Company Quick10K Filing
China Lending
Price0.99 EPS0
Shares25 P/E3
MCap25 P/FCF4
Net Debt8 EBIT12
TEV33 TEV/EBIT3
TTM 2018-12-31, in MM, except price, ratios
20-F 2019-12-31 Filed 2020-06-26
20-F 2018-12-31 Filed 2019-04-26
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-03-03
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-K 2016-03-31 Filed 2016-06-29
10-Q 2015-12-31 Filed 2016-02-12
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-12
10-K 2015-03-31 Filed 2015-05-07
10-Q 2014-12-31 Filed 2015-02-06
10-Q 2014-09-30 Filed 2014-11-14

CLDC 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert.
Item 16B. Code of Ethics.
Item 16C. Principal Accountant Fees and Services.
Item 16D. Exemptions From The Listing Standards for Audit Committees.
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers.
Item 16F. Change in Registrant's Certifying Accountant.
Item 16G. Corporate Governance.
Item 16H. Mine Safety Disclosure.
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-4.18 f20f2019ex4-18_roanhold.htm
EX-4.23 f20f2019ex4-23_roanhold.htm
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EX-99.1 f20f2019ex99-1_roanhold.htm

China Lending Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 f20f2019_roanhold.htm ANNUAL REPORT

 

 

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 the fiscal year ended December 31, 2019

 

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

 

  for the transition period from __________ to ___________

 

Commission file number: 001-36664

 

Roan Holdings Group Co., Ltd.

(Exact name of the Registrant as specified in its charter)

 

British Virgin Islands

(Jurisdiction of incorporation or organization)

 

147 Ganshui Lane, Yuhuangshannan Fund Town

Shangcheng District

Hangzhou, Zhejiang, China

(Address of principal executive offices)

 

Zhigang Liu, Chief Executive Officer

Telephone: +86-571-8662-1775

Email: zhigang.Liu@roanholdingsgroup.com

(Name, Telephone, E-mail of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

Title of each class   Symbol   Name of the principal U.S. market
Ordinary Shares, no par value   RAHGF   OTCMKTS
Warrants   RONWF   OTCMKTS

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 25,287,851 ordinary shares.

 

 

 

 

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 every Interactive Data File required to be submitted 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 such files).

  Yes  No

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer Non-accelerated filer Emerging Growth Company

 

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.

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP International Financial Reporting
Standards as issued by the International
Accounting Standards Board
Other

 

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

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.

    Yes    No

 

 

 

 

 

TABLE OF CONTENTS 

 

    Page
     
  PART I 1
     
Item 1. Identity Of Directors, Senior Management and Advisers 1
     
Item 2. Offer Statistics and Expected Timetable 1
     
Item 3. Key Information 1
A. Selected financial data 1
B. Capitalization and indebtedness 3
C. Reasons for the offer and use of proceeds 3
D. Risk factors 3
     
Item 4. Information on Our Company 20
A. History and Development of the Company 20
B. Business Overview 24
C. Organizational Structure 33
D. Property, Plants and Equipment 34
     
Item 4A. Unresolved Staff Comments 34
     
Item 5. Operating and Financial Review and Prospects 34
A. Operating Results 34
B. Liquidity and Capital Resources 43
C. Research and Development, Patents and Licenses, etc. 46
D. Trend Information 46
E. Off-balance Sheet Arrangements 46
F. Tabular disclosure of contractual obligations 47
G. Safe Harbor 47
     
Item 6. Directors, Senior Management and Employees 47
A. Directors and senior management 47
B. Compensation 48
C. Board Practices 49
D. Employees 51
E. Share Ownership 51
     
Item 7. Major Shareholders and Related Party Transactions 52
A. Major shareholders 52
B. Related party transactions 53
C. Interests of experts and counsel 53
     
Item 8. Financial Information 54
A. Statements and Other Financial Information 54
B. Significant Changes 54

 

i

 

 

Item 9. The Offer and Listing 54
A. Offer and listing details 54
B. Plan of distribution 55
C. Markets 55
D. Selling shareholders 55
E. Dilution 55
F. Expenses of the issue 55
     
Item 10. Additional Information 55
A. Share capital 55
B. Memorandum and articles of association 55
C. Material contracts 61
D. Exchange controls 61
E. Taxation 61
F. Dividends and paying agents 68
G. Statement by experts 68
H. Documents on display 68
I. Subsidiary Information 68
     
