●
except
for “prior inventions” (which is defined as all
inventions, original works of authorship, developments,
improvements, and trade secrets which were made by the executive
prior to the executive’s employment with the Company), all
inventions and other intellectual property created by the executive
during the term of employment are the property of the Company, and
the executive agrees to assist the Company to secure such
intellectual property rights; and
●
the
employment agreements include other customary terms and conditions,
and are governed by the laws of Hong Kong.
Compensation
for senior executives generally consists of four elements: a base
salary, an annual performance bonus, equity and
benefits.
In
developing salary ranges, potential bonus payouts, equity awards
and benefit plans, it is anticipated that the compensation
committee of the Board of Directors will take into account: 1)
competitive compensation among comparable companies and for similar
positions in the market, 2) relevant ways to incentivize and reward
senior management for improving shareholder value while building
Fincera into a successful company, 3) individual performance, 4)
how best to retain key executives, 5) the overall performance of
Fincera and its various key component entities, 6) Fincera’s
ability to pay and 7) other factors deemed to be relevant at the
time.
Director and Executive Officer Compensation
The
following table shows information concerning the annual
compensation for services provided to Fincera by certain employees,
including its Chief Executive Officer and its Chief Financial
Officer.
|
Name and
Principal Position
|
|
Year
|
|
Salary
(RMB)
|
|
Bonus
(RMB)
|
|
Option Awards
(RMB)(1)
|
|
Stock Awards
(RMB) (2)
|
|
All other
Compensation (RMB)
|
|
Total
Compensation (RMB)
|
|
|
Yong
Hui Li, Chief Executive Officer
|
|
2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Jason
Wang, Chief Financial Officer
|
|
2018
|
|
1,647,168
|
|
137,264
|
|
—
|
|
—
|
|
—
|
|
1,784,432
|
|
|
Zijian
Zhou, Chief Technology Officer
|
|
2018
|
|
1,029,663
|
|
500,000
|
|
—
|
|
—
|
|
—
|
|
1,529,663
|
|
|
Xiu
Wen, Vice President of Product
|
|
2018
|
|
874,663
|
|
480,000
|
|
—
|
|
—
|
|
—
|
|
1,354,663
|
|
|
Spencer
Li, Vice President of Operations
|
|
2018
|
|
747,501
|
|
80,000
|
|
—
|
|
—
|
|
—
|
|
686,320
|
|
(1)
Amounts reflect the aggregate grant date fair value of option
awards as well as any modification charge computed in accordance
with FASB ASC Topic 718 and are not necessarily an indication of
which named executive officers received the most gains from
previously granted equity awards. The fair value of each option
grant is estimated based on the fair market value on the date of
grant and using the Black-Scholes option-pricing model. For a more
detailed discussion on the valuation model and assumptions used to
calculate the fair value of our stock options, refer to Note 13 to
the Consolidated Financial Statements.
(2)
Amounts reflect the aggregate grant date fair value of Restricted
Stock Units computed in accordance with FASB ASC Topic 718 and are
not necessarily an indication of which named executive officers
received the most gains from previously granted equity awards. The
grant date fair value of each Restricted Stock Unit is measured
based on the closing price of our common stock on the date of
grant.
Fincera Inc. 2009 Equity Incentive Plan
The
Fincera Inc. 2009 Equity Incentive Plan, which we refer as the 2009
incentive plan, was approved and took effect on April 8, 2009 upon
the approval by the shareholders of Fincera Inc.
Under
the terms of the 2009 incentive plan, 1,675,000 Fincera ordinary
shares are reserved for issuance in accordance with its terms
(provided, however, that dividend equivalent rights are payable
solely in cash and therefore do not reduce the number of shares
that may be granted under the incentive plan and that stock
appreciation rights only reduce the number of shares available for
grant under the incentive plan by the number of shares actually
received by the grantee in connection with the stock appreciation
right, if any). All awards under the incentive plan are made by
Fincera’s Board of Directors or its Compensation
Committee.
The
purpose of the incentive plan is to assist Fincera in attracting,
retaining and providing incentives to its employees, directors and
consultants, and the employees, directors and consultants of its
related parties, whose past, present and/or potential future
contributions to Fincera have been, are or will be important to the
success of Fincera and to align the interests of such persons with
Fincera’s shareholders. It is also designed to motivate
employees and to significantly contribute toward growth and
profitability, by providing incentives to the directors, employees
and consultants of Fincera and its related parties who, by their
position, ability and diligence are able to make important
contributions to the growth and profitability of Fincera and its
related parties. The various types of incentive awards that may be
issued under the incentive plan will enable Fincera to respond to
changes in compensation practices, tax laws, accounting regulations
and the size and diversity of its business and the business of its
related parties.
All
directors, employees and consultants of Fincera and its related
parties are eligible to be granted awards under the 2009 incentive
plan. Fincera did not award equity incentives to its executive
officers during 2016 under the 2009 incentive plan.
Fincera Inc. 2015 Omnibus Equity Incentive Plan
The
Fincera Inc. 2015 Omnibus Equity Incentive Plan, which we refer to
as the 2015 incentive plan, took effect on September 24, 2015 and
superseded the 2009 incentive plan. It was approved by shareholders
at the Company’s annual meeting of shareholders held on July
12, 2016.
Under
the terms of the 2015 incentive plan, 5,200,000 Fincera ordinary
shares are reserved for issuance in accordance with its terms
(provided, however, that dividend equivalent rights are payable
solely in cash and therefore do not reduce the number of shares
that may be granted under the incentive plan and that stock
appreciation rights only reduce the number of shares available for
grant under the incentive plan by the number of shares actually
received by the grantee in connection with the stock appreciation
right, if any). All awards under the incentive plan are made by
Fincera’s Board of Directors or its Compensation
Committee.
The
purpose of the incentive plan is to assist Fincera in attracting,
retaining and providing incentives to its employees, directors and
consultants, and the employees, directors and consultants of its
related parties, whose past, present and/or potential future
contributions to Fincera have been, are or will be important to the
success of Fincera and to align the interests of such persons with
Fincera’s shareholders. It is also designed to motivate
employees and to significantly contribute toward growth and
profitability, by providing incentives to the directors, employees
and consultants of Fincera and its related parties who, by their
position, ability and diligence are able to make important
contributions to the growth and profitability of Fincera and its
related parties. The various types of incentive awards that may be
issued under the incentive plan will enable Fincera to respond to
changes in compensation practices, tax laws, accounting regulations
and the size and diversity of its business and the business of its
related parties.
All
directors, employees and consultants of Fincera and its related
parties are eligible to be granted awards under the 2015 incentive
plan. Fincera did not award equity incentives to its executive
officers during 2016 under the 2015 incentive plan.
Description of the 2015 Incentive Plan
A
summary of the principal features of the 2015 incentive plan is
provided below, but is qualified in its entirety by reference to
the full text of the incentive plan, a copy of which was attached
as Exhibit 4.31 to our Annual Report on Form 20-F filed on May 2,
2016.
Awards
The
incentive plan provides for the grant of any type of arrangement to
an employee, director or consultant of Fincera or its related
parties, which involves or might involve the issuance of ordinary
shares, cash, stock options or stock appreciation rights, or a
similar right with a fixed or variable price related to the fair
market value of the ordinary shares and with an exercise or
conversion privilege related to the passage of time, the occurrence
of one or more events, or the satisfaction of performance criteria
or other conditions. Such awards include, without limitation,
incentive stock options, non-qualified stock options, stock
appreciation rights, sales or bonuses of restricted shares,
restricted share units and dividend equivalent rights, or any two
or more of such awards in combination, for an aggregate of not more
than 5,200,000 of the ordinary shares, to directors, employees and
consultants of Fincera or its related parties. If any award
expires, is cancelled, or terminates unexercised or is forfeited,
the number of ordinary shares subject thereto, if any, will again
be available for grant under the incentive plan. The number of
ordinary shares with respect to which stock options or stock
appreciation rights may be granted to a grantee under the incentive
plan in any calendar year cannot exceed 100,000. The number of
restricted ordinary shares or restricted share units which may be
granted to a grantee under the incentive plan in any calendar year
cannot exceed 100,000.
As of
December 31, 2018, there are approximately 1,285 employees,
directors and consultants who are currently eligible to receive
awards under the Incentive Plan. New directors, employees and
consultants of Fincera or its related parties are eligible to
participate in the incentive plan as well.
The
below table lists the grants made under the incentive plans. The
exercise prices represent the closing prices of the Ordinary Shares
on the dates of grant. The total vesting period for each of the
stock options is four years, with 25% vesting one year after the
date of grant and the remaining 75% vesting ratably each month for
three years thereafter. Each of these stock options has a term of
10 years. The total vesting period for Restricted Stock Units
(“RSUs”) granted by the Company is four years, with 25%
of the RSUs vesting on each anniversary from the date of
grant.
|
Grant
Date
|
|
Type of
Instrument
|
|
Quantity
|
|
|
Exercise
Price
|
|
||
|
September
3, 2009
|
|
Stock
options
|
|
|
1,363,680
|
|
|
$
|
4.75
|
|
|
December
3, 2009
|
|
Stock
options
|
|
|
1,041,888
|
|
|
$
|
12.83
|
*
|
|
May 19,
2010
|
|
Stock
options
|
|
|
54,048
|
|
|
$
|
11.90
|
*
|
|
August
19, 2010
|
|
Stock
options
|
|
|
728,160
|
|
|
$
|
13.60
|
*
|
|
March
23, 2011
|
|
Stock
options
|
|
|
144,000
|
|
|
$
|
18.19
|
*
|
|
September
24, 2015
|
|
Stock
options
|
|
|
1,027,916
|
|
|
$
|
14.00
|
|
|
December
28, 2015
|
|
Stock
options
|
|
|
279,616
|
|
|
$
|
13.38
|
|
|
April
29, 2016
|
|
Stock
options
|
|
|
272,400
|
|
|
$
|
13.55
|
|
|
September
27, 2016
|
|
Stock
options
|
|
|
42,000
|
|
|
$
|
13.60
|
|
|
November
29, 2016
|
|
Stock
options
|
|
|
314,000
|
|
|
$
|
13.60
|
|
|
April
28, 2017
|
|
Stock
options
|
|
|
71,360
|
|
|
$
|
16.35
|
|
|
June
16, 2017
|
|
Stock
options
|
|
|
16,000
|
|
|
$
|
15.80
|
|
|
October
13, 2017
|
|
Stock
options
|
|
|
1,063,312
|
|
|
$
|
17.00
|
|
|
September
13, 2018
|
|
Stock
options
|
|
|
10,000
|
|
|
$
|
12.50
|
|
|
April
28, 2017
|
|
Unrestricted
stock
|
|
|
18,070
|
|
|
$
|
16.35
|
|
|
October
13, 2017
|
|
Restricted
stock units
|
|
|
8,000
|
|
|
$
|
17.00
|
|
*On
August 6, 2012, the Company’s board of directors determined
to amend certain Share Option Award Agreements entered into
pursuant to the incentive plan to reduce the exercise price per
share thereunder to the current fair market value of the
Company’s ordinary shares, which is $7.25 per share. The
amendment affected 1,968,096 shares of stock options granted during
the prior periods. The reduction in the exercise price of the stock
options increased the fair value of share-based expense by
$1,281,000 in the year ended December 31, 2012. The Company’s
amendment also increased the unrecognized compensation expenses by
$575,000 which will increase the general and administrative
expenses and additional paid-in capital throughout the remaining
vesting period of the respective stock options.
As of
December 31, 2018, 787,748 of these stock options had been
exercised, and Fincera had recorded aggregate compensation expense
of RMB 151.8 million based on the estimated fair value of the stock
options on their dates of grant. All of the exercised stock options
utilized a net exercise method, and therefore, the Company did not
receive any cash proceeds from their exercise. The per share fair
value of the stock options granted under the incentive plan was
initially estimated using the Black-Scholes option-pricing model
with the following assumptions:
|
Date of
Grant
|
September
3,
2009
|
December
3,
2009
|
May
19,
2010
|
August
19,
2010
|
March
23,
2011
|
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
2.95%
|
2.87%
|
2.82%
|
2.06%
|
2.73%
|
|
Volatility
(3)
|
47%
|
42%
|
43%
|
46%
|
60%
|
|
Expected Life (in
years) (4)
|
6.08
|
6.08
|
6.08
|
6.08
|
6.08
|
|
Date of
Grant
|
September
24,
2015
|
December
28,
2015
|
April
29,
2016
|
September
27,
2016
|
November
29,
2016
|
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
1.84%
|
2.05%
|
2.05%
|
1.39%
|
2.12%
|
|
Volatility
(3)
|
26%
|
25%
|
41%
|
32%
|
32%
|
|
Expected Life (in
years) (4)
|
6.08
|
6.08
|
6.08
|
6.08
|
6.08
|
|
Date of
Grant
|
April
28,
2017
|
June
16,
2017
|
October
13,
2017
|
September,
13
2018
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
2.10%
|
1.97%
|
2.02%
|
2.90%
|
|
Volatility
(3)
|
23%
|
21%
|
18%
|
63.1%
|
|
Expected Life (in
years) (4)
|
6.08
|
6.08
|
6.08
|
6.08
|
(1)
The
Company has no expectation of paying regular cash dividends on its
common stock.
(2)
The
risk-free interest rate is based on the U.S. Treasury yield for a
term consistent with the expected term of the awards in effect at
the time of grant.
(3)
The
Company estimates the volatility of its ordinary shares at the date
of grant based on its historical monthly price
observations.
(4)
The
expected life of stock options granted under the incentive plan is
based on expected exercise patterns, which the Company believes are
representative of future behavior.
The
Company used the binomial model to estimate the fair value of the
modified options to reflect the amendment of the exercise prices of
1,968,096 shares of stock options previously granted in August
2012, using the following assumptions:
|
Date
of Grant
|
December
3,
2009
|
May
19,
2010
|
May
19,
2010
|
March
23,
2011
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
1.08%
|
1.17%
|
1.23%
|
1.30%
|
|
Volatility
(3)
|
40%
|
40%
|
40%
|
40%
|
|
Expected Life (in
years) (4)
|
7.30
|
7.80
|
8.00
|
8.60
|
|
Date
of Grant
|
December
3,
2009
|
May
19,
2010
|
May
19,
2010
|
March
23,
2011
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
1.08%
|
1.17%
|
1.23%
|
1.30%
|
|
Volatility
(3)
|
40%
|
40%
|
40%
|
40%
|
|
Expected Life (in
years) (4)
|
7.30
|
7.80
|
8.00
|
8.60
|
|
Date
of Grant
|
December
3,
2009
|
May
19,
2010
|
May
19,
2010
|
March
23,
2011
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
1.08%
|
1.17%
|
1.23%
|
1.30%
|
|
Volatility
(3)
|
40%
|
40%
|
40%
|
40%
|
|
Expected Life (in
years) (4)
|
7.30
|
7.80
|
8.00
|
8.60
|
(1)
The
Company has no expectation of paying regular cash dividends on its
common stock.
(2)
The
risk-free interest rate is based on the U.S. Treasury yield for a
term consistent with the expected term of the awards in effect at
the time of grant.
(3)
The
Company estimates the volatility of its common stock at the date of
grant based on the implied volatility of publicly traded options on
the common stock of companies within the same
industry.
(4)
The
expected life of stock options granted under the incentive plan is
based on expected exercise patterns, which the Company believes are
representative of future behavior.
The
following table summarizes outstanding options as at December 31,
2018, related weighted average fair value and life
information:
|
|
Options
Outstanding
|
Options
Exercisable
|
|||
|
Range of
Exercise Price Per Share
|
Number
Outstanding at December 31, 2018
|
Weighted Average
Fair Value
|
Weighted Average
Remaining Life (Years)
|
Number
Exercisable at December 31, 2018
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
$4.75 to
$17.00
|
3,980,671
|
$5.09
|
3.51
|
3,388,739
|
$8.35
|
Administration of the Incentive Plan
The
incentive plan is administered by either Fincera’s Board of
Directors or its compensation committee (referred to as the
committee), if the Board of Directors delegates administration of
the incentive plan. Among other things, the Board of Directors or,
if the Board of Directors delegates its authority to the committee,
the committee, has complete discretion, subject to the express
limits of the incentive plan, to determine the employees, directors
and consultants to be granted awards, the types of awards to be
granted, the terms and conditions of awards granted, the number of
Fincera ordinary shares subject to each award, if any, the exercise
price under each option, the base price of each stock appreciation
right, the term of each award, the vesting schedule and/or
performance goals for each award that utilizes such a schedule or
provides for performance goals, whether to accelerate vesting, the
value of the ordinary shares, and any required withholdings. The
Board of Directors or the committee may amend, modify or terminate
any outstanding award, provided that the grantee’s written
consent to such action is required if the action would adversely
affect the grantee. The Board of Directors or the committee is also
authorized to construe the award agreements and may prescribe rules
relating to the incentive plan. The Board of Directors or committee
may reduce the exercise price of options or reduce the base
appreciation amount of any stock appreciation right without
shareholder approval. Except as specified below, no award intended
to qualify as performance-based compensation for purposes of
Section 162(m) of the Code may have a per share exercise or
purchase price, if any, of less than 100% of the fair market value
of an Fincera ordinary share on the date of grant.
Special Terms Relating to Stock Options
The
incentive plan provides for the grant of stock options, which may
be either “incentive stock options” (ISOs), which are
intended to meet the requirements for special U.S. federal income
tax treatment under the Code, or “nonqualified stock
options” (NQSOs). Stock options may be granted under the
incentive plan on such terms and conditions as the Board of
Directors or the committee, if any, may determine; however, the per
ordinary share exercise price under a stock option granted under
the incentive plan may not be less than 100% of the “fair
market value” (as defined in the incentive plan) of an
ordinary share on the date of grant of the stock option, and the
term of an ISO may not exceed ten years (110% of such value and
five years in the case of an ISO granted to an employee who owns
(or is deemed to own) more than 10% of the total combined voting
power of all classes of capital stock of Fincera or a parent or
subsidiary of Fincera). ISOs may be granted to both employees and
non-employees. In addition, the aggregate fair market value of the
ordinary shares underlying one or more ISOs (determined at the time
of grant of the ISO or ISOs) which are exercisable for the first
time by any one employee or non-employee during any calendar year
may not exceed $100,000. The Board of Directors or the committee,
if any, may permit a cashless “net exercise” of stock
options granted under the incentive plan. As of December 31, 2018,
all the stock options granted are ISOs.
Additional Terms
Under
the incentive plan, upon the consummation of a “corporate
transaction” (as defined in the incentive plan), all
outstanding awards under the incentive plan will terminate, except
to the extent they are assumed in connection with the corporate
transaction.
Stock
options granted under the incentive plan as ISOs may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution
and may be exercised, during the lifetime of the grantee, only by
the grantee. Other awards are transferable (i) by will and by the
laws of descent and distribution and (ii) during the lifetime of
the grantee: (a) to a “holding company” (as defined in
the incentive plan) of such grantee, or (B) to the extent and in
the manner authorized by the Board of Directors or the committee,
if any. No ordinary shares will be delivered under the incentive
plan to any grantee or other person until such grantee or other
person has made arrangements acceptable to the Board of Directors
or the committee, if any, for the satisfaction of any national,
provincial or local income and employment tax withholding
obligations, including, without limitation, obligations incident to
the receipt of ordinary shares under the incentive
plan.
Amendments
Fincera’s
Board of Directors may at any time amend, alter, suspend or
terminate the incentive plan; provided, that no amendment requiring
shareholder approval will be effective unless such approval has
been obtained, and provided further that no amendment of the
incentive plan or its termination may be effected if it would
adversely affect the rights of a grantee without the
grantee’s consent.
Certain U.S. Federal Income Tax Consequences of the Incentive
Plan
The
following is a general summary of the U.S. federal income tax
consequences under current tax law to Fincera, were it subject to
U.S. federal income taxation on a net income basis, and to grantees
under the incentive plan who are individual citizens or residents
of the United States for U.S. federal income tax purposes
(“U.S. grantees”), of ISOs, NQSOs, sales or bonuses of
restricted shares, restricted share units, dividend equivalent
rights and SARs granted pursuant to the incentive plan. It does not
purport to cover all of the special rules that may apply, including
special rules relating to limitations on the ability of Fincera to
deduct certain compensation, special rules relating to deferred
compensation, golden parachutes, grantees subject to Section 16(b)
of the Exchange Act and the exercise of a stock option with
previously-acquired ordinary shares. This summary assumes that U.S.
grantees will hold their ordinary shares as capital assets within
the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the “Code”). This summary does not address
the application of the passive foreign investment company rules of
the Code to U.S. grantees, which are discussed generally in the
section of this Annual Report on Form 20-F in the section captioned
“Taxation – United States Federal Income Taxation
– Tax Consequences to U.S. Holders – Passive Foreign
Investment Company Rules”. In addition, this summary does not
address the foreign, state or local income or other tax
consequences, or any U.S. federal non-income tax consequences,
inherent in the acquisition, ownership, vesting, exercise,
termination or disposition of an award under the incentive plan or
ordinary shares issued pursuant thereto. Grantees are urged to
consult their own tax advisors concerning the tax consequences to
them of an award under the incentive plan or ordinary shares issued
pursuant thereto.
A U.S.
grantee generally does not recognize taxable income upon the grant
of an NQSO or an ISO. Upon the exercise of an NQSO, the U.S.
grantee generally recognizes ordinary income in an amount equal to
the excess, if any, of the fair market value of the ordinary shares
acquired on the date of exercise over the exercise price
thereunder, and Fincera would generally be entitled to a deduction
for such amount at that time. If the U.S. grantee later sells
ordinary shares acquired pursuant to the exercise of an NQSO, the
grantee generally recognizes a long-term or a short-term capital
gain or loss, depending on the period for which the ordinary shares
were held thereby. A long-term capital gain is generally subject to
more favorable tax treatment than ordinary income or a short-term
capital gain. The deductibility of capital losses is subject to
certain limitations.
Upon
the exercise of an ISO, the U.S. grantee generally does not
recognize taxable income. If the U.S. grantee disposes of the
ordinary shares acquired pursuant to the exercise of an ISO more
than two years after the date of grant and more than one year after
the transfer of the ordinary shares to the grantee, the grantee
generally recognizes a long-term capital gain or loss, and Fincera
would not be entitled to a deduction. However, if the grantee
disposes of such ordinary shares prior to the end of the required
holding period, all or a portion of the gain is treated as ordinary
income, and Fincera would generally be entitled to deduct such
amount.
In
addition to the U.S. federal income tax consequences described
above, the U.S. grantee may be subject to the alternative minimum
tax (“AMT”), which is payable to the extent it exceeds
the grantee’s regular income tax. For this purpose, upon the
exercise of an ISO, the excess of the fair market value of the
ordinary shares for which the ISO is exercised over the exercise
price thereunder for such ordinary shares is a preference item for
purposes of the AMT. In addition, the U.S. grantee’s basis in
such ordinary shares is increased by such excess for purposes of
computing the gain or loss on the disposition of the ordinary
shares for AMT purposes. If a U.S. grantee is required to pay any
AMT, the amount of such tax which is attributable to deferral
preferences (including any ISO adjustment) generally may be allowed
as a credit against the grantee’s regular income tax
liability (and, in certain cases, may be refunded to the grantee)
in subsequent years. To the extent the credit is not used, it may
be carried forward.
A U.S.
grantee who receives a bonus of restricted ordinary shares or who
purchases restricted ordinary shares, which, in either case, are
subject to a substantial risk of forfeiture and certain transfer
restrictions, generally recognizes ordinary compensation income at
the time the restrictions lapse in an amount equal to the excess,
if any, of the fair market value of the ordinary shares at such
time over any amount paid by the grantee for the ordinary shares.
Alternatively, the U.S. grantee may elect to be taxed upon receipt
of the restricted ordinary shares based on the value of the
ordinary shares at the time of receipt. Fincera would generally be
entitled to deduct such amount at the same time as ordinary
compensation income is required to be included by the U.S. grantee
and in the same amount. Dividends received with respect to such
restricted ordinary shares are generally treated as compensation,
unless the grantee elects to be taxed on the receipt (rather than
the vesting) of the restricted ordinary shares.
A U.S.
grantee generally does not recognize income upon the grant of an
SAR. The U.S. grantee recognizes ordinary compensation income upon
the exercise of the SAR equal to the increase in the value of the
underlying shares, and Fincera would generally be entitled to a
deduction for such amount.
A U.S.
grantee generally does not recognize income in connection with a
dividend equivalent right or restricted share unit until payments
are received thereunder. At such time, the U.S. grantee recognizes
ordinary compensation income equal to the amount of any cash
payments and the fair market value of any ordinary shares received,
and Fincera would generally be entitled to deduct such amount at
such time.
Retirement Benefits
As of
December 31, 2018, Fincera’s subsidiaries in the PRC have
participated the government-mandated employee welfare and
retirement benefit contribution and provided pension, retirement or
similar benefits to its employees. The PRC regulations require our
PRC subsidiaries to pay the local labor administration bureau a
monthly contribution at a stated contribution rate based on the
monthly basic compensation of qualified employees. The local labor
administration bureau, which manages various investment funds, will
take care of employee retirement, medical and other fringe
benefits. Our subsidiaries have no further commitments beyond this
monthly contribution.
Fincera’s
(excluding its subsidiaries) only employees are its executive
officers for which it has entered into employment contracts with.
Fincera does not accrue pension, retirement or similar benefits,
except for a nominal amount of employer matching that may occur for
U.S. based employees’ 401k plans.
C. Board
Practices
Board Committees
Fincera’s
Board of Directors has an audit committee, governance and
nominating committee, and compensation committee, and has adopted a
charter for each committee. Each committee consists of Leon Chen,
James Sha and Diana Liu, each of whom is an independent director.
James Sha has been designated an “Audit Committee Financial
Expert” under SEC rules and the current listing standards of
the NASDAQ Marketplace Rules. Our corporate governance practices
are designed to be the same as those followed by U.S. domestic
companies under the listing standards of NASDAQ.
Audit Committee
The
audit committee, consisting of Messrs. Sha and Chen and Ms. Liu,
oversees our financial reporting process on behalf of the board of
directors. The committee’s responsibilities include the
following functions:
●
appoint
and replace the independent auditors to conduct the annual audit of
our books and records;
●
review
the proposed scope and results of the audit;
●
review
and pre-approve the independent auditors’ audit and
non-audited services rendered;
●
approve
the audit fees to be paid;
●
review
accounting and financial controls with the independent auditors and
our internal auditors and financial and accounting
staff;
●
review
and approve related party transactions;
●
meeting
separately and periodically with management and our internal
auditor and independent auditors.
Our
board of directors has determined that Mr. Sha, the Chair of the
Audit Committee, is an “audit committee financial
expert” as defined by the SEC’s rules and the current
listing standards of the NASDAQ Market Place Rules.
Governance and Nominating Committee
The
governance and nominating committee, consisting of Messrs. Sha and
Chen and Ms. Liu, is responsible for identifying potential
candidates to serve on our board and its committees. The
committee’s responsibilities include the following
functions:
●
developing
the criteria and qualifications for membership on the
board;
●
recruiting,
reviewing and nominating candidates for election to the board or to
fill vacancies on the Board;
●
reviewing
candidates for election to the board proposed by shareholders, and
conducting appropriate inquiries into the background and
qualifications of any such candidates;
●
establishing
subcommittees for the purpose of evaluating special or unique
matters;
●
monitoring
and making recommendations regarding board committee functions,
contributions and composition; and
●
evaluating,
on an annual basis, the governance and nominating committee’s
performance.
The
governance and nominating committee will consider director
candidates recommended by shareholders. Shareholders who wish to
recommend to the governance and nominating committee a candidate
for election to the board should send their letters to Fincera
Inc., 27/F, Kaiyuan Finance Center, No. 5, East Main Street,
Shijiazhuang, Hebei, 050011, People’s Republic of China,
Attention: Governance and Nominating Committee. The corporate
secretary will promptly forward all such letters to the members of
the governance and nominating committee. Shareholders must follow
certain procedures to recommend to the governance and nominating
committee candidates for election as directors. In general, in
order to provide sufficient time to enable the governance and
nominating committee to evaluate candidates recommended by
shareholders in connection with selecting candidates for nomination
in connection with Fincera’s annual meeting of shareholders,
the corporate secretary must receive the shareholder’s
recommendation no later than thirty (30) days after the end of
Fincera’s fiscal year. For a list of information required to
be submitted with a recommendation, please contact Fincera’s
secretary at the address listed above.
Compensation Committee
The
compensation committee, consisting of Messrs. Sha and Chen and Ms.
Liu, is responsible for making recommendations to the board
concerning salaries and incentive compensation for our officers and
employees and administers our stock option plans. Its
responsibilities include the following functions:
●
review
Fincera’s corporate goals and objectives relevant to the
executives’ compensation at least annually; evaluate the
executives’ performance in light of such goals and
objectives; and, either as a compensation committee or, together
with the other independent directors (as directed by the board),
determine and approve the executives’ compensation level
based on this evaluation. In determining the long-term incentive
component of the executives’ compensation, the compensation
committee will consider Fincera’s performance, the value of
similar incentive awards to the executives at comparable companies,
the awards given to the executives in past years and any relevant
legal requirements and associated guidance of the applicable
law;
●
at
least annually review and make recommendations to the board with
respect to non-executive officer and independent director
compensation to assist the board in making the final determination
as to non-executive officer and independent director
compensation;
●
attempt
to ensure that Fincera’s compensation program is effective in
attracting and retaining key employees, reinforce business
strategies and objectives for enhanced shareholder value, and
administer the compensation program in a fair and equitable manner
consistent with established policies and guidelines;
●
administer
Fincera’s incentive-compensation plans and equity-based
plans, insofar as provided therein;
●
make
recommendations to the board regarding approval, disapproval,
modification, or termination of existing or proposed employee
benefit plans;
●
approve
any stock option award or any other type of award as may be
required for complying with any tax, securities, or other
regulatory requirement, or otherwise determined to be appropriate
or desirable by the compensation committee or board;
●
approve
the policy for authorizing claims for expenses from the
executives;
●
review
and assess the adequacy of this charter annually; and
●
review
and approve the compensation disclosure and analysis prepared by
Fincera’s management, as required to be included in
Fincera’s annual report on Form 20-F, or equivalent, filed
with the SEC.
Director Independence
Fincera’s
Board of Directors has determined that Messrs. Sha and Chen and Ms.
Liu qualify as independent directors under the rules of the NASDAQ
Stock Market because they do not currently own a large percentage
of Fincera’s capital stock, are not currently employed by
Fincera, have not been actively involved in the management of
Fincera and do not fall into any of the enumerated categories of
people who cannot be considered independent in the NASDAQ Stock
Market Rules.
D. Employees
On
December 31, 2018, our subsidiaries had 762 employees.
Fincera
has no contracts or collective bargaining agreements with labor
unions and has never experienced work stoppages. Fincera considers
its relations with its employees to be good.
E. Share
Ownership
See
Item 7 below.
ITEM 7. MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS
A. Major
Shareholders
The following table sets forth, as of February 28, 2019, certain
information regarding beneficial ownership of Fincera’s
ordinary shares by each person who is known by Fincera to
beneficially own more than 5% of Fincera’s ordinary shares.
The table also identifies the stock ownership of each of
Fincera’s directors, each of Fincera’s named executive
officers, and all directors and officers as a group. Except as
otherwise indicated, the shareholders listed in the table have sole
voting and investment powers with respect to the shares indicated.
Fincera’s major shareholders do not have different voting
rights than any other holder of Fincera’s ordinary
shares.
Ordinary shares which an individual or group has a right to acquire
within 60 days pursuant to the exercise or conversion of options,
warrants or other similar convertible or derivative securities are
deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the
table.
|
Name and Address of Beneficial Owner (1)
|
Amount and Nature of Beneficial Ownership
|
Approximate Percentage of Outstanding Ordinary Shares
(2)
|
|
Honest
Best Int’l Ltd. (3)
|
39,724,501
|
81.22%
|
|
Yong
Hui Li
|
39,724,501(4)
|
81.22%
|
|
James
Cheng-Jee Sha
|
2,590,314(5)
|
5.30%
|
|
Diana
Chia-Huei Liu
|
502,322(6)
|
1.03%
|
|
Leon
Ling Chen
|
5,600
|
*
|
|
Hui
Shen
|
33,652(7)
|
*
|
|
Jason
Wang
|
262,200(8)
|
*
|
|
Spencer
Ang Li
|
138,378
|
*
|
|
Xiu
Wen
|
14,902(9)
|
*
|
|
Zijian
Zou
|
8,968(10)
|
*
|
|
|
|
|
|
All
directors and executive officers as a group (eight
individuals)
|
43,280,837(11)
|
87.99%
|
* Less than 1%
(1)
Unless
indicated otherwise, the business address of each of the
individuals is 27/F, Kaiyuan Finance Center, No. 5, East Main
Street, Shijiazhuang, Hebei, People’s Republic of
China.
(2)
Based
on 48,908,860 ordinary shares of Fincera issued and outstanding as
of February 28, 2019, except that ordinary shares which an
individual or group has a right to acquire within 60 days pursuant
to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding
for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person
shown in the table.
(3)
Yong
Hui Li is the sole shareholder of Honest Best Int’l Ltd. and
has sole voting and dispositive power over such
shares.
(4)
Consists
of 39,724,501 shares of Fincera owned by Honest Best Int’l
Ltd., whose sole shareholder is Mr. Yong Hui Li.
(5)
Consists
of 1,990,314 shares owned by Sha Living Trust. Mr. Sha is a trustee
of Sha Living Trust, and 600,000 ordinary shares owned by
Irrevocable Trust of James CJ Sha and Wen-Hsing Sha. Mr.
Sha’s spouse is a trustee of this trust.
(6)
Includes
19,596 ordinary shares of Fincera owned by William Tsu-Cheng Yu,
Ms. Liu’s husband.
(7)
Includes
32,334 shares underlying fully vested and exercisable incentive
stock options.
(8)
Includes
230,400 shares underlying fully vested and exercisable incentive
stock options.
(9)
Includes
13,500 shares underlying fully vested and exercisable incentive
stock options.
(10)
Includes
7,333 shares underlying fully vested and exercisable incentive
stock options.
(11)
Includes
53,167 shares underlying fully vested and exercisable incentive
stock options.
For a description of the Fincera Inc. 2009 Equity Incentive Plan
and the Fincera Inc. 2015 Omnibus Equity Incentive Plan, please
refer to Item 6B.
B. Related Party
Transactions
See
Note 18 to the Consolidated Financial Statements provided herewith,
which is hereby incorporated by reference.
C. Interests of experts and
counsel.
Not
required.
ITEM 8. FINANCIAL
INFORMATION
A. Consolidated Statements
and Other Financial Information.
Please
see “Item 18. Financial Statements” for a list of the
financial statements filed as part of this annual
report.
B. Significant
Changes
None.
ITEM 9. THE OFFER AND
LISTING
A. Offer and Listing
Details
Fincera’s
ordinary shares have been quoted on the over the counter market
since October 4, 2011. Our ordinary shares are currently quoted on
the OTC QB market under the symbol YUANF.
The
table below reflects the high and low bid prices for
Fincera’s ordinary shares on the OTC QB for the period from
January 1, 2013 through February 28, 2019.
|
|
Ordinary
Shares
|
|
|
|
High
|
Low
|
|
Annual
Highs and Lows
|
|
|
|
2013
|
$10.50
|
$2.55
|
|
2014
|
10.00
|
4.00
|
|
2015
|
14.00
|
7.75
|
|
2016
|
15.50
|
9.00
|
|
2017
|
21.85
|
10.00
|
|
2018
|
25.20
|
7.50
|
|
Quarterly
Highs and Lows
|
|
|
|
|
|
|
|
2016
|
|
|
|
First
Quarter
|
$14.50
|
$14.00
|
|
Second
Quarter
|
14.25
|
11.20
|
|
Third
Quarter
|
15.50
|
12.60
|
|
Fourth
Quarter
|
15.00
|
13.40
|
|
2017
|
|
|
|
First
Quarter
|
$17.00
|
$16.00
|
|
Second
Quarter
|
16.80
|
10.00
|
|
Third
Quarter
|
17.50
|
14.50
|
|
Fourth
Quarter
|
21.85
|
16.80
|
|
2018
|
|
|
|
First
Quarter
|
$25.20
|
$22.00
|
|
Second
Quarter
|
22.00
|
18.00
|
|
Third
Quarter
|
21.00
|
12.50
|
|
Fourth
Quarter
|
15.50
|
7.50
|
|
Monthly
Highs and Lows
|
|
|
|
October
2018
|
$15.50
|
$7.50
|
|
November
2018
|
15.50
|
7.50
|
|
December
2018
|
15.50
|
15.00
|
|
January
2019
|
16.00
|
15.50
|
|
February
2019
|
15.50
|
15.50
|
|
|
|
|
Number of Holders. As of February 28, 2019, there were 172
holders of record of our outstanding ordinary shares, though we
believe that the number of beneficial holders is significantly
greater.
Dividends. On June 6, 2017, the Board of Directors declared
a one-time special cash dividend in the amount of $2.00 per share.
The total amount of cash to be distributed in the divided was $47.3
million and was paid on June 30, 2017 to all ordinary shareholders
of record as of the close of business on June 23, 2017, except that
$30.3 million of dividends payable to Mr. Li were withheld for
payment at a later date. On January 27, 2012, the Board of
Directors declared a one-time special cash dividend in the amount
of $0.25 per share. The total amount of cash distributed in the
dividend was $5,885,000 and paid on February 15, 2012, to all
ordinary shareholders of record as of the close of business on
February 8, 2012.
Any
future dividends paid will be solely at the discretion of our Board
of Directors.
B. Plan of
Distribution
Not
required.
C. Markets
Fincera’s
ordinary shares have been quoted on the over the counter market
(currently on the OTC QB) under the symbol YUANF since August 31,
2017. Previously, Fincera’s ordinary shares had been quoted
on the over the counter market under the symbol AUTCF since
February 28, 2012. Our ordinary shares were quoted the OTC Pink
Market under the symbol AUTC from October 4, 2011 to February 28,
2012, and prior to that our ordinary shares were listed on the
NASDAQ Capital Market under the symbol AUTC.
In June
2015, we changed our name from AutoChina International Ltd. to
Fincera Inc. to better suit our new internet-based business. FINRA
approved the name change to be processed for trading purposes and
also approved the Company’s trading symbol change to YUANF
commencing on August 31, 2017.
D. Selling
Shareholders
Not
required.
E. Dilution
Not
required.
F. Expenses of the
Issue
Not
required.
ITEM 10. ADDITIONAL
INFORMATION
A. Share
Capital
Not
required.
B. Memorandum and Articles
of Association
We
incorporate by reference into this Annual Report the description of
our second amended and restated memorandum and articles of
association contained in the Company’s registration statement
on Form F-1/A, Registration No. 333-159607, filed on November 23,
2009.
Fincera
is authorized to issue 1,000,000,000 ordinary shares, par value
$.001, and 1,000,000 preferred shares, par value $.001.
Fincera’s shareholders of record of ordinary shares are
entitled on a poll to one vote for each ordinary share held on all
matters to be voted on by shareholders.
Members
of Fincera’s Board of Directors serve for indefinite terms.
There is no cumulative voting with respect to the election of
directors, with the result that the holders of more than 50% of the
shares eligible to vote for the election of directors can elect all
of the directors.
Fincera’s
shareholders of ordinary shares have no conversion, preemptive or
other subscription rights and there are no sinking fund or
redemption provisions applicable to the ordinary
shares.
To the
Company’s knowledge there are no limitations on the rights of
non-resident or foreign shareholders to hold our securities or
exercise voting rights.
C. Material
Contracts
Other
than in the ordinary course of business and other than those
described under this item, in “Item 4. Information on the
Company — A. History and Development of the Company” or
elsewhere in this annual report, we have not entered into any
material contract during the two years immediately preceding the
date of this annual report.
D. Exchange Controls and
Other Limitations Affecting Security Holders
Under
Cayman Islands law, there are no exchange control restrictions in
the Cayman Islands.
E. Taxation
The following summary of the material Cayman Islands, PRC and U.S.
federal income tax consequences of an investment in our ordinary
shares, sometimes referred to as our “securities,” is
based upon laws and relevant interpretations thereof in effect as
of the date of this Annual Report, all of which are subject to
change. This summary does not deal with all possible tax
consequences relating to an investment in our ordinary shares, such
as the tax consequences under state, local and other tax laws. As
used in this discussion, references to “we,”
“our,” or “us” refer only to Fincera Inc.,
and references to “ACG” refer only to AutoChina Group
Inc.
Cayman Islands Taxation
The
Government of the Cayman Islands will not, under existing
legislation, impose any income, corporate or capital gains tax,
estate duty, inheritance tax, gift tax or withholding tax upon us
or our security holders. The Cayman Islands are not party to any
double taxation treaties.
No
Cayman Islands stamp duty will be payable by our security holders
in respect of the issue or transfer of our securities. However, an
instrument transferring title to a security, if brought into or
executed in the Cayman Islands, would be subject to a nominal stamp
duty.
PRC Taxation
The
following is a summary of the material PRC tax consequences
relating to the acquisition, ownership and disposition of our
securities.
Our
security holders should consult with their own tax advisers
regarding the PRC tax consequences of the acquisition, ownership
and disposition of our securities in their particular
circumstances.
Resident Enterprise Tax Treatment
In
March 2007, the Fifth Session of the Tenth National People’s
Congress promulgated the Enterprise Income Tax Law of the PRC, or the EIT Law, which
became effective on January 1, 2008 and was amended in 2017. Under
the EIT Law, enterprises are classified as "resident enterprises"
and "non-resident enterprises." Pursuant to the EIT Law and its
implementing rules, enterprises established outside China whose "de
facto management bodies" are located in China are considered
"resident enterprises", which means that it is treated in a manner
similar to a PRC domestic enterprise for enterprise income tax
purposes and subject to the uniform 25% enterprise income tax rate
on worldwide income. According to the implementing rules of the EIT
Law, "de facto management body" refers to a managing body that in
practice exercises "substantial and overall management and control
over the production and business operations, personnel, accounting
and properties" of an enterprise.
In
April 2009, the SAT issued Circular of the State Administration of
Taxation on Issues Concerning the Identification of
Chinese-Controlled Overseas Registered Enterprises as Resident
Enterprises in Accordance with the Actual Standards of
Organizational Management, or SAT Circular 82, which was
retroactively effective as of January 1, 2008. SAT Circular 82
provides that an overseas incorporated enterprise that is
controlled domestically will be recognized as a "tax-resident
enterprise" by virtue of having a "de facto management body" in
China and will be subject to PRC enterprise income tax on its
worldwide income only if it satisfies all of the following
conditions: (i) the senior management responsible for daily
production or business operations are primarily located in the PRC,
and the location(s) where such senior management execute their
responsibilities are primarily in the PRC; (ii) strategic financial
and personnel decisions are made or approved by organizations or
personnel located in the PRC; (iii) major properties, accounting
ledgers, company seals and minutes of board meetings and
stockholder meetings, etc., are located or maintained in the PRC;
and (iv) 50% or more of the board members with voting rights or
senior management habitually reside in the PRC.
Following
SAT Circular 82, in July 2011, the SAT issued the Administrative Measures for Income Tax on
Overseas Incorporated Enterprise that is Controlled Domestically
(Trial Implementation), or SAT Bulletin 45, which specifies
that the determination of the PRC tax resident status for overseas
incorporated enterprises can be made either by (i) applying for
determination by tax authorities after a self-assessment by the
enterprises or (ii) determination by tax authorities upon
investigation and discovery by the tax authorities. In the latter
case, if the PRC tax authorities determine that each of our
offshore entities (including Fincera Inc., ACG, Fancy Think Limited
and Eastern Eagle), or Fincera Offshore Entities, is a "resident
enterprise" for PRC EIT purposes, a number of tax consequences
could follow. First, Fincera Offshore Entities could be subject to
the EIT at a rate of 25% on their worldwide taxable income, as well
as PRC enterprise income tax reporting obligations. Second, the EIT
Law provides that dividend income between "qualified resident
enterprises" is exempt from income tax. As a result, if Fincera
Offshore Entities are treated as PRC "resident enterprises," all
dividends paid from Ganglian or Chuanglian to us (through Fancy
Think Limited and ACG) or from Hebei Anyong Trading to us (through
Eastern Eagle and ACG) would constitute dividend income between
"qualified resident enterprises" and would therefore qualify for
tax exemption.
Although
SAT Circular 82 and SAT Bulletin 45 only apply to
offshore-incorporated enterprises controlled by PRC enterprises or
PRC enterprise groups and not those controlled by PRC individuals
or foreigners, the determination criteria set forth therein may
reflect the SAT’s general position on how the term "de facto
management body" could be applied in determining the tax resident
status of offshore enterprises, regardless of whether they are
controlled by PRC enterprises, individuals or
foreigners.
As of
the date this document is filed, there has not been a definitive
determination as to the "resident enterprise" or "non-resident
enterprise" status of Fincera Offshore Entities. However, as most
of Fincera Offshore Entities’ management members are based in
China, it remains unclear how the tax residency rule will apply to
these cases. As the tax residency 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" as applicable to Fincera Offshore
Entities; as a result, Fincera Offshore Entities may be treated as
a resident enterprise for PRC tax purposes under the EIT Law, and
may therefore be subject to PRC income tax on global income. We are
actively monitoring the possibility of "resident enterprise"
treatment for the applicable tax years and are evaluating
appropriate organizational changes to avoid this treatment, to the
extent possible. However, since it is not anticipated that Fincera
Offshore Entities would receive dividends or generate other income
in the near future, Fincera Offshore Entities are not expected to
have any income that would be subject to the 25% enterprise income
tax on worldwide income in the near future. We will consult with
the PRC tax authorities and make any necessary tax payment if
Fincera Offshore Entities (based on future clarifying guidance
issued by the PRC), or the PRC tax authorities, determine that
Fincera Offshore Entities are PRC resident enterprise under the EIT
Law, and if Fincera Offshore Entities were to have income in the
future.
Dividends from Chuanglian, Ganglian and Hebei Anyong
Trading
The EIT
Law and the implementing rules of the EIT Law provide that (A) EIT
at a standard tax rate of 25% will normally be applicable to
investors that are "non-resident enterprises" which (i) have
establishments or premises of business inside the PRC, and (ii) the
income in connection with their establishment or premises of
business is sourced from the PRC or the income is earned outside
the PRC but has effective connection with their establishments or
places of business inside the PRC, and (B) PRC withholding tax at a
standard tax rate of 10% will normally be applicable to dividends
payable to investors that are "non-resident enterprises" which (i)
do not have an establishment or place of business in the PRC or
(ii) have an establishment or place of business in the PRC, but the
relevant income is not effectively connected with the establishment
or place of business, to the extent such dividends are derived from
sources within the PRC. If Fancy Think Limited and Eastern Eagle
are not treated as a resident enterprise under the EIT Law, then
dividends that Fancy Think Limited receives from Chuanglian and
Ganglian and dividends that Eastern Eagle receives from Hebei
Anyong Trading may be subject to PRC withholding tax at the tax
rate of 10% (unless a lower withholding tax rate applies under the
Tax Treaty or Tax Arrangement, as mentioned below).
Tax
treaty (or Tax Arrangement) between the PRC and the jurisdiction in
which a non-PRC investor resides may reduce withholding tax rate on
such dividend income, with respect to such non-PRC enterprise
investor if certain conditions under tax treaty and domestic tax
laws are fulfilled. For example, 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, or the PRC-Hong Kong Tax
Arrangement, and PRC domestic tax laws, if the Hong Kong
enterprise is the beneficial owner of such dividend income and is
allowed to enjoy the treaty benefits regarding favorable
withholding tax rate by PRC tax authority (basically, Hong Kong
enterprise shall own more than 25% of the equity interest in a
company in China and shall not be deemed to be a conduit by the PRC
tax authorities), the 10% PRC withholding tax on the dividends the
Hong Kong enterprise receives from such company in China can be
reduced to 5%.
In
February 2009, the SAT issued the Notice of the State Administration of Taxation
on the Issues concerning the Application of the Dividend Clauses of
Tax Agreements, or SAT Circular 81, which stipulates 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 SAT issued the Announcement of the State Administration of
Taxation on Promulgation of the Administrative Measures for
Non-Resident Taxpayers to Enjoy Treatments under Tax
Treaties, or SAT Circular 60, which became effective on
November 1, 2015. SAT 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.
As a
result, if Fancy Think Limited and Eastern Eagle were treated as a
PRC non-resident enterprise” under the EIT Law, then
dividends that Fancy Think Limited receives from Chuanglian and
Ganglian or dividends that Eastern Eagle receives from Hebei Anyong
Trading (assuming such dividends were considered sourced within the
PRC) (i) may be subject to a lower 5% PRC withholding tax, if the
PRC-Hong Kong Tax Arrangement were applicable, or (ii) if such Tax
Arrangement does not apply (i.e., because the PRC tax authorities
may deem Fancy Think Limited and/or Eastern Eagle to be a conduit
not entitled to treaty benefits), may be subject to a 10% PRC
withholding tax. Similarly, if we or ACG were treated as a PRC
“non-resident enterprise” under the EIT Law, and Fancy
Think Limited and /or Eastern Eagle were treated as a PRC "resident
enterprise" under the EIT Law, then dividends that we or ACG
receive from Fancy Think Limited and/or Eastern Eagle (assuming
such dividends were considered sourced within the PRC) may be
subject to a 10% PRC withholding tax. Any such taxes on dividends
could materially reduce the net amount of dividends, if any, we
could pay to our shareholders. However, according to SAT
Circular 81 and SAT 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, then we
shall not enjoy the tax treatment prescribed in the tax treaty, the
relevant tax authorities have the right to make
adjustments.