Item 11. Quantitative and Qualitative Disclosure About Market Risk 68
     
Item 12. Description of Securities Other Than Equity Securities 69
     
  PART II 70
     
Item 13. Defaults, Dividend Arrearages And Delinquencies 70
     
Item 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds 70
     
Item 15. Controls and Procedures 70
     
Item 16 [Reserved] 71
     
Item 16A Audit Committee Financial Expert 71
     
Item 16B Code of Ethics 72
     
Item 16C Principal Accountant Fees and Services 72
     
Item 16D Exemption from the Listing Standards for Audit Committees 73
     
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers 73
     
Item 16F Change in Registrant’s Certifying Accountant 73
     
Item 16G Corporate Governance 73
     
Item 16H Mine Safety Disclosure 73
     
  PART III 74
     
Item 17 Financial Statements 74
     
Item 18. Financial Statements 74
     
Item 19 Exhibits 75
     
  Signatures 77

 

ii

 

 

CERTAIN INFORMATION

 

In this Annual Report on Form 20-F, or the “Annual Report”, unless the context indicates otherwise, all references to the terms the “Company,” “we,” “us” and “our” refer to Roan Holdings Group Co., Ltd., giving effect to the Lixin Acquisition (as defined below), and all references to “China” or “PRC” and the “Chinese government” refer to the People’s Republic of China and its government. In this Annual Report, all references to “Renminbi,” or “RMB” are to the legal currency of China and all references to “USD” “U.S. dollars,” “dollars,” “$” or “US$” are to the legal currency of the United States.

 

The Company’s functional currency is USD. The functional currency of its PRC operating subsidiaries is Chinese Yuan, or RMB. For financial reporting purposes, the financial statements of the Company’s PRC operating subsidiaries were prepared using RMB, are translated into the Company’s functional currency, USD at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and owners’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.

 

The audited financial statements for the years ended December 31, 2019, 2018 and 2017 in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States, or “U.S. GAAP.”

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report contains statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities laws. These statements relate to anticipated future events, future results of operations and/or future financial performance. In some cases, you can identify forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “ought to,” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The forward-looking statements in this Annual Report include, without limitation, statements relating to:

 

  our goals and strategies;
     
  our future business development, results of operations and financial condition;
     
  our estimates regarding expenses, future revenues, capital requirements and our need for additional financing;
     
  our estimates regarding the market opportunity for our services;
     
  the impact of government laws and regulations;
     
  our ability to recruit and retain qualified personnel;
     
  our failure to comply with regulatory guidelines;
     
  uncertainty in industry demand;
     
  general economic conditions and market conditions in the finance industry;
     
  future sales of large blocks or our securities, which may adversely impact our share price; and
     
  depth of the trading market in our securities.

 

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in Item 3D “Key Information - Risk Factors.”

 

You should not unduly rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report, to conform these statements to actual results or to changes in our expectations.

 

iii

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

A.Directors and Senior Management

 

Not required.

 

B.Advisers

 

Not required.

 

C.Auditors

 

Not required.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not required.

  

ITEM 3. KEY INFORMATION

 

A.Selected financial data

 

The following selected financial data should be read in conjunction with Item 5 - “Operating and Financial Review and Prospects” and the Financial Statements and Notes thereto included elsewhere in this Annual Report.

 

The following table summarizes our financial data. We have derived the summary statements of comprehensive income data for the three years ended December 31, 2019, 2018 and 2017 and the statements of financial position data as of December 31, 2019 and 2018 from our audited financial statements included elsewhere in this Annual Report. We have derived the selected financial data as of December 31, 2016 and 2015 from our audited financial statements not included in this Annual Report. Our financial statements have been prepared in accordance with U.S. GAAP.

 

Certain factors that affect the comparability of the information set forth in the following table are described in Item 5 “Operating and Financial Review and Prospects” and the Financial Statements and related notes thereto included elsewhere in this Annual Report.