As of
the date this document is filed, there has not been a definitive
determination as to the “resident enterprise” or
“non-resident enterprise” status of Fincera Offshore
Entities. As indicated above, however, Chuanglian, Ganglian and
Hebei Anyong Trading are not expected to pay any dividends in the
near future. We will consult with the PRC tax authorities and make
any necessary tax withholding if, in the future, Chuanglian,
Ganglian and Hebei Anyong Trading were to pay any dividends and
Fincera Offshore Entities (based on future clarifying guidance
issued by the PRC), or the PRC tax authorities, determine that any
of Fincera Offshore Entities is a non-resident enterprise under the
EIT Law.
Dividends that Non-PRC Resident Investors Receive From Us; Gain on
the Sale or Transfer of Our Securities
If
dividends payable to or gains recognized by our non-resident
enterprise investors are treated as PRC-sourced income, then the
dividends that non-resident enterprise investors receive from us
and any such gain on the sale or transfer of our securities may be
subject to PRC income tax under the PRC tax laws.
Under
the EIT Law and the implementing rules of the EIT Law, PRC
withholding tax at the standard rate of 10% is applicable to
dividends payable to investors that are “non-resident
enterprises,” which (i) do not have an establishment or place
of business in the PRC or (ii) have an establishment or place of
business in the PRC but the relevant income is not effectively
connected with the establishment or place of business, to the
extent that such dividends have their sources within the PRC.
Similarly, any gain realized on the transfer of our securities by
such enterprise investors is also subject to 10% PRC income tax if
such gain is regarded as PRC-sourced income.
The
dividends paid by us to non-resident enterprise investors with
respect to our ordinary shares, or gain non-resident enterprise
investors may realize from the sale or transfer of our securities,
may be treated as PRC-sourced income and, as a result, may be
subject to PRC withholding tax at a rate of 10%. In such event, we
may be required to withhold a 10% PRC tax on any dividends paid to
non-resident enterprise investors. In addition, non-resident
enterprise investors in our securities may be responsible for
paying PRC withholding tax at a rate of 10% on any gain realized
from the sale or transfer of our securities if such non-resident
enterprise investors and the gain satisfy the requirements under
the EIT Law and its implementing rules. However, under the EIT Law
and its implementing rules, we would not have an obligation to
withhold PRC income tax in respect of the gains that non-resident
enterprise investors (including U.S. investors) may realize from
the sale or transfer of our securities.
If we
were to pay any dividends in the future, we would consult with the
PRC tax authorities and if we (based on future clarifying guidance
issued by the PRC), or the PRC tax authorities, determine that we
must withhold PRC tax on any dividends payable by us under the EIT
Law, we will make any necessary withholding tax on dividends
payable to our non-resident enterprise investors. If non-resident
enterprise investors as described under the EIT Law (including U.S.
investors) realized any gain from the sale or transfer of our
securities and if such gain were considered as PRC-sourced income,
such non-resident enterprise investors would be responsible for
paying 10% PRC withholding tax on the gain from the sale or
transfer of our securities. As indicated above, under the EIT Law
and its implementing rules, we would not have an obligation to
withhold PRC income tax in respect of the gains that non-resident
enterprise investors (including U.S. investors) may realize from
the sale or transfer of our securities.
Moreover,
the SAT issued the Notice on
Strengthening Administration of Enterprise Income Tax for Share
Transfers by Non-Resident Enterprises, or SAT Circular 698
,in December 2009, according to which a non-resident enterprise
transferring shares in a Foreign Enterprise (i.e. an offshore
enterprise that directly or indirectly holds an equity interest in
a PRC enterprise) are subject to PRC income tax on the gains from
the transfer (other than a purchase and sale of shares issued by a
PRC resident enterprise in public securities market) if the PRC tax
authorities determine that the arrangement lacks a reasonable
commercial purpose. The PRC tax authorities will re-characterize
the indirect transfer as a direct transfer of the PRC enterprise,
and therefore subject to PRC income taxes.
To
date, the SAT has been monitoring all kinds of offshore indirect
transfer, and on February 3, 2015, the SAT released the
Announcement on Several Issues
Concerning the Enterprise Income Tax on the Indirect Transfers of
Properties by Non-resident Enterprises, or SAT Circular 7,
to supersede most of the rules under Circular 698. SAT Circular 7
introduces a new tax regime that is significantly different from
that under SAT Circular 698. Firstly, it expands the transactions
covered under Circular 698 (i.e. offshore indirect equity
transactions) into covering transactions involving the transfer of
"China Taxable Properties", which includes (i) assets attributed to
an establishment in China, (ii) immovable property in China, and
(iii) shares in Chinese resident enterprises. Second, SAT Circular
7 provides clearer criteria than SAT Circular 698 on how to assess
the reasonable commercial purposes and introduces "safe harbor" and
"blacklisted" scenarios. Third, SAT Circular 7 encourages the
transaction parties of an indirect transfer that are neither within
the Safe Harbor Scenario nor the Blacklisted Scenario to
voluntarily file a report to the in-charge China tax authority for
assessment of reasonable business purpose. If the parties of the
indirect transfer fail to file such a report, but the indirect
transfer is identified as short of reasonable business purpose, the
China tax authority will be entitled to collect the EIT on the
capital gain and also impose a heavy penalty and a late payment
interest. SAT Circular 7 brings challenges to both the foreign
transferor and the transferee of the offshore indirect transfer as
they have to make a self-assessment on whether the transaction
should be subject to PRC taxes and to file or withhold the PRC
taxes accordingly. Thus, it is advisable for the transaction
parties to consult their PRC tax advisor regarding the PRC tax
implications.
In
October 2017, the SAT issued the Bulletin of SAT on Issues Concerning the
Withholding of Non-resident Enterprise Income Tax at Source,
or SAT Bulletin 37, which, among others, repeals SAT Circular 698
and certain rules stipulated in SAT Circular 7. The Bulletin 37
further details and clarifies the tax withholding methods in
respect of income of non-resident enterprises.
Penalties for Failure to Pay Applicable PRC Income Tax
Non-resident
investors in us may be subject to the PRC income tax at a rate of
10% on any gain realized from the sale or transfer of our
securities if such non-resident investors and the gain trigger the
tax rules under the EIT Law and its implementing rules, as
described above.
According
to the EIT Law and its implementing rules, the PRC Tax
Administration and Tax Collection Law and its implementing rules,
tax criminal provisions under PRC Criminal Law, SAT Circular 7, SAT
Bulletin 37and other applicable PRC laws or regulations
(collectively the "Tax Related Laws"), where any gain derived by
non-resident investors from the sale or transfer of our securities
is subject to any income tax in the PRC, and such non-resident
investors fail to file any tax return or pay tax in this regard
pursuant to the Tax Related Laws, they may be subject to certain
fines, penalties or punishments, including without limitation: (1)
if a non-resident investor fails to file a tax return and present
the relevant information in connection with tax payments, the
competent tax authorities shall order it to do so within the
prescribed time limit and may impose a fine up to RMB 2,000, and in
serious cases, may impose a fine ranging from RMB 2,000 to RMB
10,000; (2) if a non-resident investor fails to file a tax return
or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax
amount, late payment interests on unpaid tax amount (the daily
interest rate is 0.05% of the unpaid tax amount, starting from the
first day when the tax payment liability arose), and a fine ranging
from 50% to 500% of the unpaid tax amount; (3) if a non-resident
investor fails to file a tax return or pay the tax within the
prescribed time limit according to the order by the PRC tax
authorities, the PRC tax authorities may collect and check
information about the income items of the non-resident investor in
the PRC and other payers (the "Other Payers") who will pay amounts
to such non-resident investor, and send a "Notice of Tax Issues" to
the Other Payers to collect the unpaid tax amount and impose late
payment interests and fines on such non-resident investor from the
amounts otherwise payable to such non-resident investor by the
Other Payers; (4) if a non-resident investor fails to pay the tax
payable within the prescribed time limit as ordered by the PRC tax
authorities, a fine may be imposed on the non-resident investor
ranging from 50% to 500% of the unpaid tax amount; and the PRC tax
authorities may, upon approval by the director of the tax bureau
(or sub-bureau) of, or higher than, the county level, take the
following compulsory measures: (i) notify in writing the
non-resident investor’s bank or other financial institution
to withhold from the account thereof for payment of the amount of
tax payable, and (ii) detain, seal off, or sell by auction or on
the market the non-resident investor’s commodities, goods or
other property in a value equivalent to the amount of tax payable;
or (5) if the non-resident investor fails to pay all or part of the
amount of tax payable late payment interests for outstanding tax
payment, and cannot provide a guarantee to the tax authorities, the
tax authorities may notify the entry-exit authorities to prevent
the non-resident investor or its legal representative from leaving
the territory of the PRC. In an extreme case, taxpayer might be
subject to PRC tax criminal liability (for example, fixed-term
imprisonment if tax evasion crime is constituted to deliberately
evade PRC taxes by means stipulated under PRC Criminal
Law).
United States Federal Income Taxation
General
The
following is a summary of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of our
ordinary shares. The discussion below of the U.S. federal income
tax consequences to “U.S. Holders” will apply to a
beneficial owner of our ordinary shares that is for U.S. federal
income tax purposes:
●
an
individual citizen or resident of the United States;
●
a
corporation (or other entity treated as a corporation) that is
created or organized (or treated as created or organized) in or
under the laws of the United States, any state thereof or the
District of Columbia;
●
an
estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
●
a trust
if (i) a U.S. court can exercise primary supervision over the
trust’s administration and one or more U.S. persons are
authorized to control all substantial decisions of the trust, or
(ii) it has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.
If a
beneficial owner of our ordinary shares is not described as a U.S.
Holder and is not an entity treated as a partnership or other
pass-through entity for U.S. federal income tax purposes, such
owner will be considered a “Non-U.S. Holder.” The U.S.
federal income tax consequences applicable specifically to Non-U.S.
Holders are described below under the heading “Tax
Consequences to Non-U.S. Holders.”
This
summary is based on the Internal Revenue Code of 1986, as amended,
or the “Code,” its legislative history, Treasury
regulations promulgated thereunder, published rulings and court
decisions, all as currently in effect. These authorities are
subject to change or differing interpretations, possibly on a
retroactive basis.
This
discussion does not address all aspects of U.S. federal income
taxation that may be relevant to any particular holder based on
such holder’s individual circumstances. In particular, this
discussion considers only holders that own and hold our ordinary
shares as capital assets within the meaning of Section 1221 of the
Code and does not address the alternative minimum tax. In addition,
this discussion does not address the U.S. federal income tax
consequences to holders that are subject to special rules,
including:
●
financial
institutions or financial services entities;
●
broker-dealers;
●
persons
that are subject to the mark-to-market accounting rules under
Section 475 of the Code;
●
tax-exempt
entities;
●
governments
or agencies or instrumentalities thereof;
●
insurance
companies;
●
regulated
investment companies;
●
real
estate investment trusts;
●
certain
expatriates or former long-term residents of the United
States;
●
persons
that actually or constructively own 5% or more of our voting
shares;
●
persons
that acquired our ordinary shares pursuant to the exercise of
employee stock options, in connection with employee stock incentive
plans or otherwise as compensation;
●
persons
that hold or held our securities as part of a straddle,
constructive sale, hedging, conversion or other integrated
transaction;
●
persons
whose functional currency is not the U.S. dollar;
●
controlled
foreign corporations; or
●
passive
foreign investment companies.
This
discussion does not address any aspect of U.S. federal non-income
tax laws, such as gift or estate tax laws, state, local or non-U.S.
tax laws or, except as discussed herein, any tax reporting
obligations applicable to a holder of our ordinary shares.
Additionally, this discussion does not consider the tax treatment
of partnerships or other pass-through entities or persons who hold
our ordinary shares through such entities. If a partnership (or
other entity classified as a partnership for U.S. federal income
tax purposes) is the beneficial owner of our ordinary shares, the
U.S. federal income tax treatment of a partner in the partnership
will generally depend on the status of the partner and the
activities of the partnership. This discussion also assumes that
any distribution made (or deemed made) by us on our ordinary shares
and any consideration received (or deemed received) by a holder in
consideration for the sale or other disposition of such ordinary
shares will be in U.S. dollars.
We have
not sought, and will not seek, a ruling from the Internal Revenue
Service, or the “IRS,” or an opinion of counsel as to
any U.S. federal income tax consequence described herein. The IRS
may disagree with the description herein, and its determination may
be upheld by a court. Moreover, there can be no assurance that
future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements
in this discussion.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES
TO ANY PARTICULAR HOLDER OF OUR SECURITIES MAY BE AFFECTED BY
MATTERS NOT DISCUSSED HEREIN, EACH HOLDER OF OUR SECURITIES IS
URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC
TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND
APPLICABLE TAX TREATIES.
Tax Consequences to U.S. Holders
Taxation of Cash Distributions Paid on Ordinary Shares
Subject
to the passive foreign investment company, or “PFIC,”
rules discussed below, a U.S. Holder generally will be required to
include in gross income as ordinary income the amount of any cash
dividend paid on our ordinary shares. A cash distribution on our
ordinary shares generally will be treated as a dividend for U.S.
federal income tax purposes to the extent paid out of our current
or accumulated earnings and profits (as determined under U.S.
federal income tax principles). Such dividend generally will not be
eligible for the dividends-received deduction generally allowed to
domestic corporations in respect of dividends received from other
domestic corporations. The portion of such distribution, if any, in
excess of such earnings and profits generally will constitute a
return of capital that will be applied against and reduce the U.S.
Holder’s adjusted tax basis in such ordinary shares (but not
below zero). Any remaining excess will be treated as gain from the
sale or other taxable disposition of such ordinary shares and will
be treated as described under “—Taxation on the
Disposition of Ordinary Shares” below.
With
respect to non-corporate U.S. Holders, such dividends may be
subject to U.S. federal income tax at the lower applicable
long-term capital gains tax rate (see “—Taxation on the
Disposition of Ordinary Shares” below) provided that (1) our
ordinary shares are readily tradable on an established securities
market in the United States or, in the event we are deemed to be a
Chinese “resident enterprise” under the EIT Law, we are
eligible for the benefits of the Agreement between the Government
of the United States of America and the Government of the
People’s Republic of China for the Avoidance of Double
Taxation and the Prevention of Tax Evasion with Respect to Taxes on
Income, or the “U.S.-PRC Tax Treaty,” (2) we are not a
PFIC, as discussed below, for either the taxable year in which the
dividend was paid or the preceding taxable year, and (3) certain
holding period requirements are met. Under published IRS authority,
ordinary shares are considered for purposes of clause (1) above to
be readily tradable on an established securities market in the
United States only if they are listed on certain exchanges, which
presently do not include the OTC QB. Because our ordinary shares
are currently quoted only on the OTC QB and, in any event, we may
be treated as a PFIC (as discussed below), any cash dividends paid
on our ordinary shares currently may not qualify for the lower
rate. U.S. Holders should consult their own tax advisors regarding
the availability of the lower rate for any cash dividends paid with
respect to our ordinary shares.
If a
PRC income tax applies to cash dividends paid to a U.S. Holder on
our ordinary shares, such tax may be treated as a foreign tax
eligible for a deduction from such holder’s U.S. federal
taxable income or a foreign tax credit against such holder’s
U.S. federal income tax liability (subject to applicable conditions
and limitations). In addition, if such PRC tax applies to any such
dividends, a U.S. Holder may be entitled to certain benefits under
the U.S.-PRC Tax Treaty, if such holder is considered a resident of
the United States for purposes of, and otherwise meets the
requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should
consult their own tax advisors regarding the deduction or credit
for any such PRC tax and their eligibility for the benefits of the
U.S.-PRC Tax Treaty.
Taxation on the Disposition of Ordinary Shares
Upon a
sale or other taxable disposition of our ordinary shares and
subject to the PFIC rules discussed below, a U.S. Holder generally
will recognize capital gain or loss in an amount equal to the
difference between the amount realized and the U.S. Holder’s
adjusted tax basis in such ordinary shares.
The
regular U.S. federal income tax rate on capital gains recognized by
U.S. Holders generally is the same as the U.S. federal income tax
rate on ordinary income, except that long-term capital gains
recognized by non-corporate U.S. Holders are generally subject to
U.S. federal income tax at a maximum regular rate of 20%. Capital
gain or loss will constitute long-term capital gain or loss if the
U.S. Holder’s holding period for the ordinary shares exceeds
one year. The deductibility of capital losses is subject to various
limitations.
If a
PRC income tax applies to any gain from the disposition of our
ordinary shares by a U.S. Holder, such tax may be treated as a
foreign tax eligible for a deduction from such holder’s U.S.
federal taxable income or a foreign tax credit against such
holder’s U.S. federal income tax liability (subject to
applicable conditions and limitations). In addition, if such PRC
tax applies to any such gain, a U.S. Holder may be entitled to
certain benefits under the U.S.-PRC Tax Treaty, if such holder is
considered a resident of the United States for purposes of, and
otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S.
Holders should consult their own tax advisors regarding the
deduction or credit for any such PRC tax and their eligibility for
the benefits of the U.S.-PRC Tax Treaty.
Additional Taxes
U.S.
Holders that are individuals, estates or trusts and whose income
exceeds certain thresholds generally will be subject to a 3.8%
Medicare contribution tax on unearned income, including, without
limitation, dividends on, and gains from the sale or other taxable
disposition of, our ordinary shares, subject to certain limitations
and exceptions. Under applicable regulations, in the absence of a
special election, such unearned income generally would not include
income inclusions under the qualified electing fund, or QEF, rules
discussed below under “— Passive Foreign Investment
Company Rules,” but would include distributions of earnings
and profits from a QEF. U.S. Holders should consult their own tax
advisors regarding the effect, if any, of such tax on their
ownership and disposition of our ordinary shares.
Passive Foreign Investment Company Rules
A
foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75%
of its gross income in a taxable year of the foreign corporation,
including its pro rata share of the gross income of any corporation
in which it is considered to own at least 25% of the shares by
value, is passive income. Alternatively, a foreign corporation will
be a PFIC if at least 50% of its assets in a taxable year of the
foreign corporation, ordinarily determined based on fair market
value and averaged quarterly over the year, including its pro rata
share of the assets of any corporation in which it is considered to
own at least 25% of the shares by value, are held for the
production of, or produce, passive income. Passive income generally
includes dividends, interest, rents and royalties (other than
certain rents or royalties derived from the active conduct of a
trade or business), and gains from the disposition of passive
assets.
Based
on the composition (and estimated values) of the assets and the
nature of the income of us and our subsidiaries for our 2018
taxable year, we do not believe that we would be a PFIC for the
taxable year ended December 31, 2018 and do not anticipate becoming
a PFIC in the foreseeable future. However, since we have not
performed a definitive analysis with respect to our PFIC status for
our 2018 taxable year, there can be no assurance with respect to
our status as a PFIC for such taxable year. There also could be no
assurance with respect to our PFIC status for any future taxable
year. U.S. Holders are urged to consult their own tax advisors
regarding the possible application of the PFIC rules.
If we
are determined to be a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S. Holder of
our ordinary shares and the U.S. Holder did not make either a
timely QEF election for our first taxable year as a PFIC in which
the U.S. Holder held (or was deemed to hold) our ordinary shares, a
QEF election along with a purging election or a mark-to-market
election, each as described below, such holder generally will be
subject to special rules for regular U.S. federal income tax
purposes with respect to:
●
any
gain recognized by the U.S. Holder on the sale or other disposition
of our ordinary shares; and
●
any
“excess distribution” made to the U.S. Holder
(generally, the excess of the amount of any distributions to such
U.S. Holder during a taxable year of the U.S. Holder over 125% of
the average annual distributions received by such U.S. Holder in
respect of the ordinary shares during the three preceding taxable
years of such U.S. Holder or, if shorter, such U.S. Holder’s
holding period for the ordinary shares).
Under
these rules,
●
the
U.S. Holder’s gain or excess distribution will be allocated
ratably over the U.S. Holder’s holding period for the
ordinary shares;
●
the
amount allocated to the U.S. Holder’s taxable year in which
the U.S. Holder recognized the gain or received the excess
distribution, or to the period in the U.S. Holder’s holding
period before the first day of our first taxable year in which we
qualified as a PFIC, will be taxed as ordinary income;
●
the
amount allocated to other taxable years (or portions thereof) of
the U.S. Holder and included in its holding period will be taxed at
the highest tax rate in effect for that year and applicable to the
U.S. Holder; and
●
the
interest charge generally applicable to underpayments of tax will
be imposed in respect of the tax attributable to each such other
taxable year of the U.S. Holder.
In
general, if we are determined to be a PFIC, a U.S. Holder may avoid
the PFIC tax consequences described above in respect to our
ordinary shares by making a timely QEF election (or a QEF election
along with a purging election). Pursuant to the QEF election, a
U.S. Holder generally will be required to include in income its pro
rata share of our net capital gains (as long-term capital gain) and
other earnings and profits (as ordinary income), on a current
basis, in each case whether or not distributed, in the taxable year
of the U.S. Holder in which or with which our taxable year ends if
we are treated as a PFIC for that taxable year. A U.S. Holder may
make a separate election to defer the payment of taxes on
undistributed income inclusions under the QEF rules, but if
deferred, any such taxes will be subject to an interest
charge.
The QEF
election is made on a shareholder-by-shareholder basis and, once
made, can be revoked only with the consent of the IRS. A U.S.
Holder generally makes a QEF election by attaching a completed IRS
Form 8621 (Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a
timely filed U.S. federal income tax return for the taxable year to
which the election relates. Retroactive QEF elections generally may
be made only by filing a protective statement with such return and
if certain other conditions are met or with the consent of the
IRS.
In
order to comply with the requirements of a QEF election, a U.S.
Holder must receive certain information from us. Upon request from
a U.S. Holder, we will endeavor to provide to the U.S. Holder no
later than 90 days after the request such information as the IRS
may require, including a PFIC annual information statement, in
order to enable the U.S. Holder to make and maintain a QEF
election. However, there is no assurance that we will have timely
knowledge of our status as a PFIC in the future or of the required
information to be provided.
If a
U.S. Holder has made a QEF election with respect to our ordinary
shares, and the special tax and interest charge rules do not apply
to such shares (because of a timely QEF election for our first
taxable year as a PFIC in which the U.S. Holder holds (or is deemed
to hold) such shares or a QEF election, along with a purge of the
PFIC taint pursuant to a purging election), any gain recognized on
the sale or other taxable disposition of our ordinary shares
generally will be taxable as capital gain and no interest charge
will be imposed. As discussed above, for regular U.S. federal
income tax purposes, U.S. Holders of a QEF generally are currently
taxed on their pro rata shares of the QEF’s earnings and
profits, whether or not distributed. In such case, a subsequent
distribution of such earnings and profits that were previously
included in income generally should not be taxable as a dividend to
such U.S. Holders. The adjusted tax basis of a U.S. Holder’s
shares in a QEF will be increased by amounts that are included in
income, and decreased by amounts distributed but not taxed as
dividends, under the above rules. Similar basis adjustments apply
to property if by reason of holding such property the U.S. Holder
is treated under the applicable attribution rules as owning shares
in a QEF.
Although
a determination as to our PFIC status will be made annually, the
initial determination that we are a PFIC will generally apply for
subsequent years to a U.S. Holder who held our ordinary shares
while we were a PFIC, whether or not we meet the test for PFIC
status in those subsequent years. A U.S. Holder who makes the QEF
election discussed above for our first taxable year as a PFIC in
which the U.S. Holder holds (or is deemed to hold) our ordinary
shares, however, will not be subject to the PFIC tax and interest
charge rules discussed above in respect to such shares. In
addition, such U.S. Holder will not be subject to the QEF inclusion
regime with respect to such shares for any of our taxable years
that end within or with a taxable year of the U.S. Holder and in
which we are not a PFIC. On the other hand, if the QEF election is
not effective for each of our taxable years in which we are a PFIC
and during which the U.S. Holder holds (or is deemed to hold) our
ordinary shares, the PFIC rules discussed above will continue to
apply to such shares unless the holder files on a timely filed U.S.
federal income tax return (including extensions) a QEF election and
a purging election to recognize under the rules of Section 1291 of
the Code any gain that the U.S. Holder would otherwise recognize if
the U.S. Holder had sold our ordinary shares for their fair market
value on the “qualification date.” The qualification
date is the first day of our tax year in which we qualify as a QEF
with respect to such U.S. Holder. The purging election can only be
made if such U.S. Holder held our ordinary shares on the
qualification date. The gain recognized by the purging election
will be subject to the special tax and interest charge rules
treating the gain as an excess distribution, as described above. As
a result of the purging election, the U.S. Holder will increase the
adjusted tax basis in its ordinary shares by the amount of the gain
recognized and will also have a new holding period in the ordinary
shares for purposes of the PFIC rules.
Alternatively,
if a U.S. Holder, at the close of its taxable year, owns shares in
a PFIC that are treated as marketable stock, the U.S. Holder may
make a mark-to-market election with respect to such shares for such
taxable year. If the U.S. Holder makes a valid mark-to-market
election for the first taxable year of the U.S. Holder in which the
U.S. Holder holds (or is deemed to hold) our ordinary shares and
for which we are determined to be a PFIC, such holder generally
will not be subject to the PFIC rules described above in respect to
its ordinary shares as long as such shares continue to be treated
as marketable stock. Instead, in general, the U.S. Holder will
include as ordinary income for each year that we are treated as a
PFIC the excess, if any, of the fair market value of its ordinary
shares at the end of its taxable year over the adjusted basis in
its ordinary shares. The U.S. Holder also will be allowed to take
an ordinary loss in respect of the excess, if any, of the adjusted
basis of its ordinary shares over the fair market value of its
ordinary shares at the end of its taxable year (but only to the
extent of the net amount of previously included income as a result
of the mark-to-market election). The U.S. Holder’s basis in
its ordinary shares will be adjusted to reflect any such income or
loss amounts, and any further gain recognized on a sale or other
taxable disposition of the ordinary shares in a taxable year in
which we are treated as a PFIC generally will be treated as
ordinary income. Special tax rules may apply if a U.S. Holder makes
a mark-to-market election for a taxable year after the first
taxable year in which the U.S. Holder holds (or is deemed to hold)
our ordinary shares and for which we are determined to be a
PFIC.
The
mark-to-market election is available only for stock that is
regularly traded on a national securities exchange that is
registered with the Securities and Exchange Commission or on a
foreign exchange or market that the IRS determines has rules
sufficient to ensure that the market price represents a legitimate
and sound fair market value. The OTC QB currently is not considered
to be a national securities exchange that would allow a U.S. Holder
to make or maintain a mark-to-market election. Because our ordinary
shares are currently quoted only on the OTC QB, such shares may not
qualify as marketable stock for purposes of the
election.
If we
are a PFIC and, at any time, have a foreign subsidiary that is
classified as a PFIC, a U.S. Holder of our ordinary shares
generally would be deemed to own a portion of the shares of such
lower-tier PFIC, and generally could incur liability for the
deferred tax and interest charge described above if we receive a
distribution from, or dispose of all or part of our interest in, or
the U.S. Holder were otherwise deemed to have disposed of an
interest in, the lower-tier PFIC. Upon request, we will endeavor to
cause any lower-tier PFIC to provide to a U.S. Holder no later than
90 days after the request the information that may be required to
make or maintain a QEF election with respect to the lower- tier
PFIC. However, there is no assurance that we will have timely
knowledge of the status of any such lower-tier PFIC or will be able
to cause the lower-tier PFIC to provide the required information.
U.S. Holders are urged to consult their own tax advisors regarding
the tax issues raised by lower-tier PFICs.
A U.S.
Holder that owns (or is deemed to own) shares in a PFIC during any
taxable year of the U.S. Holder may have to file an IRS Form 8621
(whether or not a QEF election or mark-to-market election is or has
been made) with such U.S. Holder’s U.S. federal income tax
return and provide such other information as may be required by the
U.S. Treasury Department.
The
rules dealing with PFICs and with the QEF and mark-to-market
elections are very complex and are affected by various factors in
addition to those described above. Accordingly, U.S. Holders of our
ordinary shares should consult their own tax advisors concerning
the application of the PFIC rules to our ordinary shares under
their particular circumstances.
Tax Consequences to Non-U.S. Holders
Cash
dividends paid or deemed paid to a Non-U.S. Holder in respect to
its ordinary shares generally will not be subject to U.S. federal
income tax, unless the dividends are effectively connected with the
Non-U.S. Holder’s conduct of a trade or business within the
United States (and, if required by an applicable income tax treaty,
are attributable to a permanent establishment or fixed base that
such holder maintains or maintained in the United
States).
In
addition, a Non-U.S. Holder generally will not be subject to U.S.
federal income tax on any gain attributable to a sale or other
taxable disposition of our ordinary shares unless such gain is
effectively connected with its conduct of a trade or business in
the United States (and, if required by an applicable income tax
treaty, is attributable to a permanent establishment or fixed base
that such holder maintains or maintained in the United States) or
the Non-U.S. Holder is an individual who is present in the United
States for 183 days or more in the taxable year of sale or other
disposition and certain other conditions are met (in which case,
such gain from U.S. sources generally is subject to U.S. federal
income tax at a 30% rate or a lower applicable tax treaty
rate).
Dividends
and gains that are effectively connected with the Non-U.S.
Holder’s conduct of a trade or business in the United States
(and, if required by an applicable income tax treaty, are
attributable to a permanent establishment or fixed base that such
holder maintains or maintained in the United States) generally will
be subject to regular U.S. federal income tax at the same regular
U.S. federal income tax rates applicable to a comparable U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation
for U.S. federal income tax purposes, may also be subject to an
additional branch profits tax at a 30% rate or a lower applicable
tax treaty rate.
Backup Withholding and Information Reporting
In
general, information reporting for U.S. federal income tax purposes
should apply to distributions made on our ordinary shares within
the United States to a U.S. Holder (other than an exempt recipient)
and to the proceeds from sales and other dispositions of our
securities by a U.S. Holder (other than an exempt recipient) to or
through a U.S. office of a broker. Payments made (and sales and
other dispositions effected at an office) outside the United States
will be subject to information reporting in limited circumstances.
In addition, certain information concerning a U.S. Holder’s
adjusted tax basis in its ordinary shares and adjustments to that
tax basis and whether any gain or loss with respect to such
ordinary shares is long-term or short-term also may be required to
be reported to the IRS, and certain holders may be required to file
an IRS Form 8938 (Statement of Specified Foreign Financial Assets)
to report their interest in our ordinary shares.
Moreover,
backup withholding of U.S. federal income tax at a rate of 28%
generally will apply to dividends paid on our ordinary shares to a
U.S. Holder (other than an exempt recipient) and the proceeds from
sales and other dispositions of our ordinary shares by a U.S.
Holder (other than an exempt recipient), in each case who (a) fails
to provide an accurate taxpayer identification number; (b) is
notified by the IRS that backup withholding is required; or (c) in
certain circumstances, fails to comply with applicable
certification requirements.
A
Non-U.S. Holder generally may eliminate the requirement for
information reporting and backup withholding by providing
certification of its foreign status, under penalties of perjury, on
a duly executed applicable IRS Form W-8 or by otherwise
establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any
backup withholding will be allowed as a credit against a U.S.
Holder’s or a Non-U.S. Holder’s U.S. federal income tax
liability and may entitle such holder to a refund, provided that
certain required information is timely furnished to the IRS.
Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and
procedures for obtaining an exemption from backup withholding in
their particular circumstances.
F. Dividends and Paying
Agents
Not
required.
G. Statement by
Experts
Not
required.
H. Documents on
Display
Documents
concerning us that are referred to in this document may be
inspected at our principal executive offices at 27/F, Kaiyuan
Finance Center, No. 5, East Main Street, Shijiazhuang, Hebei,
People’s Republic of China, Tel: +86 311 8382 7688, Fax: +86
311 8381 9636.
In
addition, we will file annual reports and other information with
the Securities and Exchange Commission. We will file annual reports
on Form 20-F and submit other information under cover of Form 6-K.
As a foreign private issuer, we are exempt from the proxy
requirements of Section 14 of the Exchange Act and our officers,
directors and principal shareholders will be exempt from the
insider short-swing disclosure and profit recovery rules of Section
16 of the Exchange Act. Annual reports and other information we
file with the Commission may be inspected at the public reference
facilities maintained by the Commission at 100 F. Street, N.E.,
Washington, D.C. 20549, and copies of all or any part thereof may
be obtained from such offices upon payment of the prescribed fees.
You may call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms and you
can request copies of the documents upon payment of a duplicating
fee, by writing to the Commission. In addition, the Commission
maintains a web site that contains reports and other information
regarding registrants (including us) that file electronically with
the Commission which can be accessed at http://www.sec.gov
.
I. Subsidiary
Information
Not
required.
ITEM 11. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For
disclosures regarding market risk exposure, see “Item 5 -
Operating and Financial Review and Prospects – Liquidity and
Capital Resources – Quantitative and Qualitative Disclosures
about Market Risk” above.
ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
None.
PART II
ITEM 13. DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES
There
has been no default of any indebtedness nor is there any arrearage
in the payment of dividends.
ITEM 14. MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
As of
December 31, 2018, there had been no changes to the instruments
defining the rights of the holders of any class of registered
securities, and the rights of holders of the registered securities
had not been altered by the issuance or modification of any other
class of securities.
There
are no restrictions on working capital and no removal or
substitution of assets securing any class of our registered
securities.
ITEM 15. CONTROLS AND
PROCEDURES
A.
Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, regarding the effectiveness of
the design and operation of our disclosure controls and procedures
as of December 31, 2018. Based on that evaluation, our management,
including our Chief Executive Officer and Chief Financial Officer,
has concluded that our disclosure controls and procedures as of
December 31, 2018 were effective.
Disclosure
controls and procedures are designed to enable us to record,
process, summarize and report information required to be included
in the reports that we file or submit under the Exchange Act within
the time period required and also effective to ensure that
information required to be disclosed in the reports that it files
or submits under the Exchange Act is accumulated and communicated
to the Company’s management, including its principal
executive and principal financial officer, to allow timely
decisions regarding required disclosure.
It
should be noted that while our disclosure controls and procedures
as of December 31, 2018 were designed at the reasonable assurance
level, our management does not expect that our disclosure controls
and procedures or internal financial controls will prevent all
errors or fraud. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
B.
Management’s Annual Report on Internal Control Over Financial
Reporting
The
management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as
such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Our internal control over financial reporting is a process designed
by, or under the supervision of, our Chief Executive Officer and
Chief Financial Officer and effected by our board of directors to
provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements
for external reporting purposes in accordance with generally
accepted accounting principles. Internal control over financial
reporting includes policies and procedures that pertain to the
maintenance of records that in reasonable detail accurately reflect
the transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with
generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with the
authorization of our board of directors and management; and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial
statements.
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the criteria established
in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(2013). Based on this evaluation, our management concluded that our
internal control over financial reporting was effective as of
December 31, 2018.
Our
registered public accounting firm, Marcum Bernstein & Pinchuk
LLP, which audited our financial statements included in this annual
report on Form 20-F has issued an attestation report on
management’s assessment of our internal control over
financial reporting. Such attestation report is provided in full
below.
C.
Attestation Report of the Registered Public Accounting
Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
To the
Stockholders and Board of Directors of
Fincera
Inc.
Opinion on Internal Control over Financial Reporting
We have
audited Fincera Inc.'s (the “Company”) internal control
over financial reporting as of December 31, 2018, based on criteria
established in Internal
Control-Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In our
opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets as of
December 31, 2018 and 2017, and the related consolidated statements
of operations, changes in stockholders’ equity and cash flows
for each of the three years in the
period ended December 31, 2018 of the Company and our report
dated April 30, 2019 expressed an unqualified opinion on those
financial statements.
Basis for Opinion
The
Company's management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying “Management Annual Report on
Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit. We are a
public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial
statements.
Because
of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that degree of compliance with the
policies or procedures may deteriorate.
/s/Marcum
Bernstein & Pinchuk llp
Marcum
Bernstein & Pinchuk llp
New
York, New York
April
30, 2019
D.
Changes in Internal Controls Over Financial Reporting
There
were no changes in our internal control over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) that occurred
during the quarter ended December 31, 2018 that have materially
affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE
FINANCIAL EXPERT
The
Company’s Board of Directors has determined that Mr. James
Cheng-Jee Sha is an audit committee financial expert and
“independent” as that term is defined in the NASDAQ
listing standards.
ITEM 16B. CODE OF
ETHICS
In May
2009, our board of directors adopted a code of ethics that applies
to our directors, officers and employees as well as those of our
subsidiaries. A copy of our code of ethics was attached as an
exhibit to our Annual Report on Form 20-F filed on June 9, 2009. We
also will provide a copy of our code of ethics to any person,
without charge, upon request. Requests for copies of our code of
ethics should be sent in writing to Fincera Inc., 27/F, Kaiyuan
Finance Center, No. 5, East Main Street, Shijiazhuang, Hebei,
People’s Republic of China, Tel: +86 311 8382 7688, Fax: +86
311 8381 9636.
ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
following table represents the approximate aggregate fees for
services rendered by Marcum Bernstein & Pinchuk LLP for fiscal
years ended December 31, 2018 and 2017:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
||
|
|
|
|
|
|
|
|
||
|
Audit
Fees – Marcum Bernstein & Pinchuk LLP
|
|
|
3,500,000
|
|
|
|
2,800,000
|
|
|
Audit-Related
Fees
|
|
|
─
|
|
|
|
─
|
|
|
Tax
Fees
|
|
|
─
|
|
|
|
─
|
|
|
All
Other Fees
|
|
|
─
|
|
|
|
─
|
|
|
Total
Fees
|
|
|
3,500,000
|
|
|
|
2,800,000
|
|
Audit Fees
Marcum
Bernstein & Pinchuk LLP audit fees for 2018 and 2017 consist of
the audits of our financial statements for the years ended December
31, 2018, 2017 and the reviews of our interim financial statements
included in 6-K filings for 2018 and 2017.
Non Audit-Related Fees
There
were no non audit-related fees incurred by the Company during 2018
or 2017.
Tax Fees
There
were no fees billed by Marcum Bernstein & Pinchuk LLP for tax
services rendered during fiscal years ended December 31, 2018 and
2017.
All Other Fees
There
were no fees billed by Marcum Bernstein & Pinchuk LLP for other
professional services rendered during fiscal years ended December
31, 2018 and 2017.
Pre-Approval of Services
Before
we engage our external auditors to render audit or non-audit
services, the engagement is pre-approved by our audit committee.
Our audit committee reviews our external auditors’
engagements letters for audit and non-audit services. All of the
services provided by our external auditors for the fiscal years
2018, 2017 and 2016 were pre-approved by the audit committee in
this manner.
ITEM 16D. EXEMPTIONS FROM
THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF
EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
The
Company did not repurchase any of its shares in the years ended
December 31, 2018 and 2017.
ITEM 16F. CHANGES IN
REGISTRANT’S CERTIFYING ACCOUNTANT
There
were no changes to the certifying accountant for the year ended
December 31, 2018.
ITEM 16G. CORPORATE
GOVERNANCE
Not
applicable.
ITEM 16H. MINE SAFETY
DISCLOSURE
Not
applicable.
PART III
ITEM 17. FINANCIAL
STATEMENTS
We have
elected to provide financial statements pursuant to Item
18.
ITEM 18. FINANCIAL
STATEMENTS
The
financial statements are filed as part of this annual report
beginning on page F-1.
ITEM 19. EXHIBITS
|
Exhibit No.
|
|
Description
|
|
|
Amended
and Restated Memorandum and Articles of Association
(*)
|
|
|
|
Specimen
Ordinary Share Certificate (1)
|
|
|
|
Share
Exchange Agreement (2)
|
|
|
|
Form of
Indemnification Agreement (3)
|
|
|
|
Form of
Fincera Inc. 2009 Equity Incentive Plan (4)
|
|
|
|
Executive
Employment Agreement between the Registrant and Yong Hui Li, dated
June 6, 2018 (*)
|
|
|
|
Executive
Employment Agreement between the Registrant and Zijian Zhou, dated
June 15 , 2018 (*)
|
|
|
|
Executive
Employment Agreement between the Registrant and Xiu Wen, dated June
15, 2018 (*)
|
|
|
|
Executive
Employment Agreement between the Registrant and Jason Wang, dated
March 1, 2019 (*)
|
|
|
|
Executive
Employment Agreement between the Registrant and Spencer Ang Li,
dated June 6, 2019 (*)
|
|
|
|
Business
Operation Agreement (Xuhua Trading) between Hebei Yarui Trading
Co., Ltd. and Hebei Chuanglian Trade Co., Ltd., dated December 23,
2016 (9)
|
|
|
|
Equity
Pledge Agreement (Xuhua Trading) between Hebei Yarui Trading Co.,
Ltd. and Hebei Chuanglian Trade Co., Ltd., dated December 23, 2016
(9)
|
|
|
|
Option
Agreement (Xuhua Trading) between Hebei Yarui Trading Co., Ltd. and
Hebei Chuanglian Trade Co., Ltd., dated December 23, 2016
(9)
|
|
|
|
Services
Agreement (Xuhua Trading) between Hebei Yarui Trading Co., Ltd. and
Hebei Chuanglian Trade Co., Ltd., dated December 23, 2016
(9)
|
|
|
|
Voting
Attorney Agreement (Xuhua Trading) between Hebei Yarui Trading Co.,
Ltd. and Hebei Chuanglian Trade Co., Ltd., dated December 23, 2016
(9)
|
|
|
|
Business
Operation Agreement (Kaiyuan Auto Trade) between Hebei Shengrong
Investment Co., Ltd. and Hebei Chuanglian Finance Leasing Co.,
Ltd.., dated January 31, 2013 (6)
|
|
|
|
Equity
Pledge Agreement (Kaiyuan Auto Trade) between Hebei Shengrong
Investment Co., Ltd. and Hebei Chuanglian Finance Leasing Co.,
Ltd., dated January 31, 2013 (6)
|
|
|
|
Option
Agreement (Kaiyuan Auto Trade) between Hebei Shengrong Investment
Co., Ltd. and Hebei Chuanglian Finance Leasing Co., Ltd., dated
January 31, 2013 (6)
|
|
|
|
Services
Agreement (Kaiyuan Auto Trade) between Hebei Shengrong Investment
Co., Ltd. and Hebei Chuanglian Finance Leasing Co., Ltd., dated
January 31, 2013 (6)
|
|
|
|
Voting
Attorney Agreement (Kaiyuan Auto Trade) between Hebei Shengrong
Investment Co., Ltd. and Hebei Chuanglian Finance Leasing Co.,
Ltd., dated January 31, 2013 (6)
|
|
|
|
Equity
Pledge Agreement between Hebei Shengrong Investment Co., Ltd. and
Hebei Chuanglian Finance Leasing Co., Ltd., dated January 31, 2013
(6)
|
|
Exhibit No.
|
|
Description
|
|
|
Eastern
Eagle International 100% Equity Transfer Agreement, dated August 8,
2016, by and among Smart Success Investment Limited, Fincera Inc.
and Eastern Eagle International (8)
|
|
|
|
Form of
Fincera Inc. 2015 Omnibus Equity Incentive Plan (7)
|
|
|
8.1
|
|
Subsidiaries
of the Registrant (*)
|
|
|
Code of
Ethics (5)
|
|
|
12.1
|
|
Certification
of the Chief Executive Officer (Principal Executive Officer)
pursuant to Rule 13a-14(a) of the Securities Exchange Act, as
amended
|
|
12.2
|
|
Certification
of the Chief Financial Officer (Principal Financial Officer)
pursuant to Rule 13a-14(a) of the Securities Exchange Act, as
amended
|
|
|
13
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
15.1
|
|
Consent
of Marcum Bernstein & Pinchuk LLP, independent registered
public accounting firm
|
|
|
101
|
|
Interactive
Data File
|
|
*
Attached
to this Annual Report on Form 20-F.
(1)
Incorporated
by reference to Fincera’s Registration Statement (File No.
333-147284), filed with the SEC on Form S-1 dated January 30,
2008.
(2)
Incorporated
by reference to Annex C to Fincera’s Final Proxy Statement,
filed as Exhibit 99.1 to Fincera’s Current Report on Form 6-K
filed with the SEC on March 11, 2009.
(3)
Incorporated
by reference to Schedule N to Annex C to Fincera’s Final
Proxy Statement, filed as Exhibit 99.1 to Fincera’s Current
Report on Form 6-K filed with the SEC on March 11,
2009.
(4)
Incorporated
by reference to Annex E to Fincera’s Final Proxy Statement,
filed as Exhibit 99.1 to Fincera’s Current Report on Form 6-K
filed with the SEC on March 11, 2009.
(5)
Incorporated
by reference to Fincera’s Annual Report, filed with the SEC
on Form 20-F filed June 9, 2009.
(6)
Incorporated
by reference to Fincera’s Annual Report on Form 20-F, filed
with the SEC on April 18, 2014.
(7)
Incorporated
by reference to Fincera’s Annual Report on Form 20-F, filed
with the SEC on May 2, 2016.
(8)
Incorporated
by reference to Fincera’s Current Report on Form 6-K filed
with the SEC on August 15, 2016.
(9)
Incorporated
by reference to Fincera’s Annual Report on Form 20-F, filed
with the SEC on May 1, 2017.
SIGNATURES
The
Registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its
behalf.
|
|
FINCERA
INC.
|
|
|
|
|
|
|
April
30, 2019
|
By:
|
/s/ Yong Hui
Li
|
|
|
|
Yong
Hui Li
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
April
30, 2019
|
By:
|
/s/ Jason
Wang
|
|
|
|
Jason
Wang
|
|
|
|
Chief
Financial Officer
|
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-2
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-4
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
F-6
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-7
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
F-9
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Stockholders and Board of Directors of
Fincera
Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
Fincera Inc. (the “Company”) as of December 31, 2018
and 2017, the related consolidated statements of operations,
changes in stockholders’ equity and cash flows for each of
the three years in the period ended December 31, 2018, and the
related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) ("PCAOB"), the
Company's internal control over financial reporting as of December
31, 2018, based on the
criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in 2013 and our report dated April 30,
2019, expressed an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the 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 financial statements
are free of material misstatement, whether due to error or fraud.
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 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 financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Emphasis of a Matter - Change in Reporting Currency
As
discussed in Note 3, the Company changed its reporting currency
from United States dollar to Renminbi effective July 1, 2017.
United States dollar amounts are presented solely for the
convenience of readers in the United States of
America.
/s/
Marcum Bernstein & Pinchuk llp
Marcum
Bernstein & Pinchuk llp
We have
served as the Company’s auditor since 2011.
New
York, New York
April
30, 2019
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in
thousands except share and per share data)
|
|
December
31,
|
||
|
|
2018
|
2018
|
2017
|
|
|
USD
|
RMB
|
RMB
|
|
ASSETS
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash and cash
equivalents
|
144,902
|
994,489
|
1,123,296
|
|
Restricted
cash
|
104
|
714
|
127,762
|
|
Loans,
net
|
329,436
|
2,260,982
|
1,851,001
|
|
Other financing
receivables, net
|
1,729
|
11,868
|
1,936,213
|
|
Prepaid expenses
and other current assets
|
11,556
|
79,313
|
62,913
|
|
Current assets of
discontinued operations
|
5,600
|
38,433
|
49,872
|
|
Total current
assets
|
493,327
|
3,385,799
|
5,151,057
|
|
|
|
|
|
|
Property, equipment
and leasehold improvements, net
|
189,578
|
1,301,114
|
1,350,858
|
|
Deferred tax
assets, net
|
31,961
|
219,355
|
209,587
|
|
Long-term loans,
net
|
3,354
|
23,021
|
—
|
|
Non-current assets
of discontinued operations
|
2,181
|
14,966
|
42,002
|
|
|
|
|
|
|
Total
assets
|
720,401
|
4,944,255
|
6,753,504
|
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
(in
thousands except share and per share data)
The
accompanying notes are an integral part of these consolidated
financial statements.