 

1

 

 

Statements of Operations and Comprehensive (Loss) Income

 

  

For the Years Ended

December 31,

 
   2019   2018   2017   2016   2015 
                     
Revenues from services  $639,220   $71,568   $-   $-   $- 
Cost of services   (8,080)   -    -    -    - 
Net revenues from services   631,140    71,568    -    -    - 
                          
Commissions and fees on financial guarantee services   8,797    -    -    -    - 
Provision for financial guarantee services   (5,008)   -    -    -    - 
Commission and fee income on guarantee services, net   3,789    -    -    -    - 
                          
Interest and fees income                         
Interest and fees on direct loans   1,153    15,035    1,628,525    6,837,230    2,447,051 
Interest income on loans due from third parties   34,707    -    -    -    - 
Interest income from factoring business   2,782,332    35,229    -    -    - 
Interest income on deposits with banks   64,636    418    537    1,613    105 
Total interest and fee income   2,882,828    50,682    1,629,062    6,838,843    2,447,156 
                          
Interest expense                         
Interest expenses and fees on secured loans   (2,218,815)   (25,118)   -    -    - 
                          
Net interest (loss) income   664,013    25,564    1,629,062    6,838,843    2,447,156 
                          
Provision for loan losses   (2,244,601)   (2,176,216)   (565,187)   (17,158)   (16,055)
                          
Net interest (loss) income after provision for loan losses   (1,580,588)   (2,150,652)   1,063,875    6,821,685    2,431,101 
                          
Operating (loss) income   (945,659)   (2,079,084)   1,063,875    6,821,685    2,431,101 
                          
Other income, net   -    -    -    93    - 
                          
Total operating expenses                         
Salaries and employee surcharge   (512,314)   (572,117)   (518,015)   (776,557)   (163,290)
Business taxes and surcharge   (352)   (714)   (9,879)   (49,295)   (9,029)
Other operating expenses   (1,384,907)   (1,468,738)   (1,691,387)   (2,309,461)   (69,566)
Changes in fair value of warrant liabilities   530,863    748,346    -    -    - 
Total operating expenses   (1,366,710)   (1,293,223)   (2,219,281)   (3,135,313)   (241,885)
                          
(Loss) Income before income taxes   (2,312,369)   (3,372,307)   (1,155,406)   3,686,465    2,189,216 
Income tax expenses   (244,741)   (17,635)   (250,245)   (1,285,094)   (578,296)
                          
Net (loss) income from continuing operations   (2,557,110)   (3,389,942)   (1,405,651)   2,401,371    1,610,920 
                          
Net income (loss) from discontinued operations, net of income tax   26,846,018    (90,736,365)   (53,377,622)   14,877,033    12,508,894 
                          
Net income (loss)   24,288,908    (94,126,307)   (54,783,273)   17,278,404    14,119,814 
Dividend – convertible redeemable Class A preferred share   (686,400)   (686,400)   (686,400)   (333,327)   - 
Net income attributable to noncontrolling interests   (76,108)   (76)   -    -    - 
Net income (loss) attributable to Roan Holding Group Co., Ltd.’s shareholders  $23,526,400   $(94,812,783)  $(55,469,673)  $16,945,077   $14,119,814 
Other comprehensive (loss) income                         
Foreign currency translation adjustment   1,435,262    (29,318)   5,608,353    (7,530,549)   (5,714,112)
Reclassified to net gain from discontinued operations   2,691,969    -    -    -    - 
    4,127,231    (29,318)   5,608,353    (7,530,549)   (5,714,112)
                          
Comprehensive income (loss)   28,416,139    (94,155,625)   (49,174,920)   9,747,855    8,405,702 
                          
Other comprehensive income attributable to noncontrolling interests   (97,733)   -    -    -    - 
Dividend – convertible redeemable Class A preferred share   (686,400)   (686,400)   (686,400)   (333,327)   - 
Net income attributable to noncontrolling interests   (76,108)   (76)   -    -    - 
Total comprehensive income (loss) attributable to Roan Holdings Group Co., Ltd.’s shareholders  $27,555,898   $(94,842,101)  $(49,861,320)  $9,414,528  $8,405,702
                          
Weighted average number of ordinary share outstanding                         
Basic   25,287,887    24,380,051    17,343,763    18,353,249    20,859,953 
Diluted   25,287,887    24,380,051    17,343,763    21,871,632    20,859,953 
                          
Earnings (Loss) per share                         
    Net earnings (loss) per share – Basic  $0.93   $(3.89)  $(3.20)  $0.92   $0.68 
    Net earnings (loss) per share – Diluted  $0.93   $(3.89)  $(3.20)  $0.77   $0.68 
Net loss per share from continuing operations - Basic  $(0.13)  $(0.17)  $(0.12)  $0.11   $0.08 
Net (loss) earnings per share from continuing operations - Diluted  $(0.13)  $(0.17)  $(0.12)  $0.09   $0.08 
Net earnings (loss) per share from discontinued operations - Basic  $1.06   $(3.72)  $(3.08)  $0.81   $0.60 
Net earnings (loss) per share from discontinued operations - Diluted  $1.06   $(3.72)  $(3.08)  $0.68   $0.60 

 

2

 

 

Balance Sheet

 

  

For the Years Ended

December 31,

 
   2019   2018   2017   2016   2015 
                     
Cash and cash equivalents for continuing operations  $6,911,592   $1,301,124   $1,179,878   $4,193,190   $728,521 
Total assets for continuing operations  $55,389,282   $69,144,144   $6,192,846   $7,800,613   $2,252,944 
Total assets for discontinued operations  $-   $26,524,386   $113,427,423   $151,155,958   $150,097,392 
Total liabilities for continuing operations  $5,296,461   $66,031,719   $775,664   $5,482,948   $711,237 
Total liabilities for discontinued operations  $-   $55,984,465   $52,095,258   $40,304,476   $48,269,245 
Total shareholders’ equity (deficit)  $32,982,300   $(36,000,257)  $57,783,220   $104,255,820   $103,369,854 

 

B.Capitalization and Indebtedness

 

Not required.

 

C.Reasons for the Offer and Use of Proceeds

 

Not required.

 

D.Risk factors

 

In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.

 

You should carefully consider the following factors and other information in this Annual Report before you decide to invest in our ordinary shares. If any of the risks referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.

 

Risks Factors Relating to the Company’s Business and Operations

 

The Company has had a lot of structural changes recently and we cannot guarantee the new structure will work well.

 

For the fiscal years ended December 31, 2019 and 2018, we were unable to achieve similar results and grow at the same rate as the Company has in the past. While the Company finished the Lixin Acquisition in December 2019 and has incorporated the business of Lixin Financial Holdings Group Limited (“Lixin Cayman”) and its subsidiaries, it is still difficult to evaluate our prospects, as we may not have sufficient experience in managing the changes and addressing the risks to which companies operating in new and rapidly evolving markets such as the financial guarantee industry may be exposed. The Company will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:

 

  obtain sufficient working capital and increase its registered capital to support expansion of its financial guarantee business, asset management, supply chain financing and business factoring;

 

  comply with any changes in the laws and regulations of the PRC or local province that may affect its  operations;

 

  expand its customer base;

 

3

 

 

  maintain adequate control of default risks and expenses allowing it to realize anticipated revenue growth;

 

  implement its customer development, risk management of national growth and acquisition strategies and plans and adapt and modify them as needed;

 

  integrate any future acquisitions; and

 

  anticipate and adapt to changing conditions in the Chinese financing industry resulting from changes in government regulations, mergers and acquisitions involving its competitors, and other significant competitive and market dynamics.

 

If the Company is unable to address any or all of the foregoing risks, its business may be materially and adversely affected.

 

Public health epidemics or outbreaks such as COVID-19 could adversely impact our business.

 

Our business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, such as the COVID-19 outbreak and spread, which could significantly disrupt our operations. In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. The COVID-19 outbreak and spread is causing lockdowns, quarantines, travel restrictions, and closures of businesses and schools. Due to COVID-19 outbreak, our facilities remained closed or had limited business operations after the Chinese New Year holiday until early March 2020. In addition, COVID-19 has caused severe disruptions in transportation, limited access to our facilities and limited support from workforce employed in our operations, and as a result, we may experience the delays in provision of financial guarantee services and consulting services to our customers. Although we have taken all possible measures to overcome the adverse impact derived from the COVID-19 outbreak and have resumed our normal business activities in early March 2020, it is estimated that a lower amount of revenue and profit during the period from February to April 2020. The extent to which the coronavirus impacts our results for fiscal year 2020 will depend on certain future developments, including the duration and spread of the outbreak, emerging information concerning the severity of the coronavirus and the actions taken by governments and private businesses to attempt to contain the coronavirus, all of which is uncertain at this point.

 

Our limited operating history makes it difficult to evaluate their business and prospects.

 

In general we have a limited operating history. For example, the income from Zhiyuan Commercial Factoring (Guangzhou) Co., Limited (“Zhiyuan”) and Hangzhou Zeshi Investment Partners (“Zeshi”) constituted the majority of the revenue of the Company in fiscal 2019. However, they were incorporated at the end of 2018 and have a limited operating history. We are not sure about their future development and their income in 2019 may not be indicative of future performance.