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands except share and per share data)
|
|
Years ended
December 31,
|
|||
|
|
2018
|
2018
|
2017
|
2016
|
|
|
USD
|
RMB
|
RMB
|
RMB
|
|
Income
|
|
|
|
|
|
Facilitation
fee
|
95,974
|
658,686
|
231,709
|
—
|
|
Interest
income
|
28,391
|
194,855
|
310,289
|
243,169
|
|
Service
charges
|
2,826
|
19,396
|
201,386
|
447,181
|
|
Property lease and
management
|
30,893
|
212,026
|
192,221
|
169,765
|
|
Other
income
|
18,016
|
123,644
|
72,600
|
15,810
|
|
Debt assignment
income
|
29,638
|
203,409
|
15,646
|
—
|
|
Total
income
|
205,738
|
1,412,016
|
1,023,851
|
875,925
|
|
|
|
|
|
|
|
Operating
Costs and Expenses (Income)
|
|
|
|
|
|
Interest
expense
|
10,666
|
73,206
|
307,191
|
262,762
|
|
Interest expense,
related parties
|
22,843
|
156,775
|
162,041
|
41,339
|
|
Provision for
credit losses
|
51,683
|
354,711
|
(13,443)
|
116,032
|
|
Product development
expense
|
11,665
|
80,057
|
82,375
|
62,647
|
|
Property and
management cost
|
17,048
|
117,006
|
112,030
|
109,568
|
|
Marketing
expense
|
(26,030)
|
(178,650)
|
51,284
|
—
|
|
Selling and
marketing
|
34,551
|
237,128
|
129,892
|
89,620
|
|
General and
administrative
|
28,148
|
193,187
|
204,077
|
198,787
|
|
Total operating
costs and expenses
|
150,574
|
1,033,420
|
1,035,447
|
880,755
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
55,164
|
378,596
|
(11,596)
|
(4,830)
|
|
Income tax
provision (benefit)
|
15,125
|
103,804
|
(878)
|
8,534
|
|
Income
(loss) from continuing operations
|
40,039
|
274,792
|
(10,718)
|
(13,364)
|
|
|
|
|
|
|
|
Income from
discontinued operations, net of taxes
|
1
|
9
|
2,336
|
1,094
|
|
Net
income (loss)
|
40,040
|
274,801
|
(8,382)
|
(12,270)
|
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS– Continued
(in
thousands except share and per share data)
|
|
Years ended
December 31,
|
|||
|
|
2018
|
2018
|
2017
|
2016
|
|
|
USD
|
RMB
|
RMB
|
RMB
|
|
Earnings (loss) per
share
|
|
|
|
|
|
Basic
|
|
|
|
|
|
Continuing
operations
|
0.82
|
5.65
|
(0.23)
|
(0.28)
|
|
Discontinued
operations
|
—
|
—
|
0.05
|
0.02
|
|
|
0.82
|
5.65
|
(0.18)
|
(0.26)
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Continuing
operations
|
0.79
|
5.45
|
(0.23)
|
(0.28)
|
|
Discontinued
operations
|
—
|
—
|
0.05
|
0.02
|
|
|
0.79
|
5.45
|
(0.18)
|
(0.26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
|
|
|
|
Basic
|
48,604,738
|
48,604,738
|
47,271,473
|
47,113,656
|
|
Diluted
|
50,456,098
|
50,456,098
|
47,271,473
|
47,113,656
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
(in
thousands except share data)
|
|
|
|
Additional
|
|
(Accumulated
Deficit)
|
Total
|
|
|
Ordinary Shares
(1)
|
Paid-in
|
Statutory
|
Retained
|
Stockholders’
|
|
|
|
Shares
|
Amount
|
Capital
|
Reserves
|
Earnings
|
Equity
(deficit)
|
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
|
Balance, December
31, 2015
|
47,101,986
|
327
|
2,438,151
|
172,672
|
(965,849)
|
1,645,301
|
|
(Combined)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
—
|
—
|
8,399
|
—
|
—
|
8,399
|
|
|
|
|
|
|
|
|
|
Appropriations to
statutory reserves
|
—
|
—
|
—
|
15,252
|
(15,252)
|
—
|
|
|
|
|
|
|
|
|
|
Disposal of
subsidiaries
|
—
|
—
|
—
|
(28,123)
|
28,123
|
—
|
|
|
|
|
|
|
|
|
|
Equity awards
exercised
|
21,912
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
Capital
Distribution
|
—
|
—
|
(1,486,175)
|
—
|
—
|
(1,486,175)
|
|
|
|
|
|
|
|
|
|
Gain on disposal of
entity under common control
|
—
|
—
|
1,798
|
—
|
—
|
1,798
|
|
|
|
|
|
|
|
|
|
Net loss for the
year ended December 31, 2016
|
—
|
—
|
—
|
—
|
(12,270)
|
(12,270)
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2016
|
47,123,898
|
327
|
962,173
|
159,801
|
(965,248)
|
157,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
—
|
—
|
24,045
|
—
|
—
|
24,045
|
|
|
|
|
|
|
|
|
|
Appropriations to
statutory reserves
|
—
|
—
|
—
|
4,458
|
(4,458)
|
—
|
|
|
|
|
|
|
|
|
|
Disposal of
subsidiaries
|
—
|
—
|
—
|
(3,970)
|
3,970
|
—
|
|
|
|
|
|
|
|
|
|
Equity awards
exercised
|
407,901
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
Capital
contribution
|
|
|
29,812
|
|
|
29,812
|
|
|
|
|
|
|
|
|
|
Cash
dividend
|
|
|
(322,141)
|
|
|
(322,141)
|
|
|
|
|
|
|
|
|
|
Net loss for the
year ended December 31, 2017
|
—
|
—
|
—
|
—
|
(8,382)
|
(8,382)
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2017
|
47,531,799
|
327
|
693,889
|
160,289
|
(974,118)
|
(119,613)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
—
|
—
|
13,269
|
—
|
—
|
13,269
|
|
|
|
|
|
|
|
|
|
Appropriations to
statutory reserves
|
—
|
—
|
—
|
25,733
|
(25,733)
|
—
|
|
|
|
|
|
|
|
|
|
Equity awards
exercised
|
57,061
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
Debt
Conversion
|
1,320,000
|
9
|
195,158
|
—
|
—
|
195,167
|
|
|
|
|
|
|
|
|
|
Net Income for the
year ended December 31, 2018
|
—
|
—
|
—
|
—
|
274,801
|
274,801
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2018
|
48,908,860
|
336
|
902,316
|
186,022
|
(725,050)
|
363,624
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
FINCERA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(in
thousands)
FINCERA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2018, 2017 and 2016
(in
thousands except share and per share data)
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Fincera
Inc. (the “Company” or “Fincera”) is a
holding company whose only business operations are conducted
through its wholly owned subsidiary, AutoChina Group Inc.
(“ACG”). ACG’s operations consist of 1)
Internet-business and 2) Property lease and management business.
Our internet-based segment is its own reportable segment. Within
our property lease and management business are two additional
reportable segments: hotel and office leasing. The Company is in
the process of winding down its commercial vehicle sales, leasing
and support business and insurance agency business. All the
business is conducted in the People’s Republic of China (the
“PRC” or “China”).
In
October 2016, the Company acquired 100% equity interest of Eastern
Eagle and its subsidiaries which mainly operate Shijiazhuang Hilton
Hotel (the “Hotel”) from Smart Success, an entity
wholly-owned by the controlling shareholder of the Company. The
Company accounted for this transaction using the method similar to
the pooling-of-interests method in accordance with ASC 805-50;
accordingly, the assets and liabilities and operations of the
Company and Eastern Eagle were combined at their historical
carrying amounts, and all periods presented were adjusted as if the
entities had always been combined when the combining entities were
under common control since July 2007. Intercompany balances and
transactions between the combining entities prior to the
acquisition are eliminated from the combined financial
statements.
On
September 14, 2017, the Company’s Board of Directors approved
a two-for-one stock split of the Company’s common stock, par
value $0.001. The stock split was in the form of a stock dividend
distributed on November 8, 2017 to stockholders of record at the
close of business on November 1, 2017. The stock split entitled
each stockholder to receive one additional share of common stock,
par value $0.001, for each share they held as of the record date.
All common stock share and per share data for all periods presented
in the accompanying consolidated financial statements and related
notes are have been adjusted to reflect the Stock Split, except for
authorized common shares, which were not affected.
Internet-based business
From
February 2012 to October 2014, the Company established a series of
subsidiaries, including Chuang Jin World Investment Limited
(“Chuang Jin World”) and Hebei Remittance Guarantee
Limited (“Hebei Remittance”). Through its variable
interest entities (“VIEs”) it also established Beijing
Yihaoche Technology, Dianfubao Investments Limited and Qingyi
Technology Limited. All of these subsidiaries and subsidiaries of
VIEs were established to facilitate the internet-based operations
including a new peer-to-peer lending platform called CeraVest, and
a payment processing and settlement platform called
CeraPay.
CeraVest,
launched at the end of 2014, is a proprietary peer-to-peer
(“P2P”) lending platform. Before July 2017, the Company
offered small and medium sized businesses (“SMBs”)
180-day financing at competitive interest rates through CeraVest,
which is guaranteed by legal representatives or shareholders of the
SMBs and 8.0% of the principal balance of the loan is remitted to
the Company as a loan deposit recorded as security deposits under
other payables and accrued liabilities (Note 10). These 180-day
loans are funded by investors, who can invest in two types of
products “CeraVest Fixed” and “CeraVest
Flex” through the CeraVest platform simply by visiting the
platform’s website (www.qingyidai.com), completing
the registration process and selecting which product to invest in.
CeraVest Fixed, for investors to enter a transfer agreement at a
same period and quoted rate of return as the 180-day loans, of
which interest is established at approximately 8.62% per annum.
CeraVest Flex is designed to offer investors the flexibility to add
to or withdraw from the investments, as opposed to the CeraVest
Fixed. It transfers the 180-day loans and CeraPay receivables, to
investors through a transfer agreement at a quoted rate of return
of approximately 8.03% per annum.
CeraPay,
launched at the end of 2014, is our proprietary revolving credit
product that also processes and settles transactions between our
borrowers and merchants. CeraPay users are provided with a credit
line that can be utilized at participating CeraPay merchants or be
used to pay other CeraPay users. Having features similar to a
credit card, there are no fees (other than late fees and penalties
for CeraPay users who become delinquent on amounts borrowed) for
using the CeraPay payments service as long as any outstanding
balances are paid in full each month. Before July 2017, we
generated revenue from CeraPay primarily by charging transaction
fees, which were approximately 2.4%, to merchants participating in
the network. Merchants may use CeraPay funds to make payments to
other CeraPay users or merchants or cash out the funds via transfer
to a bank account. CeraPay users are subject to an application and
credit approval process and provide guarantees and collateral
before they are provided with a credit line.
From
July 2017, in order to comply with strengthened regulations, we
re-developed the loan transaction process for all of our loan
products so that loan facilitation occurs only through our
peer-to-peer lending platform. After the adjustment, credit line
transactions and loan request are all listed on our peer-to-peer
lending platform for funding by investors, and we earn facilitation
fee from borrowers.
Through
CeraVest, we offer three types of financing services with different
terms and payment schedules for borrowers and offer three
corresponding investment products for investors, 30-day lines of
credit transactions, 180-day term loans and installment loans. The
underlying products of 30-day lines of credit transactions and
installment loans result from CeraPay, of which transaction fees
are collected and then allocated to the investors of the loans as
interest payments and to the Company as a facilitation fee. These
new products were offered in parallel with the old products,
CeraVest Fixed and CeraVest Flex, which were phased out and
terminated by December 2017 and February 2018,
respectively.
On
February 6, 2018, in accordance with regulations in China that
require online lending information intermediaries to set up custody
accounts with qualified banks to manage customer funds, we entered
into an agreement with XWBank to provide fund custody services for
our CeraVest customers and investors. We launched the new custody
system on March 20, 2018. Under the arrangement, XWBank provides
fund custody services which include transaction settlement and
clearing, verification of platform fund transaction data, customer
identity verification, and other services mandated by regulations
in China. Sichuan XWBank is a non-state-owned bank established in
December 2016 and is headquartered in Chengdu, China. It is the
third commercial bank established in China with an internet based
operating model and possesses no retail branches. It is the 7th
ever private bank approved by the China Banking Regulatory
Commission ("CBRC") and it is the first privately-owned bank in the
Sichuan province.
Since
the third quarter of 2018, Fincera launched a new broker
distribution network that is not owned by the Company. Under the
new broker network business model, the Company’s distribution
network is structured into a 4-layer hierarchy: level A brokers,
level B brokers, level C brokers, and level D brokers. The function
of each level is similar to the Company’s prior structure of
provincial store, city store, associate store, and franchise store,
respectively. New brokers are not limited to former Fincera
employees and can be any private entities and entrepreneurs who are
interested in joining. The Company believes that the broker network
will have more profit motive than before when the associated
personnel were direct employees of the Company. Overall, the
Company believes that the change will result in increased
efficiency and profitability as well as regulatory
compliances.
On June
2018, the Company has a re-development on the loan transaction
process of its loan products. This eliminated the time gap between
investor receiving the investment and borrowers repaying the loans,
which decreases the Company’s current liabilities of payable
to investors and therefore reduces the need for working
capital.
The
Company continued to sell the non-performing loans to the third
parties in the year 2018. The
significant growing sale of delinquent loans to third parties
compared with the year 2017 increases the Company’s
current assets and therefore increases the working
capital.
To the
best of the Company’s knowledge and based on consultations
with legal counsel, the Company is in compliance with the existing
PRC regulations. Due to the lack of detailed rules from regulatory
authorities and the fact that the rules, laws, and regulations are
expected to continue to evolve in this newly emerging industry, we
cannot be certain that our existing practices would not be deemed
to violate any existing or future rules, laws, and
regulations.
Property lease and management business
We own
the Kaiyuan Finance Center, which is a 54 story large-scale
commercial building with hotel, office and ancillary facilities,
erected on a land parcel with a site area of approximately 10,601
square meters in the central business district of Shijiazhuang,
China. The office space in the building comprises a total gross
floor area of approximately 62,972 square meters. Our corporate
headquarters occupies floors 26 and 27 and we lease out the space
that we do not occupy (approximately 56,092 square
meters).
The
Kaiyuan Finance Center also houses the Hotel. This full-service,
premiere hotel property totals over 119,000 square meters and
includes guest rooms, restaurants, conference facilities, fitness
center, spa and an underground parking garage. The Company has
entered into a management and franchise agreement with Hilton
Worldwide Holdings Inc. to manage and operate the
Hotel.
NOTE 2 – GOING CONCERN
Liquidity and Capital Resources
The Company’s principal sources of liquidity have been cash
provided by related parties and revenues generated from loan
facilitation. The Company reported a net decrease in cash, cash
equivalent and restricted cash of RMB255,855 the year ended
December 31, 2018 and a net increase in cash, cash equivalent and
restricted cash of RMB486,240 and RMB294,558 for the year ended
December 31, 2017 and 2016. As of December 31, 2018, the Company
had RMB994,489 in unrestricted cash and cash equivalents. The
Company’s cash and cash equivalents are unrestricted as to
withdrawal or use, and are placed with banks and other financial
institutions. The Company’s consolidated current liabilities
exceeded its consolidated current assets by approximately RMB
689,832 as of December 31, 2018. The Company’s consolidated
net assets amounted to RMB363,624 as of December 31,
2018.
Management Plan and Actions
The Company has addressed liquidity requirements through a series
of cost reduction initiatives, financing from both banks and
related parties, and the sale of non-performing
assets.
The Company continued to sell the non-performing loans to the third
parties in the year 2018. As of December 31, 2018, certain
non-performing loans with a total amount of RMB 2,724 million have
been sold to several third parties at a total consideration of RMB
2,941 million. This action reduces the working capital
needs.
From July 2017 and onwards, the Company re-developed the loan
transaction process for all of its loan products, which reduces the
need for working capital. Under the prior business model, the
Company would be required to first fund loans and then seek
investment for them. However, under the new model, loans are
facilitated directly with investors on the Company’s
peer-to-peer lending platform. This eliminates the need for the
Company to use its own working capital for the initial loan
funding. And in June 2018, the Company had another development on
the loan transaction process of its loan products. This eliminated
the time gap between investor receiving the investment and
borrowers repaying the loans, which decreases the amount of payable
to investors and therefore reduces the need for working
capital.
Since the third quarter of 2018, Fincera began converting its
existing wholly-owned store distribution network into a broker
distribution network that is not owned by the Company. The new
broker distribution network will operate under a revenue sharing
arrangement where predetermined amounts of revenues will be shared
with the brokers. In addition, since the new distribution network
will be owned by third-parties, Fincera will no longer be
responsible for funding its operating costs.
The Company will continue to focus on developing the internet-based
business, improving operating efficiency and reducing costs, and
enhancing its marketing function. Although the Company’s
operating results for future periods might be subject to numerous
uncertainties and/or adverse conditions like negative cash flow,
working capital deficiency that may raise substantial doubt about
the Company’s ability to continue as a going concern, after
considering above factors and valuations, as of the filing date of
the 20-F hereof, the Company is able to fulfill its current
obligations.
Mr. Li
signed a Financial Support Letter that states he and the entities
directly or indirectly controlled by him will provide the necessary
financial support to the Company, so as to enable the company to
meet its liabilities as and when they fall due and to carry on its
business without a significant curtailment of operations for the
foreseeable future, which will remain in force till December 31,
2020.
The Company believes that available cash and cash equivalents,
future cash provided by operating activities under new business
model, together with the efforts from aforementioned management
plan and actions, should enable the Company to meet presently
anticipated cash needs for at least the next 12 months after the
date that the financial statements are issued and the Company has
prepared the consolidated financial statements on a going concern
basis. However, the Company continues to have ongoing obligations
and it expects that it will require additional capital in order to
execute its longer-term business plan. If the Company encounters
unforeseen circumstances that place constraints on its capital
resources, management will be required to take various measures to
conserve liquidity, which could include, but not necessarily be
limited to, curtailing the Company’s business development
activities, suspending the pursuit of its business plan,
controlling operating expenses and seeking to further dispose of
non-core assets. Management cannot provide any assurance that the
Company will raise additional capital if needed.
NOTE 3 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Financial Statement Preparation and Presentation
The
accompanying consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) and
generally accepted accounting principles in the United States
(“U.S. GAAP”).
As
mentioned in Note 4, the Company is winding down its commercial
vehicle sales, leasing and support business and its insurance
agency business and therefore has classified them as discontinued
operations. The results of discontinued operations have been
reflected separately in the consolidated statements of operations
as a single line item for all periods presented in accordance with
U.S. GAAP.
In
October 2016, the Company acquired 100% of the equity interest of
Eastern Eagle and its subsidiaries from Smart Success. For all
periods presented, the Company, Smart Success, and Eastern Eagle
and its subsidiaries were all under the control of Mr. Li, this
transaction was accounted for as a combination of commonly
controlled entities and accounted for as if the acquisition had
been consummated at the beginning of the earliest period presented,
with no gain or loss being recognized. The acquired assets and
liabilities of Eastern Eagle and its subsidiaries were recorded at
carrying value. The consolidated and combined financial statements
for all periods presented are retrospectively adjusted to reflect
the acquisition under common control of Eastern Eagle and its
subsidiaries.
Principles of Consolidation
The
consolidated financial statements include the financial statements
of the Company, its subsidiaries and VIEs. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Reclassification
The
Company has reclassified certain comparative amounts in the
consolidated statements of operations for the year ended December
31, 2017 to conform to the current year’s presentation. The
principal reclassifications are related to the provision for
CeraVest loan products held by the investors being reclassified
from the selling and marketing to marketing expense which is
categorized separately on the income statement. The
reclassification did not have an impact on the reported total
assets, liabilities, stockholders’ equity and net
income.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during
the periods presented. The most significant estimates and related
assumptions include the assessment of the provision for credit
losses and accrued marketing expenses, the assessment of the
impairment of tangible long-lived assets, and the assessment of the
valuation allowance on deferred tax assets and uncertain tax
position. Actual results could differ from these
estimates.
Cash and Cash Equivalents
For
purposes of the consolidated statements of cash flows, cash
equivalents include all highly liquid debt instruments with
original maturities of three months or less which are not securing
any corporate obligations. As of December 31, 2018 and 2017, the
majority of cash, including restricted cash, was in RMB on deposit
in PRC financial institutions, which the management believes are of
high credit quality.
Restricted Cash
As of
December 31, 2018 and 2017, the restricted cash was RMB714 and
RMB127,762, respectively. After the Company entered into an
agreement with XWBank and implemented the custodian system on March
20, 2018, the uninvested cash balances in CeraVest customer
accounts were no longer deposited in the Company’s bank
account. Therefore, the restricted cash as of as of December 31,
2018 were mainly fixed-term bank deposits.
Loans, net
Loans,
net primarily represent loans to CeraVest borrowers and loans to
other borrowers, and related interest receivable, net of provision
for credit losses that reflects the Company’s best estimate
of the amounts that will not be collected.
Other financing Receivables
Other
financing receivables represent financing transactions with CeraPay
borrowers that would not be facilitated for funding by CeraVest
investors.
Provision for Credit Losses
The
allowance for credit losses, which includes the allowance for
loans, long-term loans, net and other financing receivables
represents management’s estimate of probable losses inherent
in the Company’s internet-based and other business. The
Company determines to collectively assess provision for credit
losses based on homogeneous risk characteristics, combined with
targeted analysis on certain large individual balances. The
allowance attributed to these loans, long-term loans, net and other
financing receivables is established via a process that estimates
the probable losses inherent in the specific portfolio. For the
loans and other financing receivables with similar risk
characteristics and small outstanding balance, this process
includes migration analysis in which historical delinquency and
credit loss experience is applied to the current aging of the
portfolio.
For
loans with significant outstanding balance, the Company would apply
impairment testing individually. Such loan is impaired when, based
on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment measurement is
based on a combination of considerations including 1) the present
value of expected future cash flows discounted at the loan’s
effective interest rate and 2) the fair value of the collateral, if
any.
The
Company performs periodic and systematic detailed reviews of its
loans and other financing receivables, to identify credit risks and
to assess the overall collectability of those portfolios, and may
adjust its estimates on allowance of credit losses when new
circumstances arise.
Marketing expenses
Marketing
expense, provided for the off-balance sheet loans which are held by
third-party investors, represents management’s estimate of
promotional cost for providing guarantee to the investors inherent
in the Company’s internet-based business. In consideration of
the same homogeneous risk characteristics, it shares the same
estimation methodology as that used in “Provision for credit
loss”. Reversal of the marketing expense occurs upon the
underlying investments are ultimately collected by the Company,
which was a result of successfully transferring those
non-performing loans to third-parties buyers, after the Company
first purchases the loans from the initial
investors.
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentration
of credit risk consist principally of loans and other financing
receivables. Credit risk concentration with respect to these
instruments is reduced because a large number of diverse customers
over a wide geographic area make up the Company’s customer
base.
Product Development Expense
Our
product development expense includes the costs associated with the
engineering and technical headcount responsible for product
development, as well as their associated costs. It includes labor
and facilities-related costs for employees responsible for research
and development of our existing and new products and services, as
well as depreciation and equipment-related expenses.
Property, Equipment and Leasehold Improvements, net
Property
and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. All
depreciation is included in operating expenses on the accompanying
consolidated statements of operations. Leasehold improvements are
capitalized and amortized over the lesser of the life of the lease
or the useful life of the related asset.
The
estimated useful lives of property, equipment and leasehold
improvements are as follows:
|
|
|
Useful life
|
|
Buildings
|
|
40
years
|
|
Equipment
|
|
5 - 10
years
|
|
Furniture
and fixtures
|
|
5 - 10
years
|
|
Company
automobiles
|
|
3 - 5
years
|
|
Leasehold
improvements
|
|
Shorter
of the remaining lease terms and estimated useful
lives
|
Except
for the leasehold improvements, all other assets are deemed to have
a residual value of 5%.
Expenditures
for major additions or improvements that extend the useful lives of
assets are capitalized. Minor replacements, maintenance and repairs
that do not improve or extend the lives of such assets are expensed
as incurred.
The
Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. When these events
occur, the Company assesses the recoverability of the long-lived
assets by comparing the carrying value of the long-lived assets to
the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition where the
fair value is lower than the carrying value, measurement of an
impairment loss is recognized in the consolidated statements of
operations for the difference between the fair value, using the
expected future discounted cash flows, and the carrying value of
the assets. No impairment of long-lived assets was recognized for
the periods presented.
Fair Value of Financial Instruments
Financial
instruments consist primarily of cash and cash equivalents,
restricted cash, loans, other financing receivables, short-term
bank borrowings, financing payables, related parties and long-term
bank borrowings. The carrying amounts of the short-term financial
instruments at December 31, 2018 and 2017 approximated their fair
values because of their short maturities or existence of variable
interest rates, which reflect current market rates. For long-term
financial instruments, the carrying amount approximates its fair
value since the interest rates applied to determine the carrying
amount is close to the market interest rates for similar types of
long-term instruments. When available, the Company measures the
fair value of financial instruments based on quoted market prices
in active markets, valuation techniques that use observable
market-based inputs or unobservable inputs that are corroborated by
market data. Pricing information that the Company obtains from
third parties is internally validated for reasonableness prior to
use in the consolidated financial statements. When observable
market prices are not readily available, the Company generally
estimates fair value using valuation techniques that rely on
alternate market data or inputs that are generally less readily
observable from objective sources and are estimated based on
pertinent information available at the time of the applicable
reporting periods. In certain cases, fair values are not subject to
precise quantification or verification and may fluctuate as
economic and market factors vary and the Company’s evaluation
of those factors changes. Although the Company uses its best
judgment in estimating the fair value of these financial
instruments, there are inherent limitations in any estimation
technique. In these cases, a minor change in an assumption could
result in a significant change in its estimate of fair value,
thereby increasing or decreasing the amounts of the Company’s
consolidated assets, liabilities, equity and net income or
loss.