 

Feng Hui Ding Xin (Beijing) Financial Consulting Co., Limited (“Ding Xin”) was formed in the second quarter of 2015. Ding Xin commenced operations in August 2015 but it mainly acted as the WFOE (a wholly foreign-owned enterprise) of the VIE which we divested towards the end of 2019. It incorporated a branch company in Xinjiang in 2015 for finance consulting business.

 

Ningbo Ding Tai Financial Leasing Co., Limited (“Ding Tai”) was formed in the December of 2016. While it incorporated Zeshi in 2019 and Zeshi (Hangzhou) Health Management Co., Ltd. (“Zeshi Health”) and Nibo Zeshi Insurance Technology Co., Ltd. (“Zeshi Insurance”) in 2020, itself has not commenced operations.

 

The operating subsidiaries under Lixin Cayman also have a limited operating history. While Zhejiang Jing Yu Xin Financing Guarantee Co., Ltd. (“Zhejiang Jingyuxin”) was incorporated in 2013 and Zhejiang Lixin Enterprise Management Holding Group Co., Ltd.(“Zhejiang Lixin”) was incorporated in 2015, Lixin (Hangzhou) Asset Management Co., Ltd. (“LAM”) and Lixin Supply Chain Management (Tianjin) Co., Ltd. (“Lixin Supply Chain”) were incorporated in 2017.

 

4

 

 

The Company’s current operations in China are geographically limited to certain areas.

 

Our business focuses on Yangtze River Delta region and Pearl River Delta region. The Company’s future growth opportunities will depend on the growth and stability of the economy in these areas. A downturn in the economy of these areas or the implementation of provincial or local policies unfavorable to middle-sized and micro enterprises (“MSMEs”) may cause a decrease in the demand for the Company’s loan guaranty services and may negatively affect borrowers’ ability to repay their loans on a timely basis, both of which could have a negative impact on the Company’s profitability and business. Although it is open to and are trying to develop business in more areas, the Company still needs more time to expand its business geographically.

 

Regarding its financial guarantee services to MSMEs, the Company is subject to greater credit risks than larger guarantee providers, which could adversely affect its results of operations.

 

There are inherent risks associated with our financial guarantee activities, including credit risk, which is the risk that our customers may not repay us after we make payments for them according to our contracts. We provide financial guarantee services to MSMEs. These customers generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may have fewer financial resources to weather a downturn in the economy. Such customers may expose the Company to greater credit risks than guaranty providers guaranteeing for larger, better-capitalized state-owned businesses with longer operating histories. Conditions such as inflation, economic downturn, local policy change, adjustment of industrial structure and other factors beyond our control may increase our credit risk more than such events would affect larger guaranty providers. In addition, since we are still focusing on Yangtze River Delta region and Pearl River Delta region, our ability to geographically diversify the economic risks is currently limited by the local markets and economies. Also, decreases in local real estate value could adversely affect the values of the real property used as collateral in the financial guarantee business. Such adverse changes in the local economies may have a negative impact on the ability of customers to repay their loans and the value of their collateral and in turn our results of operations and financial condition may be adversely affected.

 

Competition in the financial industry is growing and could cause the Company to lose market share and revenues in the future.

 

We believe that the financial industry is an emerging market in China. We may face growing competition in the financial industry, and the Company believes that financial industry is becoming more competitive as this industry matures and begins to consolidate. The Company will compete other financial companies and some cash-rich state-owned companies or individuals that provide financial services to MSMEs. Some of these competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have. As a result, the Company could lose market share and its revenues could decline, thereby adversely affecting our earnings and potential for growth.

 

5

 

 

The Company’s businesses will require highly qualified personnel, and if it is unable to hire or retain qualified personnel, then it may not be able to grow effectively.

 

The Company’s future success depends upon its ability to attract and retain highly qualified personnel. Establishment of Zeshi Insurance and Zeshi Health in the first quarter of 2020 with healthcare business and expansion   of the businesses of each operating company will require additional managers and employees with relevant industry experience, and its success will be highly dependent on its ability to attract and retain skilled management personnel and other employees. These operating companies may not be able to attract or retain highly qualified personnel. In addition, competition for skilled personnel is significant in China. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees. The Company may incur additional expenses to recruit and retain qualified replacements and its businesses may be disrupted and its financial condition and results of operations may be materially and adversely affected. In addition, key managers may join a competitor or form a competing company. An operating company may not be able to successfully enforce any contractual rights with its management team, in particular in China, where all of these individuals reside or will reside. 