A
financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. Three levels of inputs
are used to measure fair value:
Level 1
applies to assets or liabilities for which there are quoted prices
in active markets for identical assets or liabilities.
Level 2
applies to assets or liabilities for which there are inputs other
than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level 3
applies to assets or liabilities for which there are unobservable
inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or
liabilities.
As of
December 31, 2018 and 2017, there were no assets or liabilities
were measured and reported at fair value on a recurring
basis.
Commitments and Contingencies
In the
normal course of business, the Company is subject to contingencies,
including legal proceedings and claims arising out of the business
that relate to a wide range of matters. The Company recognizes a
liability for such contingency if it determines it is probable that
a loss has occurred and a reasonable estimate of the loss can be
made. The Company may consider many factors in making these
assessments including historical and the specific facts and
circumstances of each matter.
Revenue Recognition
Management
has adopted this standard effective January 1, 2018 using the
modified-retrospective approach, in which case the cumulative
effect of applying the standard would be recognized at the date of
initial application.
In
accordance with ASC Topic 606, revenues are recognized when control
of the promised goods or services is transferred to the
Company’s customers, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for
those goods or services. In determining when and how much revenue
is recognized from contracts with customers, the Company performs
the following five-step analysis: (1) identify the contract(s) with
a customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the
transaction price to the performance obligations in the contract;
(5) recognize revenue when (or as) the entity satisfies a
performance obligation.
The
Company’s contracts with customers do not include variable
consideration, significant financing component, nor any clause
concerning with returns, refunds or other similar obligations.
Currently, the Company recognizes revenue under ASC Topic 606 for
each type of its performance obligation either over time or at a
point in time as follows:
Facilitation Fee
Facilitation
fee represents fees which the Company charges borrowers for
matching their loan requests with investors on the
CeraVest platform. These fees are charged by the Company in
return for services including evaluating the borrower’s
credit, examining the loan application and provided information,
connecting investors to qualified borrowers, facilitating the
execution of the loan between the parties through the CeraVest
platform. Facilitation fee is variable depending on the types of
loan products. These fees are deducted upfront from borrowers, are
recognized at loans inception when facilitated successfully through
CeraVest platform.
Service Charges
Service
charges represent transaction fees charged on merchants for the
offline vehicle-related purchases, between registered consumers and
merchants, completed solely under CeraPay, in which the Company
uses its self-owned capital to pay for the consumer and collect the
repayment subsequently in full. Merchants are entitled to receive
the sales proceeds net of the service charge. These fees are
recognized upon the completion of the purchase. The Company does
not have this revenue item to report beginning in the third quarter
of 2018 due to the business transaction change to 30-day and
12-month installment loans and loans being completely facilitated
through CeraVest.
Interest Income
Interest
income is generated from loans and other financing receivables,
recognized based on the effective interest rate method over the
contract term. Company stops recognizing the interest income for
any subsequent periods upon when a loan is in default.
Property lease and management
Minimum
contractual rental income related to office leases are recognized
on a straight-line basis over the terms of the respective leases.
Straight-line rental revenue commences when the tenant assumes
control of the leased premises. In accordance with the
Company’s standard lease terms, rental payments are generally
due on a monthly basis. Tenant recovery revenue includes payments
from tenants as reimbursements for management fees and utilities,
etc., which are recognized when the related expenses are incurred.
Rental from office lease and tenant recovery revenue together is
recorded as “Property lease and
management.”
Revenues
related to the Hotel are primarily related to rooms rentals, food
and beverage sales, and are recognized on an accrual basis. For
guest rooms, revenue is recognized when the rooms are occupied and
the services are performed. Food and beverage revenues are
recognized when the services are performed or products delivered to
the customer. Deferred revenue consisting of deposits paid in
advance is recognized as revenue when the services are performed
for hotels and restaurants. Hotel revenue is also recorded as
“Property lease and management.”
Other income
Other
income mainly includes penalty and late fees, and gain from debt
assignment. Penalty and late fees are charged to borrowers of loans
and other financing receivables if they become delinquent in
repaying. These fees are recognized at a point of time when
collected from borrowers. Gain from debt assignment are the
proceeds collected when a loan and all the associated rights and
obligations is transferred from the Company to a third party. These
proceeds are collected upon sales contract is signed at which point
it is recognized. Promotional cash incentives are accounted for as
reduction of revenue while the referral incentives are recorded as
sales and marketing expense when used by the
investors.
Below is the summary presenting the Company’s revenues
disaggregated by products and services and timing of revenue
recognition:
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Facilitation
Fee
|
658,686
|
231,709
|
|
Interest
income
|
194,855
|
310,289
|
|
Service
charges
|
19,396
|
201,386
|
|
Property
lease and management
|
75,006
|
58,474
|
|
Hotel
revenue
|
137,020
|
133,747
|
|
Debt
assignment income
|
203,409
|
15,646
|
|
Other
income
|
123,644
|
72,600
|
|
Total revenues
|
1,412,016
|
1,023,851
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Revenue
recognized over time
|
269,861
|
368,763
|
|
Revenue
recognized at a point in time
|
1,142,155
|
655,088
|
|
Total revenues
|
1,412,016
|
1,023,851
|
Contract Balances
For the
twelve months ended December 31, 2018, the Company did not have any
significant incremental costs of obtaining contracts with customers
incurred and/or costs incurred in fulfilling contracts with
customers within the scope of ASC Topic 606, that shall be
recognized as an asset and amortized to expenses in a pattern that
matches the timing of the revenue recognition of the related
contract. Other than the interest receivables of the 180-day loans
held by the Company which are accrued by the Company but unbilled
until the loans mature, amounted to RMB 9,256 as of December 31,
2018, the Company does not have any other contract assets (unbilled
receivables) since revenue is recognized when the performance
obligation is fulfilled and the payment from customers is not
contingent on a future event.
Advances
received from customers related to unsatisfied performance
obligations are recorded as contract liabilities (advance from
customers), which will be recognized as revenues upon the
satisfaction of performance obligations through the transfer of
related promised goods and services to customers.
The
Company’s contract liabilities consist of advance from
customers related to the deposits paid in advance for hotels
accommodations and restaurants service, and rent paid in advance
for leasing office. All contract liabilities are recognized when
the services are performed for hotels and restaurants. Below is the
summary presenting the movement of the Company’s contract
liabilities for the twelve months ended December 31,
2018:
Allocation to Remaining Performance Obligations
The
Company has elected to apply the practical expedient in paragraph
ASC Topic 606-10-50-14 and did not disclose the information related
to transaction price allocated to the performance obligations that
are unsatisfied or partially unsatisfied as of December 31, 2018,
because either the performance obligation of the Company’s
contracts with customers has an original expected duration of one
year or less or the Company has a right to consideration from a
borrower or a customer in an amount that corresponds directly with
the value to the borrower or the customer of the Company’s
performance completed to date, therefore the Company may recognize
revenue in the amount to which the Company has a right to invoice
or collect.
Advertising
The
Company expenses advertising costs as incurred. Advertising
expenses totaled approximately RMB9,337, RMB5,516 and RMB2,747 for
the years ended December 31, 2018, 2017 and 2016, respectively, and
are included in selling and marketing expense in the accompanying
consolidated statements of operations.
Value added Tax and Business Tax
In the
PRC, before May 1st ,2018, value added
tax (the “VAT”) of 17% on invoice amount was collected
in respect of the sales of goods on behalf of tax authorities.
After May 1st, 2018, the VAT has
changed to 16%. The VAT collected is not revenue of the Company;
instead, the amount is recorded as a liability on the balance sheet
until such VAT is paid to the authorities.
Since
May 2016, all entities that were originally subject to a business
tax are subject to VAT only under the National VAT Reform Program
launched by the People's Congress of PRC. For the tax rates
applicable, those that were initially charged at 5% of business tax
are now subject to a 6% VAT for a general VAT payer, or 3% for a
small-scale VAT payer, for the Company’s PRC
subsidiaries’ revenue from the internet-based business,
rental income, hotel revenue, membership fee, interest from
sales-type leases, management servicing fee, commission fee and
revenues from tires, fuel and insurance financing
services.
Income Taxes
Income
taxes are accounted for using an asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
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 in the applicable
tax jurisdiction 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 the period that includes the
enactment date. Deferred income tax expense represents the change
during the period in the deferred tax assets and deferred tax
liabilities. Realization of the deferred tax asset is dependent on
generating sufficient taxable income in future years.
The
Company recognizes interest on non-payment of income taxes under
requirement by tax law and penalties associated with tax positions
when a tax position does not meet the minimum statutory threshold
to avoid payment of penalties. According to the PRC Tax
Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational
errors made by the taxpayer or the withholding agent. The statute
of limitations is extended to five years under special
circumstances, where the underpayment of taxes is more than RMB
100,000. In the case of transfer pricing issues, the statute of
limitation is ten years. There is no statute of limitation in the
case of tax evasion. The tax returns of the Company’s PRC
VIEs and subsidiaries are subject to examination by the relevant
tax authorities.
The
Company’s Chinese subsidiaries are subject to taxation in the
PRC. The PRC income tax returns are generally not subject to
examination by the tax authorities for tax years before 2012. With
a few exceptions, the tax years 2012 to 2018 remain open to
examination by tax authorities in the PRC.
Uncertain tax positions
The
Company adopted the guidance on accounting for uncertainties in
income taxes, which prescribes a more likely than not threshold for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Guidance was also
provided on de-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, accounting for income taxes in interim periods, and
income tax disclosures. Significant judgment is required in
evaluating the Company’s uncertain tax positions and
determining its provision for income taxes.
The
Company has elected to classify interest related to an uncertain
tax position (if and when required) to interest expense, and
classify penalties related to an uncertain tax position (if and
when required) as part of income tax expense in the consolidated
statements of operations. For the years ended December 31, 2018,
2017 and 2016, the Company did not have any significant interest
and penalties associated with uncertain tax positions. As of
December 31, 2018 and 2017, the Company did not have any
significant unrecognized uncertain tax positions and the Company
does not believe that its unrecognized tax benefits will change
over the next twelve months.
Segment Reporting
Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief executive officer (“CODM”), in
deciding how to allocate resources and assessing performance. All
of the Company’s sales are generated in the PRC and
substantially all of the Company’s assets are located in the
PRC. The Company’s operations consist of three reporting and
operating segments, the internet-based business, property lease and
management business and hotel business (Note 17).
Earnings (Loss) Per Share
The
Company computes earnings (loss) per share (“EPS”) in
accordance with generally accepted accounting principles. Companies
with complex capital structures are to present basic and diluted
EPS. Basic EPS is measured as the income (loss) available to
ordinary shareholders divided by the weighted average ordinary
shares outstanding for the period. For basic EPS, the weighted
average number of shares outstanding for the period includes
contingently issuable shares (i.e., shares issuable for little or
no cash consideration upon the satisfaction of the conditions of a
contingent stock agreement) as of the date that all necessary
conditions have been met. Diluted earnings per share reflect the
potential dilution that could occur if securities or other
contracts to issue ordinary shares were exercised or converted into
ordinary stock. Ordinary shares issuable upon the conversion of the
convertible preferred shares are included in the computation of
diluted earnings per share on an “if-converted” basis
when the impact is dilutive. The dilutive effect of outstanding
ordinary share warrants and options are reflected in the diluted
earnings per share by application of the treasury stock method when
the impact is dilutive. Potential ordinary shares that have an
anti-dilutive effect are excluded from the calculation of diluted
EPS.
Basic
and diluted earnings per share for each of the periods presented
are calculated as follows:
Due to
the gain from continued operations for the years ended December 31,
2018, 1,851,360 stock options were included into the calculation of
diluted net earnings per share. Due to the loss from continued
operations for the years ended December 31, 2017 and 2016,
4,369,527 and 4,655,384 stock options were excluded from the
calculation of diluted net loss per share, respectively, because
the effect would be anti-dilutive.
Foreign Currency Translation and Change in Reporting
Currency
Starting
from the second quarter of 2017, the Company changed its reporting
currency from USD to RMB. The change in reporting currency was
undertaken to reduce the effect of increased volatility of the RMB
to USD exchange rate on the Company’s reported operating
results and to increase comparability with its peer companies in
China. The related financial statements prior to April 1, 2017 have
been recast to RMB as if the financial statements originally had
been presented in RMB since the earliest periods
presented.
The
Company’s operations are principally conducted through the
subsidiaries and VIEs located in the PRC where RMB is the
functional currency.
Assets
and liabilities denominated in foreign currencies are translated
into the functional currency at the exchange rates prevailing at
the balance sheet date. Exchange gains and losses are included in
earnings as a component of general and administration
expense.
Translations
of amounts from RMB into USD are solely for the convenience of the
reader and were calculated at the rate of USD1.00 = RMB6.8632 on
December 31, 2018, representing the certificated exchange rate
published by the People’s Bank of China’s Monetary
Policy Division. No representation is intended to imply that the
RMB amounts could have been, or could be, converted, realized or
settled into US$ at such rate, or at any other rate.
Share-Based Payments
The
Company records all share-based payments grants of employee stock
options to employees and non-employees in the financial statements
based on their fair values on the grant date and amortizes to
expense on a straight-line basis over the vesting period. The
Company used the Black-Scholes option-pricing model to estimate the
fair value of the options at the date of grant for both the 2009
incentive plan and the 2015 incentive plan. The Company used the
binomial model to estimate the fair value of repriced options as
the Company has reassessed the exercise pattern and determined that
the Binomial Pricing model was a better model for estimating the
fair values of the repriced options. The Company recognizes
expenses related to share-based payments as part of general and
administrative expense.
Recently Issued and Adopted Accounting Standards
In
January 2016, the FASB issued ASU No. 2016-01, Financial
Instruments - Recognition and Measurement of Financial Assets and
Financial Liabilities. The amendments in this update address
certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. The amendments in this update
require public business entities that are required to disclose fair
value of financial instruments measured at amortized cost on the
balance sheet to measure that fair value using the exit price
notion consistent with Topic 820, Fair Value Measurement. The
amendments in this update require an entity to present separately
in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair
value option. The amendments in this update require separate
presentation of financial assets and financial liabilities by
measurement category and form of financial asset (that is,
securities or loans and receivables) on the balance sheet or in the
accompanying notes to the financial statements. Early application
by public business entities to financial statements of fiscal years
or interim periods that have not yet been issued or, by all other
entities, that have not yet been made available for issuance of the
following amendments in this update are permitted as of the
beginning of the fiscal year of adoption: an entity should present
separately in other comprehensive income the portion of the total
change in the fair value of a liability resulting from a change in
the instrument-specific credit risk if the entity has elected to
measure the liability at fair value in accordance with the fair
value option for financial instruments. There was no material
impact of adoption of this guidance on the consolidated financial
statements.
In June
2016, the FASB issued ASU No. 2016-13, Financing Instruments-Credit
Losses (Topic 326): Measure of Credit Losses on Financial
Instruments. The amendments change the guidance on the impairment
of financial instruments. The main objective of this Update is to
provide financial statement users with more decision-useful
information about the expected credit losses on financial
instruments and other commitments to extend credit held by a
reporting entity at each reporting date. To achieve this objective,
the amendments in this Update replace the incurred loss impairment
methodology in current GAAP with a methodology that reflects
expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit
loss estimates. For public business entities that are U.S.
Securities and Exchange Commission (SEC) filers, the amendments in
this update are effective for annual periods beginning after
December 15, 2019, and interim periods within those annual periods.
For all other public business entities, the amendments in this
Update are effective for fiscal years beginning after December 15,
2020, including interim periods within those fiscal years. In
November 2018, the FASB issued ASU No.2018-19, Codification
Improvements to Topic 326, Financial Instruments—Credit
Losses. The amendments align the implementation date for nonpublic
entities’ annual financial statements with the implementation
date for their interim financial statements and clarify the scope
of the guidance in the amendments in Update 2016-13. The effective
date and transition requirements for the amendments in this Update
are the same as the effective dates and transition requirements in
Update 2016-13, as amended by this Update. The Company is
evaluating the impact of adopting ASU No. 2016-13and ASC No.2018-19
on the consolidated financial statements.
In
February 2018, the FASB issued guidance to address the income tax
accounting treatment of the tax effects within other comprehensive
income due to the enactment of the Tax Cuts and Jobs Act (the
“Tax Act”). This guidance allows entities to elect to
reclassify the tax effects of the change in the income tax rates
from other comprehensive income to retained earnings. The guidance
is effective for periods beginning after December 15, 2018 although
early adoption is permitted. In March 2018, the FASB issued ASU No.
2018-05, Income Tax (Topic 740) - Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118. This update adds
SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No.
118, which expresses the view of the staff regarding application of
Topic 740, Income Taxes, in the reporting period that includes
December 22, 2017 - the date on which the Tax Act was signed into
law. There was no material impact of adoption of this guidance on
the consolidated financial statements as the Company does not have
any US entities nor US operations.
In June
2018, the FASB issued ASU No. 2018-07, Compensation-Stock Expense
(Topic 718). The amendments in this Update expand the scope of
Topic 718 to include share-based payment transactions for acquiring
goods and services from non-employees. The amendments in this ASU
are effective for public companies for fiscal years beginning after
December 15, 2018, including interim periods within that fiscal
year. For all other companies, the amendments are effective for
fiscal years beginning after December 15, 2019, and interim periods
within fiscal years beginning after December 15, 2020. Early
adoption is permitted, but no earlier than a company’s
adoption date of Topic 606. According to ASU 2018-7, the Company
should apply the requirements of Topic 718 to non-employee awards
except for specific guidance on inputs to an option pricing model
and the attribution of cost (that is, the period of time over which
share-based payment awards vest and the pattern of cost recognition
over that period). The Company adopted new ASC 718 effective on
January,1st, 2018, and do not
have any material impact to the consolidated financial statements
from ASU No. 2018-07.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. The new
standard creates Topic 842, Leases, in the FASB Accounting
Standards Codification (FASB ASC) and supersedes FASB ASC 840,
Leases. ASU 2016-02 requires a lessee to recognize the assets and
liabilities that arise from leases (operating and finance).
However, for leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election not to recognize
lease assets and lease liabilities. If a lessee makes this
election, it should recognize lease expense for such leases
generally on a straight-line basis over the lease term. For public
business entities, the amendments in this update are effective for
financial statements issued for annual periods beginning after
December 15, 2018, and interim periods within those annual periods.
Earlier application is permitted for all entities as of the
beginning of an interim or annual reporting period.
In July
2018, the FASB issued ASU No. 2018-10, Codification Improvements to
Topic 842, Leases. The amendments in this Update affect narrow
aspects of the guidance issued in the amendments in Update 2016-02.
The amendments in this Update related to transition do not include
amendments from proposed Accounting Standards Update, Leases (Topic
842): Targeted Improvements, specific to a new and optional
transition method to adopt the new lease requirements in Update
2016-02. For entities that early adopted Topic 842, the amendments
are effective upon issuance of this Update, and the transition
requirements are the same as those in Topic 842. For entities that
have not adopted Topic 842, the effective date and transition
requirements will be the same as the effective date and transition
requirements in Topic 842.
In July
2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted
Improvement. The amendments in
this Update provide entities with an additional (and optional)
transition method to adopt the new leases standard. Under this new
transition method, an entity initially applies the new leases
standard at the adoption date and recognizes a cumulative-effect
adjustment to the opening balance of retained earnings in the
period of adoption consistent with preparers’ requests.
Consequently, an entity’s reporting for the comparative
periods presented in the financial statements in which it adopts
the new leases standard will continue to be in accordance with
current GAAP (Topic 840, Leases). An entity that elects this
additional (and optional) transition method must provide the
required Topic 840 disclosures for all periods that continue to be
in accordance with Topic 840. The amendments do not change the
existing disclosure requirements in Topic 840 (for example, they do
not create interim disclosure requirements that entities previously
were not required to provide).
In
December 2018, the FASB issued ASU No.2018-20, Leases (Topic 842):
Narrow-Scope Improvements for Lessors. The amendments in this Update
related to:1. sales taxes and other similar taxes collected from
lessees affect all lessors that elect the accounting policy
election; 2. lessor costs affect all lessor entities that have
lease contracts that either require lessees to pay lessor costs
directly to a third party or require lessees to reimburse lessors
for costs paid by lessors directly to third parties; the
recognition of variable payments for contracts with lease and
nonlease components affect all lessor entities with variable
payments that relate to both lease and nonlease
components. The effective
date and transition requirements for the amendments in this Update
for entities that have not adopted Topic 842 before the issuance of
this Update are the same as the effective date and transition
requirements in Update 2016-02 (for example, January 1, 2019, for
calendar-year-end public business entities).
In
March 2019, the FASB issued ASU No.2019-01—Leases (Topic
842): Codification Improvements. The amendments in this Update amend
Topic 842, including the following items: 1. Determining the fair
value of the underlying asset by lessors that are not manufacturers
or dealers (Issue 1);2. Presentation on the statement of cash
flows—sales-type and direct financing leases (Issue 2);3.
Transition disclosures related to Topic 250, Accounting Changes and
Error Corrections (Issue 3). That Topic has different effective
dates for public business entities and entities other than public
business entities. According to this update, the effective date for
the Company is for fiscal years beginning after December15, 2019,
and interim periods within fiscal years beginning after December
15, 2020. Early application is permitted. An entity should apply
the amendments as of the date that it first applied Topic 842,
using the same transition methodology in accordance with paragraph
842-10-65-1(c). The Company will adopt the new ASC 842 effective on
January 1st, 2019 and record
cumulative effect adjustment as of January 1st, 2019. Company does
not expect a significant effect on current accounting practice or a
significant an administrative cost incurred by ASU
No. 2018-10. In accordance with ASU No. 2018-11, the Company will
adopt the new transition method and not adjust comparative
periods.
In
August 2018, the FASB issued ASU No.2018-13, Fair Value Measurement
(Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement. The amendments in
this Update modify the
disclosure requirements on fair value measurements in Topic 820,
Fair Value Measurement, based on the concepts in the Concepts
Statement, including the consideration of costs and benefits. The
amendments in this Update are effective for all entities for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2019. An entity is permitted to early adopt any
removed or modified disclosures upon issuance of this Update and
delay adoption of the additional disclosures until their effective
date. The Company is in
the process of evaluating the impact of adoption of this guidance
on the consolidated financial statements.
Recently
issued ASUs by the FASB, are not expect to have significant impact
on the Company’s consolidated results of operations or
financial position.
NOTE 4 – DISCONTINUED OPERATIONS
On
December 31, 2015 the Board of Directors approved that the Company
shift its strategy to focusing on its internet-based business,
which was initially launched near the end of 2014. Accordingly, the
Company determines that the traditional businesses were ceased as
of December 31, 2015, and should be reported as discontinued
operations.
The
Company continues to service and collect on payments that have
become overdue. This constitutes significant continuing involvement
in the traditional businesses after their cessation.
The
assets and liabilities of the traditional businesses were included
in the captions “Assets of discontinued operations” and
“Liabilities of discontinued operations”, in the
accompanying balance sheets at December 31, 2018 and 2017 and
consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
Liabilities
classified as discontinued operations
|
|
|
|
Other payables and
accrued liabilities
|
10,352
|
10,916
|
|
Total
liabilities
|
10,352
|
10,916
|
The
following are revenues and income from discontinued
operations:
The
following are selective cash flow information from discontinued
operations:
NOTE 5 – LOANS, NET
The
following lists the components of loans, net:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
Loans to CeraVest
borrowers
|
1,981,706
|
1,090,497
|
|
Loans to other
borrowers
|
332,678
|
788,639
|
|
Less: Provision for
credit losses
|
(53,402)
|
(28,135)
|
|
|
|
|
|
Loans,
net
|
2,260,982
|
1,851,001
|
Credit quality of Loans to CeraVest borrowers
|
December
31, 2018
|
Current
|
1-90
days
past
due
|
> 90
days
past
due
|
Total
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
|
|
|
|
|
|
|
Loans to CeraVest
borrowers
|
1,673,861
|
153,807
|
154,038
|
1,981,706
|
|
Less: Provision for
credit losses of CeraVest borrowers
|
(125)
|
(257)
|
(7,814)
|
(8,196)
|
|
Loans to CeraVest
borrowers, net
|
1,673,736
|
153,550
|
146,224
|
1,973,510
|
|
December
31, 2017
|
Then-Current
|
1-90
days
past
due
|
> 90
days
past
due
|
Total
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
|
|
|
|
|
|
|
Loans to CeraVest
borrowers
|
447,151
|
472,800
|
170,546
|
1,090,497
|
|
Less: Provision for
credit losses of CeraVest borrowers
|
(2,313)
|
(11,341)
|
(13,774)
|
(27,428)
|
|
Loans to CeraVest
borrowers, net
|
444,838
|
461,459
|
156,772
|
1,063,069
|
|
Credit
quality of Loans to other borrowers
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
Loans to other
borrowers
|
332,678
|
788,639
|
|
Less: Provision for
credit losses of other borrowers
|
(45,206)
|
(707)
|
|
Loans to other
borrowers, net
|
287,472
|
787,932
|
Provision for credit losses
The
movement of provision for credit losses was as
follows:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Balance at
beginning of year
|
(28,135)
|
(35,337)
|
|
Net
(Addition)/Reversal
|
(25,267)
|
7,202
|
|
Balance at ending
of year
|
(53,402)
|
(28,135)
|
For the
years ended December 31, 2018, the Company has five overdue loans
to other borrowers, three of which have resigned with extended
terms and new interest rates as they became defaulted in 2018. The
Company did not accrue interest receivables and recognize interest
income over the period as the loans become defaulted and will not
resume until the previously outstanding interest is fully received.