 

The Company’s business continuity plans could prove to be inadequate, resulting in a material interruption in or disruption to, its business and a negative impact on the Company’s results of operations.

 

The Company relies on communications and information systems to conduct its business to some extent, and in general its ability to protect its systems against damage from fire, power loss, telecommunication failure, severe weather, natural disasters, terrorism or other factors is important to its operations. The computer systems and network infrastructure the Company uses could be vulnerable to unforeseen problems. While the Company has a business continuity plan and other policies and procedures designed to prevent or limit the effect of a failure or interruption of our information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions of our information systems could, among other things, damage the Company’s reputation or result in a loss of clients, which could have a material adverse effect on the Company’s results of operations.

 

The Company has no material insurance coverage, which could expose it to significant costs and business disruption.

 

Risks associated with the Company’s business and operations include, but are not limited to, clients’ failure to repay the outstanding principal and interest after we make the payments for them and loss reserves are not sufficient cover such failure, losses of key personnel, business interruption due to power loss or network failure, and risks posed by natural disasters including storms, floods and earthquakes, any of which may result in significant costs or business disruption. The Company does not maintain any credit insurance, business interruption insurance, general third-party liability insurance, nor does it maintain key-man life insurance or any other insurance coverage except the mandatory social insurance for employees. If the Company incurs any loss that is not covered by reserves, its business, financial condition and results of operations could be materially and adversely affected.

 

The Company maintains cash deposits with various banks. These cash accounts are not sufficiently insured or otherwise protected. Should any bank holding these cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds, it could lose the cash on deposit with that particular bank or trust company.

 

The Company uses credit reports issued by the Credit Reference Center of the People’s Bank of China for credit records, which may not cover all accurate credit activities of guarantee customers.

 

The Company generally uses credit reports issued by the Credit Reference Center of the People’s Bank of China (“CCRC”) for guarantee customers’ credit records. According to the information from CCRC’s official website (http://www.pbccrc.org.cn/crc/), CCRC is a professional credit information service institution directly under the People’s Bank of China (“PBOC”) which collects comprehensive credit information about both enterprises and individuals throughout China. The 2,100 credit reports query points of the PBOC’s branches have covered almost all rural areas in China, and CCRC has 300,000 information query ports in financial institutions and networks around the country, and the credit information service network is used throughout China. As of the end of April 2015, CCRC’s database had collected credit information of over 860 million individuals and over 20 million enterprises and institutions, mainly from commercial banks as well as other financial institutions. However, the CCRC’s credit reports do not cover all credit and financing activities with all trust companies, leasing companies, asset management companies, direct lending companies, insurance companies, and other financial companies. Moreover, the PBOC had not established a credit reporting system until 1997 when it established the Bank Credit Registration System which upgraded to the CCRC in 2006. Therefore, CCRC’s credit reports may not be able to cover credit and financing activities that occurred before 1997. In addition, the accuracy of credit reports provided by CCRC may be mainly adversely affected: (1) reliability of information source; (2) victimized by criminals forging identity of the customers; (3) mistakes made by data entry operators; and (4) technical stability of CCRC’s computer system. Furthermore, despite using credit reports issued by the CCRC, privately-owned guarantors may be more susceptible to default than state-owned or public guarantors due to financial difficulties or fraud and therefore, the Company may have more difficulty enforcing guarantees from privately-owned guarantors than from state-owned or public guarantors. Finally, having clean credit history in the past does not preclude a guarantee customer from defaulting in the future.

 

6

 

 

Risks Related to the Company’s Corporate Structure 

 

The failure to comply with PRC regulations relating to mergers and acquisitions of domestic enterprises by offshore special purpose vehicles may subject the Company to severe fines or penalties and create other regulatory uncertainties regarding the Company’s corporate structure.

 

On August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the China Securities Regulatory Commission (“CSRC”), the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation (“SAT”), the State Administration for Industry and Commerce (the “SAIC”), and the State Administration of Foreign Exchange (“SAFE”), jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as amended on June 22, 2009. This regulation, among other things, has certain provisions that require offshore companies formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies which are the related parties with the PRC domestic companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing special purpose vehicles’ securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.