Any future interest received afterwards will be recognized as
income directly on a cash-basis. The following is a summary of
maturity date and interest rates before and after the extension,
including the long-term loans (See Note 7):
|
No.
|
Item
|
Outstanding Principal and Interest
as of December,2018
|
Original Maturity Date
|
Original Interest Rate
|
New Maturity Date
|
New Interest Rate
|
|
1
|
Loans, net
|
231,754
|
August, 2018
|
18%
|
August, 2019
|
18%
|
|
|
|
|
|
|
|
|
|
1
|
Long-term loans, net
|
304,768
|
September, 2018
|
18%
|
September, 2020
|
19.20%
|
|
2
|
Long-term loans, net
|
55,533
|
September, 2018
|
18%
|
September, 2020
|
19.20%
|
|
|
Subtotal
|
360,301
|
|
|
|
|
As for
the other two overdue loans with an aggregated principal amount of
RMB 101 million, the maturity date of which is November 2018 and
December 2018, respectively. The Company is actively negotiating with the borrowers to
repay their debts.
As of
December 31, 2018 and 2017, the Company has nil and nil
commitments, respectively, to lend additional fund to the borrowers
who have received extension on their loans.
NOTE 6 – OTHER FINANCING RECEIVABLES, NET
The
following lists the components of other financing receivables,
net:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Other financing
receivables
|
14,342
|
1,946,524
|
|
Less: Provision for
credit losses
|
(2,474)
|
(10,311)
|
|
|
|
|
|
Other financing
receivables, net
|
11,868
|
1,936,213
|
Credit quality of other financing receivables
The
carrying amount of the current and past due other financing
receivables as of December 31, 2018 and 2017 were as
follows:
|
December
31, 2018
|
Current
|
1-90
days
past
due
|
> 90
days
past
due
|
Total
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
|
Gross other
financing receivables
|
—
|
—
|
14,342
|
14,342
|
|
Less: Provision for
credit losses
|
—
|
—
|
(2,474)
|
(2,474)
|
|
Other financing
receivables, net
|
—
|
—
|
11,868
|
11,868
|
|
December
31, 2017
|
Then-Current
|
1-90
days
past
due
|
> 90
days
past
due
|
Total
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
|
Gross other
financing receivables
|
1,946,524
|
—
|
—
|
1,946,524
|
|
Less: Provision for
credit losses
|
(10,311)
|
—
|
—
|
(10,311)
|
|
Other financing
receivables, net
|
1,936,213
|
—
|
—
|
1,936,213
|
Provision for credit losses
The
movement of provision for credit losses during the year of 2018 and
2017 was as follows:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Balance at
beginning of year
|
(10,311)
|
(144,359)
|
|
Reclassification to
accrued marketing expense
|
—
|
127,807
|
|
(Addition)/Reversal
|
7,837
|
6,241
|
|
Balance at ending
of year
|
(2,474)
|
(10,311)
|
The
addition/reversal of provision for credit losses of loans and other
financing receivables is reported in the “Provision for
credit losses” in the consolidated statements of operations.
After July 2017, the then-current and overdue other financing
receivables were sold to CeraVest investors through our
peer-to-peer lending platform, resulting in reclassification of
provision for credit losses to accrued marketing expenses during
the year ended December 31, 2017 (See Note 6 and Note
10).
NOTE 7 – LONG-TERM LOANS, NET
The
following lists the components of Long-term loans,
net:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Long-term
loans
|
360,301
|
─
|
|
Less: Provision for
credit losses
|
(337,280)
|
─
|
|
|
|
|
|
Long-term loans,
net
|
23,021
|
─
|
The
Company negotiated a term extension for two loans to other
borrowers which were due in the year 2019 to the year 2020 (See
Note 5), and reclassified the total outstanding balance to
Long-term loans, net from Loans, net due to the changed loan
maturity.
NOTE 8 – PREPAID EXPENSES AND OTHER CURRENT
ASSETS
A
summary of prepaid expenses and other current assets is as
follows:
NOTE 9 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
NET
Property,
equipment and leasehold improvements are summarized as
follows:
Depreciation
and amortization expense for the continuing operations were
approximately RMB52,686, RMB54,478 and RMB59,391 for the years
ended December 31, 2018, 2017 and 2016, respectively.
The
following schedule provides an analysis of Fincera’s
investment in property on operating leases and hotel business by
major classes as of December 31, 2018 and 2017:
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Buildings and
leasehold improvements
|
1,338,773
|
1,338,773
|
|
Equipment
|
107,453
|
107,453
|
|
Total
|
1,446,226
|
1,446,226
|
|
|
|
|
|
Less: Accumulated
depreciation and amortization
|
(232,062)
|
(190,054)
|
|
Total
|
1,214,164
|
1,256,172
|
The
building and leasehold improvements and equipment were partially
pledged as collateral for bank borrowings as of December 31, 2018
and 2017 (See Note 11).
NOTE 10 – OTHER PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities consist of the
followings:
(1)
Payable
to investors mainly include (i) repayment in advance by the
borrowers before maturity, and (ii) interest payable to investors
for 30-day and installment loans. In June 2018, the Company had a
re-development on the loan transaction process of 30-day and
installment loans. This eliminated the time gap between investor
receiving the investment and borrowers repaying the loans, which
significantly decreased the amount of payable to investor in the
year 2018 compared to the year 2017.
(2)
After
July 2017, accrued marketing expense represents the estimation of
future cash out-flow for purchase of delinquent CeraVest loans from
CeraVest investors, net off the future cash in-flow collectible
from such loans. Due to the significant decrease of CeraVest loans
held by the investors in the year 2018, the estimated future cash
out-flow for purchase of delinquent CeraVest loans from CeraVest
investors decreased as well, therefore, the Company reversed a
great amount of previously accrued marketing expense. The Company
has no legal obligation to purchase delinquent loans from investors
but provides such solution for marketing purpose.
(3)
Advance
of debt assignment represents the advance payment made to the
Company by the third-party buyers before the process of debt
assignment fully completed. During the fiscal year 2018, some
third-party buyers made payments before the contractually
agreed-upon due date of debt assignment. Those payments will be
reversed against the loans, net after the completion of debt
assignment.
The
movement of accrued marketing expense during the year of 2018 and
2017 is as below. The addition of accrued marketing expense
presented separately on the face of the consolidated statement of
operations.
|
|
December
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Balance at
beginning of year
|
179,091
|
—
|
|
Reclassification
from provision of credit losses for other financing receivable
(Note 6)
|
—
|
127,807
|
|
Addition
(Reversal)
|
(178,650)
|
51,284
|
|
Balance at ending
of year
|
441
|
179,091
|
NOTE 11 – THIRD PARTY BORROWINGS
Short-term bank borrowings
Summaries
of short-term bank borrowings are as follows:
|
|
Weighted-average
interest rate
|
|
December
31,
|
||
|
|
2018
|
2017
|
Maturities
|
2018
|
2017
|
|
|
|
|
|
RMB
|
RMB
|
|
Short-term bank
borrowings
|
4.81%
|
4.65%
|
December
2019
|
678,772
|
520,000
|
Short-term
bank borrowings represent loans from local banks that were used for
working capital. The borrowings bore interest at rates in the range
of 4.35% to 5.22% and 4.35% to 4.79% as of December 31, 2018 and
2017, respectively, are denominated in RMB and have terms maturing
within one year. The weighted average short-term bank borrowings
for the years ended December 31, 2018 and 2017 was RMB631,022
million and RMB592,822 million respectively.
The
legal representative of Shijie Kaiyuan Auto Trade Co., Ltd, a
subsidiary of VIE, has provided the guarantee for the Company to
secure two short-term bank borrowings from Agricultural Bank of
China for a total amount of RMB160 million.
As of
December 31, 2018, the Company had overdue bank borrowings to China
Minsheng Bank (“CMBC”) and China CITIC Bank
(“CITIC”) amounting to RMB219 million in total. In
February 2019, the Company has paid off the bank borrowings owed to
CMBC amounting to RMB60 million. In March 2019, the Company has
paid off the borrowings owed to CITIC amounting to RMB 159
million.
Long-term bank borrowings
Summaries
of long-term bank borrowings are as follows:
The
total carrying amount of property, equipment and leasehold
improvements that have been pledged as collateral to secure
financing from commercial banks is RMB1,109 million and RMB1,043
million as of December 31, 2018 and 2017 respectively. All the
revenue from property
lease & management has been pledged as collateral to secure
financing from commercial banks is RMB 137 million as of December
31, 2018.
NOTE
12 – INCOME TAXES
Cayman Islands: Under the current tax laws of the Cayman
Islands, the Company and its subsidiaries are not subject to tax on
their income or capital gains.
Hong Kong: The Company’s subsidiary in Hong Kong did
not have assessable profits that were derived from Hong Kong during
the years ended December 31, 2018, 2017 and 2016. Therefore, no
Hong Kong profit tax has been provided for in the periods
presented.
The
two-tier profits tax rates system was introduced under the Inland
Revenue (Amendment)(No.3) Ordinance 2018 (“the
Ordinance”) of Hong Kong became effective for the assessment
year 2018/2019. Under the two-tier profit tax rates regime, the
profits tax rate for the first HKD 2 million (approximately
$255,180) of assessable profits of a corporation will be subject to
the lowered tax rate, 8.25% while the remaining assessable profits
will be subject to the legacy tax rate, 16.5%. The Ordinance only
allows one entity within a group of “connected
entities” is eligible for the two-tier tax rate benefit. An
entity is a connected entity of another entity if (1) one of them
has control over the other; (2) both of them are under the control
(more than 50% of the issued share capital) of the same entity; (3)
in the case of the first entity being a natural person carrying on
a sole proprietorship business-the other entity is the same person
carrying on another sole proprietorship business. Since ACG, Fancy
Think Limited and Eastern Eagle are wholly owned and under the
control of Fincera, all entities are connected entities. Under the
Ordinance, it is an entity’s election to nominate the entity
that will be subject to the two-tier profits tax rates on its
Profits Tax Return. The election is irrevocable. The Company has
not elected an entity to apply for the two-tire profit tax rates
yet.
China: The foreign invested enterprises and domestic
companies are generally subject to enterprise income tax at a
uniform rate of 25%. Pursuant to the relevant laws and regulations
in the PRC, Shijiazhuang Chuanglang Trade is regarded as a small
and micro entity, and thus enjoys preferential tax treatments,
which is 10% as the enterprise income tax from January 1, 2018 to
December 31, 2020. For Shijiazhuang Chuanglang Trade, it has not
make profit yet. The Company’s PRC subsidiary and other
subsidiaries of the VIE are subject to a standard 25%
EIT.
Summaries
of the income tax (benefit) provision attributable to continued
operations in the consolidated statements of operations are as
follows:
|
|
Years Ended
December 31,
|
||
|
|
2018
|
2017
|
2016
|
|
|
RMB
|
RMB
|
RMB
|
|
|
|
|
|
|
Current
|
91,762
|
38,860
|
42,821
|
|
Deferred
|
12,042
|
(39,738)
|
(34,287)
|
|
Total
|
103,804
|
(878)
|
8,534
|
The tax
effects of temporary differences of continuing operations
representing deferred income tax assets / liabilities result
principally from the following:
As of
December 31, 2018 and 2017, deferred income tax assets are derived
from accrued liabilities, provision for credit losses and tax loss
carried forward arising from the same tax jurisdictions in China.
The Company recorded RMB 2,476 and nil valuation allowances against
the deferred tax assets arose from unutilized advertising expense
as of December 31, 2018 and 2017 respectively, because it is
considered more likely than not that these deferred tax assets will
not be realized in the future as the Company expects to spend more
on advertising in 2019 while the unutilized advertising expenses
could only carry forward for one year.
For the year ended December 31, 2018, total valuation allowance
increased by approximately RMB2.5 million. For the year ended
December 31, 2017, nil valuation allowance was recorded, as the
Company measured its U.S. deferred tax assets using the statutory
rate of 25% continuously, there is no effective tax rate impact to
the Company.
At
December 31, 2018, the Company had RMB381,918 of tax loss carry
forwards that expires through December 31, 2023.
The
difference between the effective income tax rate and the expected
statutory rate on income (loss) from operations was as
follows:
*Tax-exempt
entities represent entities outside of China and Hong Kong for
which the statutory tax rate is zero.
**Additional
deduction for research and development expenses represent
additional 75% of research and development expenses could be
deducted from profit before tax, which had been approved by local
tax bureau in May 2017.
The
Company adopted the guidance on accounting for uncertainties in
income taxes, which prescribes a more likely than not threshold for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Guidance was also
provided on de-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, accounting for income taxes in interim periods, and
income tax disclosures. Significant judgment is required in
evaluating the Company’s uncertain tax positions and
determining its provision for income taxes. The Company has elected
to classify interest related to an uncertain tax position (if and
when required) to interest expense, and classify penalties related
to an uncertain tax position (if and when required) as part of
income tax expense in the consolidated statements of operations.
For the years ended December 31, 2018, 2017 and 2016, the Company
did not have any significant interest and penalties associated with
uncertain tax positions. As of December 31, 2018 and 2017, the
Company did not have any significant unrecognized uncertain tax
positions and the Company does not believe that its unrecognized
tax benefits will change over the next twelve months.
PRC Withholding Tax on Dividends
The
current PRC Enterprise Income Tax Law imposes a 10% withholding
income tax for dividends distributed by foreign invested
enterprises to their immediate holding companies outside the PRC. A
lower withholding tax rate will be applied if there is a tax treaty
arrangement between the PRC and the jurisdiction of the foreign
holding company. Distributions to holding companies in Hong Kong
that satisfy certain requirements specified by PRC tax authorities,
for example, will be subject to a 5% withholding tax
rate.
As of
December 31, 2018 and 2017, the Company had not recorded any
withholding tax on the retained earnings of its foreign invested
enterprises in the PRC. The Company typically intends for its
foreign invested enterprises in the PRC to reinvest their earnings
to further expand the Company’s business in mainland China.
Therefore the Company does not typically intend for these PRC
subsidiaries to declare dividends to their immediate foreign
holding companies.
NOTE 13 – STOCK-BASED COMPENSATION
On
April 9, 2009, the Fincera Inc. 2009 Equity Incentive Plan (the
“2009 Incentive Plan”) was approved by the shareholders
of the Company. Under the terms of the 2009 Incentive Plan,
3,350,000 ordinary shares were reserved for issuance. All
directors, employees and consultants of Fincera and its related
parties are eligible to be granted awards under the 2009
Plan.
On
September 24, 2015, the Fincera Inc. 2015 Omnibus Equity Incentive
Plan (the “2015 Incentive Plan”) took effect and
replaced the 2009 Incentive Plan. Effective on and after that date,
no new awards will be granted under the 2009 Incentive Plan,
although all outstanding awards under that plan will remain
outstanding according to their terms and the terms of that plan.
Under the terms of the 2015 Incentive Plan, 5,200,000 ordinary
shares are reserved for issuance. The 2015 Incentive Plan provides
for the grant of incentive and nonstatutory stock options, stock
appreciation rights, restricted stock, unrestricted stock,
restricted stock units, performance units, performance shares,
deferred compensation awards and other stock-based awards. All
directors, employees and consultants of Fincera and its related
parties are eligible to be granted awards under the 2015 Incentive
Plan. The Board of Directors of the Company may amend or terminate
the 2015 Incentive Plan at any time. Certain amendments, including
an increase in the share reserve, require shareholder
approval.
The
total vesting period for stock options granted by the Company is
four years, with 25% of the options vesting one year after the date
of grant and the remaining 75% vesting ratably each month for three
years thereafter. The options have a total term of 10 years. The
Company will issue new shares to the holders of stock options upon
exercise of the options. The Board of Directors may grant stock
options to employees, directors and consultants to the Company to
purchase shares of the Company’s common stock at an exercise
price not less than the fair market value of the stock at the date
of grant.
On
September 13, 2018, the Company granted 10,000 shares of
unrestricted stock to employees under the terms of the 2015
Incentive Plan.
Below
is the summary of stock options of the 2015 Incentive Plan. The
exercise price represents the closing price of the Company’s
ordinary shares on the date of grant.
|
|
|
Exercise
Price
|
|
|
Date of
Grant
|
Shares
Granted
|
RMB
|
USD
|
|
24-Sep-15
|
1,027,916
|
91.48
|
14.00
|
|
28-Dec-15
|
279,616
|
87.39
|
13.38
|
|
29-Apr-16
|
272,400
|
88.54
|
13.55
|
|
Sep-27-16
|
42,000
|
88.87
|
13.60
|
|
Nov-29-16
|
314,000
|
88.87
|
13.60
|
|
Apr-28-17
|
71,360
|
106.80
|
16.35
|
|
Jun-16-17
|
16,000
|
103.24
|
15.80
|
|
Oct-13-17
|
531,656
|
111.08
|
17.00
|
|
Sep-13-18
|
10,000
|
85.79
|
12.50
|
Due to
the change from the new business model launched in the third
quarter of year 2018, there are 255 former employees who are turned
into brokers and operate independently of the Company. At the time
of the change, the number of the stock options held by these former
employees is 882,072. The total unamortized compensation expense
for these stock options as of December 31, 2018 is USD$1,587.5. The
terms in the Company’s stock option award agreement are
applicable for both brokers and employees. With the new ASC 718
effective on January 1st 2018, the Company continues the same
accounting treatment to calculate the future compensation expense
of brokers’ stock options. Stock options granted to employees
by Fincera were subject to amortization of their fair value at the
grant date over the subsequent vesting period of four years as per
ASC 718. For the brokers who are former employees and hold stock
options, their stock options are still subject to the amortization
of stock-based compensation originating from their grant
date.
During
the years ended December 31, 2018, 2017 and 2016, 275,979, 301,574
and 288,028 stock options have been forfeited, respectively, as a
result of the resignation of the employees or the termination of
service relations with the brokers. In connection with the grant of
stock options to employees, the Company recorded compensation
expense charges in general and administrative expenses of RMB
13,269, RMB 20,052 and RMB 8,399 for the years ended December 31,
2018, 2017 and 2016, respectively, based on the estimated fair
value of the options on the date of grant. No stock-based
compensation charges were recorded for non-employees for the years
ended December 31, 2017 and 2016. In 2018, due to the
implementation of new broker business model, approximately 255
brokers who used to be Fincera’s employees are granted stock
options. The stock-based compensation charges were recorded for
those non-employees under the requirements of ASC 718. Per share
fair value of the stock options granted has been estimated using
the Black-Scholes option-pricing model with the following
assumptions:
|
Date of
Grant
|
September
24,
2015
|
December
28,
2015
|
April
29,
2016
|
September
27,
2016
|
November
29,
2016
|
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
1.84%
|
2.05%
|
2.05%
|
1.39%
|
2.12%
|
|
Volatility
(3)
|
26%
|
25%
|
41%
|
32%
|
32%
|
|
Expected Life (in
years) (4)
|
6.08
|
6.08
|
6.08
|
6.08
|
6.08
|
|
Date
of Grant
|
April
28,
2017
|
June
16,
2017
|
October
13,
2017
|
September
13,
2018
|
|
|
|
|
|
|
|
Dividend yield
(1)
|
None
|
None
|
None
|
None
|
|
Risk-free interest
rate (2)
|
2.10%
|
1.97%
|
2.02%
|
2.90%
|
|
Volatility
(3)
|
23%
|
21%
|
18%
|
63.11%
|
|
Expected Life (in
years) (4)
|
6.08
|
6.08
|
6.08
|
6.08
|
|
(1)
|
The
Company has no expectation of paying regular cash dividends on its
ordinary shares.
|
|
(2)
|
The
risk-free interest rate is based on the U.S. Treasury yield for a
term consistent with the expected term of the awards in effect at
the time of grant.
|
|
(3)
|
The
Company estimates the volatility of its ordinary shares at the date
of grant based on its historical monthly price
observations.
|
|
(4)
|
The
expected life of stock options granted under the Incentive Plan is
based on expected exercise patterns, which the Company believes are
representative of future behavior.
|
The
following table summarizes outstanding options at December 31,
2018, and the related weighted average fair value and life
information:
A
summary of option activity under the employee share option plan as
of December 31, 2018, 2017 and 2016, and changes during the three
years then ended is presented as follows:
|
Options
|
Number of
Shares
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Life (Years)
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
Outstanding at
January 1, 2016
|
4,318,084
|
$8.52
|
5.76
|
$21,779
|
|
Exercised
|
(3,072)
|
$7.25
|
|
|
|
Granted
|
628,400
|
$13.58
|
|
|
|
Forfeited
|
(288,028)
|
$13.92
|
|
|
|
Outstanding at
December 31, 2016
|
4,655,384
|
$8.87
|
5.17
|
$28,548
|
|
Exercised
|
(603,299)
|
$7.20
|
|
|
|
Granted
|
619,016
|
$16.90
|
|
|
|
Forfeited
|
(301,574)
|
$13.94
|
|
|
|
Outstanding at
December 31, 2017
|
4,369,527
|
$9.89
|
4.85
|
$54,984
|
|
Exercised
|
(122,877)
|
$12.53
|
|
|
|
Granted
|
10,000
|
$12.50
|
|
|
|
Forfeited
|
(275,979)
|
$15.24
|
|
|
|
Outstanding at
December 31, 2018
|
3,980,671
|
$9.44
|
3.51
|
$24,252
|
A
summary of unvested options under the employee share option plan as
of December 31, 2018, and changes during the year then ended is
presented as follows:
|
Options
|
Number of
Shares
|
Weighted Average
Fair Value
|
|
|
|
|
|
Unvested at January
1, 2018
|
1,260,630
|
$3.65
|
|
Granted
|
10,000
|
$7.51
|
|
Vested
|
(402,719)
|
$5.52
|
|
Forfeited or
exercised
|
(275,979)
|
$4.53
|
|
Unvested at
December 31, 2018
|
591,932
|
$4.87
|
|
Expected to vest
thereafter
|
591,932
|
$4.87
|
As of
December 31, 2018, 3,388,739 of the share options are vested and
exercisable and a total of RMB 19,503 of compensation expense
pertaining to options remains unrecognized. This amount will be
recognized as compensation expense ratably over the remaining
vesting period. The weighted average remaining vesting period of
the options is 3.51 years.
Restricted
Stock Units (“RSUs”) are share awards that entitle the
holder to receive shares of the Company’s common stock upon
vesting. The total vesting period for RSUs granted by the Company
is four years, with 25% of the RSUs vesting on each anniversary
from the date of grant. A summary of RSU transactions for all
equity compensation plans follows:
|
|
Number of
Shares
|
Weighted-Average
Grant Date Fair value
|
Aggregate
Intrinsic Value
|
|
RSUs outstanding at
January 1, 2018
|
8,000
|
$17.00
|
$136
|
|
Granted
|
—
|
—
|
—
|
|
Forfeited
|
—
|
—
|
—
|
|
Vested
|
2,000
|
17.00
|
34
|
|
RSUs outstanding at
December 31, 2018
|
6,000
|
$17.00
|
$102
|
At
December 31, 2018, total unrecognized compensation expense related
to non-vested RSUs granted prior to that date was RMB 651, which is
expected to be recognized over a weighted-average period of 2.8
years. The Company granted 8,000 shares of restricted stock options
on October 13, 2017 and there were no RSUs granted during
2018.
NOTE 14 – FUTURE MINIMUM RENTAL INCOME UNDER OPERATING
LEASES
Fincera’s
operations include the leasing of commercial property at the
Kaiyuan Finance Center. The leases thereon expire at various dates
through 2023. The following is a schedule of minimum future rents
on non-cancelable operating leases at December 31,
2018:
|
Year
Ending December 31,
|
Future Minimum
Rentals
|
|
|
RMB
|
|
2019
|
66,005
|
|
2020
|
30,538
|
|
2021
|
2,384
|
|
2022
|
—
|
|
2023
|
—
|
|
Total
|
98,927
|
There
are no contingent rentals as of December 31, 2018.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The
Company leases certain facilities under long-term, non-cancelable
leases and monthly or quarterly leases. These leases are accounted
for as operating leases. Rent expense for continuing operations
amounted to RMB15,330 RMB13,755and RMB7,961 for the years ended
December 31, 2018, 2017 and 2016, respectively. Rent expense for
discontinued operations amounted to nil, RMB249 and RMB4,903 for
the years ended December 31, 2018, 2017 and 2016,
respectively.
Future
minimum payments for operations under long-term, non-cancelable
leases as of December 31, 2018 are as follows:
|
Year
Ending December 31,
|
Future Minimum
Payments
|
|
|
RMB
|
|
2019
|
2,029
|
|
2020
|
2,982
|
|
2021
|
1,583
|
|
2022
|
-
|
|
2023
|
-
|
|
Total
|
6,594
|
Capital Commitments
As of
December 31, 2018, the Company’s capital commitments
contracted but not yet reflected in the consolidated financial
statements amounted to nil.
Legal Proceedings
In the
opinion of management, there are no material claims assessments or
litigation pending against the Company.
NOTE 16 – PROFIT APPROPRIATION
The
Company’s China-based subsidiaries and VIEs are required to
make appropriations to certain non-distributable reserve
funds.
In
accordance with the PRC Company Law, some of the Company’s
PRC subsidiaries and VIEs have to make appropriations from their
after-tax-profit under the Generally Accepted Accounting Principles
in the PRC (“PRC GAAP”) to non-distributable reserve
funds, including a statutory surplus fund and a discretionary
surplus fund. Each year, at least 10% of the after-tax-profit under
PRC GAAP is required to be set aside as statutory surplus fund
until such appropriations for the fund equal 50% of the registered
capital of the applicable company. The appropriation for the
discretionary surplus fund is at the Company’s discretion as
determined by the shareholders’ meeting of each
company.
Upon
certain regulatory approvals and subject to certain limitations,
the general reserve fund and the statutory surplus fund can be used
to offset prior year losses, if any, and can be converted into
paid-in capital of the applicable company, but it cannot be
distributed to shareholders except in the event of a solvent
liquidation of the company.
For the
years ended December 31, 2018, 2017 and 2016, appropriations for
the general reserve funds and statutory surplus funds totaled RMB
25,733, RMB4,458 and RMB15,252 respectively. The 2017 and 2016
reserve refund is due to the refund of surplus reserves caused by
the Company’s winding down of its commercial vehicle sales,
leasing and support business.
NOTE 17 – SEGMENT REPORTING
The
Company’s chief operating decision maker (“CODM”)
has been identified as the CEO, who reviews the financial
information of separate operating segments when making decisions
about allocating resources and assessing performance of the
Company. The Company measures segment income as income from
operations less provision for credit losses, interest expenses,
interest expenses of related parties, and property and management
cost. The reportable segments are components of the Company, which
offer different products or services and are separately managed,
with separate financial information available that is separately
evaluated regularly by the Company’s Chief Executive Officer
in determining the performance of the business. Income tax expenses
are not allocated to the segments.
The
Company operated three segments: the internet-based business
segment, the hotel segment and the office leasing
segment.
Discontinued
operations have been excluded from the segment information for
periods presented.
Year
ended December 31, 2018
|
|
Internet-based
Business
|
Hotel
Business
|
Office
Leasing
|
Corporate
|
Totals
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
|
Segment
Revenues
|
1,199,990
|
137,020
|
75,006
|
—
|
1,412,016
|
|
Property and
management cost
|
—
|
103,865
|
13,141
|
—
|
117,006
|
|
Marketing
expense
|
(178,650)
|
—
|
—
|
—
|
(178,650)
|
|
Provision for
credit losses
|
354,711
|
—
|
—
|
—
|
354,711
|
|
Interest expense,
related parties
|
153,827
|
—
|
2,948
|
—
|
156,775
|
|
Interest
expense
|
33,360
|
39,846
|
—
|
—
|
73,206
|
|
Product development
expense
|
80,057
|
—
|
—
|
—
|
80,057
|
|
|
|
|
|
|
|
|
Segment Income
before taxes
|
756,685
|
(6,691)
|
58,917
|
—
|
808,911
|
|
General and
administrative
|
—
|
—
|
—
|
193,187
|
193,187
|
|
Selling and
marketing
|
—
|
—
|
—
|
237,128
|
237,128
|
|
Income (loss) from
continuing operations before income taxes
|
756,685
|
(6,691)
|
58,917
|
(430,315)
|
378,596
|
Year
ended December 31, 2017
|
|
Internet-based
Business
|
Hotel
Business
|
Office
Leasing
|
Corporate
|
Totals
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
|
Segment
Revenues
|
831,630
|
133,747
|
58,474
|
—
|
1,023,851
|
|
Property and
management cost
|
—
|
98,248
|
13,782
|
—
|
112,030
|
|
Marketing
expense
|
51,284
|
—
|
—
|
|
51,284
|
|
Reversal of
provision for credit losses
|
(13,443)
|
—
|
—
|
—
|
(13,443)
|
|
Interest expense,
related parties
|
157,295
|
—
|
4,746
|
—
|
162,041
|
|
Interest
expense
|
272,171
|
35,020
|
—
|
—
|
307,191
|
|
Product development
expense
|
82,375
|
—
|
—
|
—
|
82,375
|
|
|
|
|
|
|
|
|
Segment Income
before taxes
|
281,948
|
479
|
39,946
|
—
|
322,373
|
|
General and
administrative
|
—
|
—
|
—
|
204,077
|
204,077
|
|
Selling and
marketing
|
—
|
—
|
—
|
129,892
|
129,892
|
|
Income (loss) from
continuing operations before income taxes
|
281,948
|
479
|
39,946
|
(333,969)
|
(11,596)
|
Year
ended December 31, 2016
|
|
Internet-based
Business
|
Hotel
Business
|
Office
Leasing
|
Corporate
|
Totals
|
|
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
|
Segment
Revenues
|
706,160
|
109,708
|
60,057
|
—
|
875,925
|
|
Property and
management cost
|
—
|
95,974
|
13,594
|
—
|
109,568
|
|
Provision for
credit losses
|
116,032
|
—
|
—
|
—
|
116,032
|
|
Interest
expense-related parties
|
37,816
|
1,619
|
1,904
|
—
|
41,339
|
|
Interest
expense
|
221,934
|
40,350
|
478
|
—
|
262,762
|
|
Product development
expense
|
62,647
|
—
|
—
|
—
|
62,647
|
|
|
|
|
|
|
|
|
Segment Income
(loss) before taxes
|
267,731
|
(28,235)
|
44,081
|
—
|
283,577
|
|
General and
administrative
|
—
|
—
|
—
|
198,787
|
198,787
|
|
Selling and
marketing
|
—
|
—
|
—
|
89,620
|
89,620
|
|
Income (loss) from
continuing operations before income taxes
|
267,731
|
(28,235)
|
44,081
|
(288,407)
|
(4,830)
|
The
assets of the office leasing segment as of December 31, 2018 and
2017 amounted to RMB1,148 million and RMB1,307 million,
respectively. The assets of the hotel business segment as of
December 31, 2018 and 2017 amounted to RMB988 million and RMB1,033
million, respectively. The assets of the internet-based business
segment as of December 31, 2018 and 2017 amounted to RMB2,755
million and RMB4,321 million, respectively. The remaining balances
of assets as of December 31, 2018 and 2017 were RMB53 million and
RMB92 million.
NOTE 18 – RELATED PARTY BALANCES AND
TRANSACTIONS
Financing payables, related parties
The
outstanding financing payables, related parties as of December 31,
2018 and 2017 were as follows:
Notes:
(2)
Entity
controlled by Mr. Li’s brother.
(3)
Entity
in which Mr. Li is the indirect beneficial owner of approximately
20.92%.
During
the periods presented, the Company has borrowed from the
Company’s Chairman and Chief Executive Officer, Mr. Li and
companies affiliated with Mr. Li. Each of these loans was entered
into to satisfy the Company’s short-term capital needs. On
March 18, 2018, the Company and Mr. Li entered into and executed an
agreement to convert the majority amount of the loans that the
Company owed to Mr. Li into 1.32 million shares of common stock of
the Company.
The
amount due to Mr. Li is unsecured and due on demand by the lender
and bore an interest at approximately 3.9% per annum based on the
outstanding unpaid balances.
The
amount due to Alliance Rich is non-interest bearing, unsecured and
due on demand by the lender.
The
amount due to Smart Success Investment Limited (“Smart
Success”) is non-interest bearing, unsecured and due on
demand by the lenders.
The
amount due to Hebei Kaiyuan is unsecured and due on demand by the
lender and bore an interest at 8.00% per annum based on the
outstanding unpaid amounts.
The
amount due to Ruituo is unsecured and due on demand by Ruituo and
bore an interest at approximately 8.00% based on the weighted
average outstanding payable balances at month end.
The Company pays a financing charge to Beiguo Mall Xinji Branch and
Beiguo Mall Luquan Outlets for the funds obtained. The financing
charge is approximately 9.2% per annum if funds are repaid in full
within 6 months and 12% per annum after 6 months but within 7
months. If the funds are still unpaid after 7 months, the financing
charge rate increases to 18% per annum. During the fiscal year
2018, the Company paid a financing charge of approximately 9.2% per
annum to Beiguo Mall Xinji Branch and Beiguo Mall Luquan Outlets
for the funds obtained. The financing arrangement is guaranteed by
Hebei Kaiyuan and Mr. Li, who has a long-term business relationship
with Beiguo. In addition, the payable balances of each loan are due
in 180 days.
Borrowed funds from CeraVest investor, related party
During
the year of 2017 and 2016, the related parties, including eight
senior executives and Mr. Li’s relatives, have provided to
the Company through the CeraVest platform for the purpose of
funding CeraVest loans, including CeraVest Fixed and CeraVest Flex,
with weighted average interest rate of 8.43% and 8.03%, and 8.49%
and 8.03% per annum as of December 31, 2017 and 2016, respectively.
CeraVest Fixed and CeraVest Flex have phased out in
2018.
Related Parties Transactions
During
the periods presented, the details of the significant related party
transactions were as follows:
Notes:
(1)
Entity
controlled by Mr. Li.
(2)
Entity
controlled by Mr. Li’s brother.
(3)
The
Chairman and Chief Executive Officer of Fincera.
(4)
Entity
in which Mr. Li is the indirect beneficial owner of approximately
20.92%
(5)
Entity
in which Mr. Li holds 40% equity interest.
(6)
The
regional manager of the Company.
(7)
The
sister of Mr. Li.
(8)
The
Company’s COO, retired from the Company since August
2017.
(9)
The
brother of Mr. Li.
(10)
The
director of the Company
(11)
The
legal representative of one of the subsidiaries of Fincera
Inc.
Nature of transaction:
(a)
Bank
loan guarantee provided to the bank by the related
parties.
(b)
Loan
provided to the Company during the year.
(c)
Internet-based
financing provided to the Company during the year.
(d)
Interest incurred
by the Company during the year.
(e)
Capital
transaction with shareholder .
(f)
Acquisition
transaction.
(g)
CeraVest
investment.
NOTE 19 – VARIABLE INTEREST ENTITIES
On
November 26, 2008, through the Company’s wholly owned
subsidiary, Chuanglian, the Company executed a series of
contractual arrangements with the Auto Kaiyuan Companies (refers to
Kaiyuan Logistics, Kaiyuan Auto Trade Co., Ltd., and Hebei Xuhua
Trading Co., Ltd.) and their shareholder, as the Enterprise
Agreements. Pursuant to the Enterprise Agreements, the Company had
exclusive rights to obtain the economic benefits and assume the
business risks of the Auto Kaiyuan Companies from their
shareholder, and generally had control of the Auto Kaiyuan
Companies. The Auto Kaiyuan Companies were considered VIEs and the
Company was the primary beneficiary. The Company’s
relationships with the Auto Kaiyuan Companies and their shareholder
were governed by the Enterprise Agreements between Chuanglian and
each of the VIEs .
In
January 2013, the Company has further amended the Enterprise
Agreements with Kaiyuan Auto Trade and Kaiyuan Logistics and their
shareholder, Hebei Kaiyuan. Under the amendment, Hebei Kaiyuan
transferred its entire equity interests held in Kaiyuan Auto Trade
(2%) and Kaiyuan Logistics (100%) to its parent company, Hebei
Shengrong Investment. Thereafter, Hebei Shengrong Investment became
the shareholder of these two VIEs. The rights and obligations of
the Company and the VIEs in the Enterprise Agreements remain
unchanged.
In
December 2016, Hebei Kaiyuan was replaced by Hebei Yarui Trading.
The related Enterprise Agreements involving Hebei Kaiyuan were
replaced by identical agreements involving Hebei Yarui Trading
instead. This occurred because Hebei Kaiyuan had split into two
companies due to business reasons. One of the split companies,
Hebei Yarui Trading, replaced Hebei Kaiyuan in our VIE
structure.
In
2017, Kaiyuan Logistics was deregistered, as a result thereof, the
VIEs only include Kaiyuan Auto Trade and Hebei Xuhua Trading
thereafter.
In
2018, Kaiyuan Auto Trade and Hebei Xuhua Trading remain unchanged
as the two VIEs of the Company.
Details
of the Enterprise Agreements are as follows:
Assignment of Voting Rights
The
shareholder of the VIEs irrevocably agreed to assign all of its
voting rights to the Company for all business resolutions. As a
result, the Company has direct control of the Board of Directors
and has authority to appoint the majority of the Board of Directors
which makes it the primary controlling shareholder of the
VIEs.
Management and Operating Agreement
The
Company is engaged to exclusively manage and operate the sales and
service of the VIEs, including the development of sales and
marketing strategy, management of customer services, daily
operations, financial management, employment issues and all other
related operating and consulting services. Furthermore, the
shareholders of the VIEs agree that without the prior consent of
the Company, the VIEs will not engage in any transactions that
could materially affect their respective assets, liabilities,
rights or operations, including, without limitation, incurrence or
assumption of any indebtedness, sale or purchase of any assets or
rights, incurrence of any encumbrance on any of their assets or
intellectual property rights in favor of a third party or transfer
of any agreements relating to their business operation to any third
party. The management and operating agreement in respect of each of
VIEs was entered in 2013 and 2016, respectively, and has a term of
10 years and will be extended for another 10 years automatically
unless the Company files a written notice at least 3 months prior
to the expiration of this agreement.
Equity Interest Transfer Agreement
The
shareholders of the VIEs agree to transfer all of its assets to the
Company and the Company has an exclusive, irrevocable and
unconditional right to purchase, or cause the Company’s
designated party to purchase, from such shareholders, at the
Company’s sole discretion, part or all of the
shareholders’ equity interests in the VIEs when and, to the
extent that, applicable PRC Laws permit the Company to own part or
all of such equity interests in the VIEs. According to the
Exclusive Equity Interest Transfer Agreement, the purchase price to
be paid by the Company to the shareholders of the VIEs will be the
minimum amount of consideration permitted by applicable PRC Law at
the time when such share transfer occurs.
Equity Pledge Agreement
Pursuant
to the Equity Pledge Agreement, the VIEs and their shareholders
agree to pledge all of its equity interest and operating profits to
guarantee the performance of the VIEs in the obligation under the
Equity Interest Transfer Agreement. In the event of the breach of
any conditions of the Equity Interest Transfer Agreement, the
Company is entitled to enforce its pledge rights over the equity
interests of the VIEs for any losses suffered from the
breach.
The
FASB issued guidance requiring companies to provide enhanced
disclosures about an enterprise’s involvement in a VIE. This
guidance also requires an enterprise to qualitatively assess the
determination of the primary beneficiary of a VIE. As part of its
qualitative assessment the Company has evaluated the
following:
●
The entity in which
equity investors do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support; or
●
As a group, the
holders of the equity investment at risk lack any one of the
following three characteristics:
(i)
The power through
voting rights or similar rights to direct activities that most
significantly impact the entity’s economic
performance,
(ii)
The obligation to
absorb the expected losses of the entity, and
(iii)
The right to
receive the expected residual return of the entity.
If an
investment is determined to be a VIE, the Company then performs an
analysis to determine if the Company is the primary beneficiary of
the VIE. U.S. GAAP requires a VIE to be consolidated by its primary
beneficiary. The primary beneficiary is the party that has a
controlling financial interest in an entity. In order for a party
to have a controlling financial interest in an entity it must
have:
●
The power to direct
the activities of a VIE that most significantly impact the
entity’s economic performance (“power
criterion”), and
●
The obligation to
absorb losses of an entity that could potentially be significant to
the VIE or the right to receive benefits from the entity that could
potentially be significant to the VIE (“losses/benefits
criterion”).
As part
of its qualitative assessment, Fincera has concluded that it
maintains the power criterion since the Company directs the
activities that impact the underlying economics of the VIEs. One
example of such an activity is that Fincera’s Officers, which
is composed of senior employees across Fincera’s departments,
is responsible for monitoring performance and allocating resources
and capital to the VIEs. Further, since Fincera maintains a
priority earnings position in the VIEs and has the ability and
obligation to absorb the losses of the VIEs, Fincera also meets the
losses/benefits criterion.
These
contractual arrangements may not be as effective in providing the
Company with control over the VIEs as direct ownership. Due to its
VIE structure, the Company has to rely on contractual rights to
effect control and management of the VIEs, which exposes it to the
risk of potential breach of contract by the shareholders of the
VIEs for a number of reasons. For example, their interests as
shareholders of the VIEs and the interests of the Company may
conflict and the Company may fail to resolve such conflicts; the
shareholders may believe that breaching the contracts will lead to
greater economic benefit for them; or the shareholders may
otherwise act in bad faith. If any of the foregoing were to happen,
the Company may have to rely on legal or arbitral proceedings to
enforce its contractual rights, including specific performance or
injunctive relief, and claiming damages. Such arbitral and legal
proceedings may cost substantial financial and other resources, and
result in a disruption of its business, and the Company cannot
assure that the outcome will be in its favor. Apart from the above
risks, there are no significant judgments or assumptions regarding
enforceability of the contracts.
In
addition, as all of these contractual arrangements are governed by
PRC law and provide for the resolution of disputes through either
arbitration or litigation in the PRC, they would be interpreted in
accordance with PRC law and any disputes would be resolved in
accordance with PRC legal procedures. The legal environment in the
PRC is not as developed as in other jurisdictions, such as the
United States. As a result, uncertainties in the PRC legal system
could further limit the Company’s ability to enforce these
contractual arrangements. Furthermore, these contracts may not be
enforceable in China if PRC government authorities or courts take a
view that such contracts contravene PRC laws and regulations or are
otherwise not enforceable for public policy reasons. In the event
the Company is unable to enforce these contractual arrangements, it
may not be able to exert effective control over the VIEs, and its
ability to conduct its business may be materially and adversely
affected.
None of
the assets of the VIEs can be used only to settle obligations of
the consolidated VIEs. Liabilities recognized as a result of
consolidating these VIEs do not represent additional claims on the
Company’s general assets; rather, they represent claims
against the specific assets of the consolidated VIEs.
The
following financial statement amounts and balances of the VIEs were
included in the accompanying consolidated financial statements as
of December 31, 2018 and 2017 and for the years ended December 31,
2018, 2017 and 2016:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
|
|
|
|
Total
assets
|
5,065,370
|
4,637,085
|
|
Total
liabilities
|
3,134,146
|
5,388,831
|
NOTE 20 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION OF
FINCERA INC.
A
substantial part of the Company’s businesses and assets are
denominated in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized
to buy and sell foreign currencies at the exchange rates quoted by
the People’s Bank of China. Approval of foreign currency
payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form
together with suppliers’ invoices, shipping documents and
signed contracts. These requirements imposed by the PRC government
authorities may restrict the ability of the Company’s
subsidiaries and VIEs to transfer its net assets to the Company
through loans, advances or cash dividends, which consisted of
paid-up capital, additional paid in capital and statutory reserves
and amounted to approximately RMB1,088.3 million as of December 31,
2018, exceeding 25% of the Company’s consolidated net assets.
Accordingly, condensed parent company financial statements have
been prepared in accordance with Rule 5-04 and Rule 12-04 of SEC
Regulation S-X.
The
Company records its investments in its subsidiaries under the
equity method of accounting. Such investments are presented on the
separate condensed balance sheets of the Company as
“Long-term investments in subsidiaries”.
The
subsidiaries did not pay any dividends to the Company for the
periods presented. Certain information and footnote disclosures
generally included in financial statements prepared in accordance
with U.S. GAAP have been condensed and omitted. The footnote
disclosures represent supplemental information relating to the
operations of the Company, as such, these statements should be read
in conjunction with the notes to the consolidated financial
statements of the Company.
As of
December 31, 2018 and 2017, there were no material contingencies,
significant capital and other commitments, provisions for long-term
obligations, or guarantees of the Company, except as separately
disclosed in the Company’s Consolidated Financial Statements,
if any.
Condensed Balance Sheets
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
RMB
|
RMB
|
|
Assets
|
|
|
|
Cash and cash
equivalents
|
2,636
|
6,246
|
|
Prepaid expenses
and other current assets
|
351
|
39
|
|
Investment in
subsidiaries, continuing operations
|
797,767
|
504,092
|
|
Due from
subsidiaries
|
—
|
—
|
|
Total
assets
|
800,754
|
510,377
|
|
|
|
|
|
Liabilities
|
|
|
|
Other payables and
accrued liabilities
|
394
|
3,795
|
|
Due to
subsidiaries
|
392,465
|
391,446
|
|
Due to Mr.
Li
|
44,271
|
61,817
|
|
Dividends
payable
|
—
|
172,932
|
|
Total
liabilities
|
437,130
|
629,990
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
Ordinary shares -
$0.001 par value authorized – 1,000,000,000 shares; issued
and outstanding – 48,908,860 shares at December 31, 2018;
issued and outstanding – 47,531,799 shares at December 31,
2017, respectively
|
336
|
327
|
|
Additional paid-in
capital
|
902,316
|
693,889
|
|
Accumulated
losses
|
(539,028)
|
(813,829)
|
|
Total
stockholders’ equity (deficit)
|
363,624
|
(119,613)
|
|
|
|
|
|
Total liabilities
and stockholders’ equity
|
800,754
|
510,377
|
Condensed Statements of Income
|
|
Years ended
December 31,
|
||
|
|
2018
|
2017
|
2016
|
|
|
RMB
|
RMB
|
RMB
|
|
|
|
|
|
|
Equity in profit of
subsidiaries and VIEs
|
292,582
|
5,096
|
25,051
|
|
Total equity in
profit of subsidiaries
|
292,582
|
5,096
|
26,145
|
|
|
|
|
|
|
General and
administrative expenses
|
17,781
|
13,478
|
38,415
|
|
Total operating
expenses
|
17,781
|
13,478
|
38,415
|
|
|
|
|
|
|
Profit (Loss) from
operations
|
274,801
|
(8,382)
|
(12,270)
|
|
Net
loss
|
274,801
|
(8,382)
|
(12,270)
|
Condensed Statements of Cash flows
|
|
Year ended
December 31,
|
||
|
|
2018
|
2017
|
2016
|
|
|
RMB
|
RMB
|
RMB
|
|
|
|
|
|
|
Net cash and cash
equivalents used in operating activities
|
(3,412)
|
(4,418)
|
(5,346)
|
|
Net cash and cash
equivalents provided by investing activities
|
—
|
9,127
|
3,100
|
|
Net cash and cash
equivalents (used in) provided by financing activities
|
(198)
|
6,006
|
—
|
|
Cash and cash
equivalents, beginning of the year
|
6,246
|
4,658
|
877
|
|
Cash and cash
equivalents, end of the year
|
2,636
|
6,246
|
4,658
|
NOTE 21 – SUBSEQUENT EVENT
As of
April 11, 2019, certain overdue loans with a total amount of
RMB523.5 million were sold to several third parties at a total
consideration of RMB531.9 million.
On
April 24, 2019, the Board of Directors approved a cash dividend of
$0.30 per share, payable on or about May 22, 2019 to shareholders
of record as of the close of business on May 10, 2019.
On
April 24, 2019, the Company granted stock options and restricted
stock units (RSU) to certain employees and consultants. The grants
consisted of 500 stock options with a strike price of USD$17.35 to
an employee, 193,940 restricted stock units to 71 employees and
consultants, and 22,000 restricted stock units with vesting based
on performance conditions to 2 employees.
F-44