 

The application of the M&A Rules with respect to the Company’s corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under the M&A Rules are not required in the context of the Business Combination and the Lixin Acquisition because we did not acquire Feng Hui’s equity or assets and Jing Kai and Ding Xin and Lixin Group are already foreign owned. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC will not deem that the Business Combination or the Lixin Acquisition circumvented the M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for overseas financing.

 

If prior CSRC approval for overseas financings is required and not obtained, the Company may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on the Company’s operations in the PRC, limit the Company’s operating privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ordinary shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure the Company’s corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.

 

The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy.

 

PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

 

SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. 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 resident 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, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

SAFE promulgated the Notice of SAFE on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment, or SAFE Circular 13, on February 13, 2015, which was effective on June 1, 2015. SAFE Circular 13 cancels two administrative approval items: foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment, instead. Banks shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment, and SAFE and its branch shall indirectly regulate the foreign exchange registration of direct investment through banks.

 

7

 

 

We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligations in accordance with SAFE Circular 37 and SAFE Circular 13. However, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37, SAFE Circular 13 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37, SAFE Circular 13 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37, SAFE Circular 13 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, since SAFE Circular 37 and SAFE Circular 13 was recently promulgated and it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.

 

If any of our subsidiaries fails to maintain the requisite registered capital, licenses and approvals required under PRC law, our business, financial condition and results of operations may be materially and adversely affected.

 

Numerous regulatory authorities of the central PRC government, provincial and local authorities are empowered to issue and implement regulations governing various aspects of the financial industry. Each of our subsidiaries may be required to obtain and maintain certain assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide its current services. These registered capital, licenses and approvals will be essential to the operation of the Company’s business. If any of our subsidiaries fails to obtain or maintain any of the required registered capital, licenses or approvals for its business, it may be subject to various penalties, such as confiscation of illegal net revenue, fines and the discontinuation or restriction of its operations. Any such disruption in its business operations could materially and adversely affect our business, financial condition and results of operations.

 

The business overlap of our subsidiaries could result in inefficiencies to the Company’s business.

 

We completed the Lixin Acquisition in December 2019. Most of our subsidiaries are in the financial industry and may conduct the same business. On one hand they may share resources and expand their own businesses. On the other hand, they may target the same clients and compete with each other. This could reduce the efficiency of the Company as a whole. For example, Zeshi has commenced operations of asset management from 2019. Lixin (Hangzhou) Asset Management Co., Ltd. (“LAM”) started its asset management business in 2017. They both focus on Zhejiang province. Zeshi is staffed entirely by new hires and in some measure may compete with LAM for customers. As a result, Zeshi may initially struggle to establish its business after the Lixin Acquisition and some of its success it has may come at the expense of LAM. Furthermore, because of PRC limitations, even though the economic benefit of Zeshi and LAM will inure to us, each will need to have its own segregated capital and client base. As a result, Zeshi and LAM will not be able to cross-collateralize or combine operations at the working level. Although the Company plans to allocate the resources from a strategic level, this structure may not allow the Company to allocate resources to their most efficient use and may require redundant or additional expenses.

 

8

 

 

The Company may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002.

 

The Company is required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC. The Company is required to provide management’s attestation on internal controls. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act of 2002 are significantly more stringent than those required of a privately-held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements, especially considering the new corporate structure after the Lixin Acquisition. If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and the market price of our ordinary shares.

 

If the Company fails to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately. Any inability to report and file our financial results accurately and timely could harm our business and adversely affect the trading price of our ordinary shares.

 

We are required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the Securities and Exchange Commission (the “SEC”). At present, we have instituted internal controls, but, we are in the process of correcting certain material weaknesses in our internal controls. Our management, cannot guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

 

There is no guarantee that our warrants will ever be in the money, and they may expire worthless and the terms of our warrants may be amended.

 

In addition to the warrants issued before January 1, 2018, at an exercise price of $6.00 per one-half of one share ($12.00 per whole share),  the Company issued in July 2018 Series A Warrants at an exercise price of $2.6 per one share which was adjusted to $1.18 per share on January 19, 2019. All warrants are subject to adjustments. Warrants may be exercised only for a whole number of the Company’s ordinary shares. No fractional shares will be issued upon exercise of the warrants. There is no guarantee that the warrants will ever be in the money prior to their expiration, and they may expire worthless.

 

A market for the Company’s securities may not continue, which would adversely affect the liquidity and price of our securities.

 

The price of the Company’s securities may fluctuate significantly due to the market’s reaction and general market and economic conditions. An active trading market for our securities may never develop or, if developed, it may not be sustained. In addition, the price of the Company’s securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, because the Company’s ordinary shares were delisted from the Nasdaq Capital Market in September 2019, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities are more limited than when we were listed on the Nasdaq Capital Market. You may be unable to sell your securities unless a market can be established or sustained.

 

9

 

 

Because the Nasdaq Capital Market delisted the Company’s ordinary shares from trading on its exchange due to our failure to meet the Nasdaq Capital Market’s initial and/or continued listing standards, we and our security holders face significant material adverse consequences including:

 

  a limited availability of market quotations for our securities;

 

  a determination that our ordinary shares are a “penny stock,” which requires brokers trading in our ordinary shares to adhere to more stringent rules, resulting in a reduced level of trading activity in the secondary trading market for our ordinary shares;

 

  a limited amount of analyst coverage; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

Although we are making all the efforts to help our ordinary shares be listed on Nasdaq again, there can be no assurance that we will succeed or, if listed, that we will be able to comply with the continued listing standards of Nasdaq.

 

Our ordinary shares were delisted from the Nasdaq Capital Market in September 2019. To list the Company’s securities on the Nasdaq Capital Market again, among other conditions, we will be required to demonstrate compliance with Nasdaq’s initial listing standards, which are more rigorous than Nasdaq’s continued listing requirements. For instance, the Company must maintain a minimum number of holders (300 round-lot holders). While we are working hard and spending significant resources on applying for listing on Nasdaq again, we cannot assure you that we will be able to meet those initial listing standards and/or any other conditions.

 

If the Lixin Acquisition’s benefits do not meet the expectations of investors, shareholders or financial analysts, the market price of the Company’s securities may decline.

 

If benefits of the Lixin Acquisition do not meet the expectations of investors or securities analysts, the market price of the Company’s securities may decline. In addition, following the Lixin Acquisition, fluctuations in the price of the Company’s securities could contribute to the loss of all or part of your investment. The valuation ascribed to the Company’s ordinary shares in the Lixin Acquisition may not be indicative of the price that will prevail in the trading market. If an active market for the Company’s securities develops and continues, the trading price of our securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in the Company’s securities which may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.

 

Factors affecting the trading price of the Company’s securities may include:

 

  actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

  changes in the market’s expectations about our operating results;

 

  success of competitors;

 

  our operating results failing to meet the expectation of securities analysts or investors in a particular period;

 

  changes in financial estimates and recommendations by securities analysts concerning the Company or the lending market in general;

 

  operating and stock price performance of other companies that investors deem comparable to the Company;

 

  our ability to market new and enhanced services on a timely basis;

 

  changes in laws and regulations affecting our business;

 

  commencement of, or involvement in, litigation involving the Company;

 

10

 

 

  the Company’s ability to access the capital markets as needed;

 

  changes in the Company’s capital structure, such as future issuances of securities or the incurrence of additional debt;

 

  the volume of ordinary shares available for public sale;

 

  any major change in our board or management;

 

  sales of substantial amounts of ordinary shares by our directors, executive officers or significant shareholders or the perception that such sales could occur; and

 

  general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.

 

Broad market and industry factors may materially harm the market price of the Company’s securities irrespective of our operating performance. The stock market in general, has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

The Company’s business and share and warrant prices may suffer as a result of the Company’s insufficient public company operating experience and if securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or its market, or if they change their recommendations regarding our ordinary shares adversely, the price and trading volume of our ordinary shares and warrants could decline.

 

The Company has been a public company for a limited number of years. The Company’s insufficient public company operating experience may make it difficult to forecast and evaluate its future prospects. If the Company is unable to execute its business strategy, either as a result of its inability to manage effectively its business in a public company environment or for any other reason, the Company’s business, prospects, financial condition and operating results may be harmed.

 

The trading market for our ordinary shares and warrants will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on the Company. If no securities or industry analysts commence coverage of the Company, our Ordinary Share and warrant prices and trading volume would likely be negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding our shares adversely, or provide more favorable relative recommendations about our competitors, the price of our ordinary shares and warrants would likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause our share and warrant prices or trading volume to decline.

 

The Company has only registered a small number of our ordinary shares issuable upon exercise of our warrants, and has not registered any of our ordinary shares underlying the preferred shares under the Securities Act of 1933, as amended (the “Securities Act”) or state securities laws at this time, and such registration may not be in place when an investor desires to exercise such warrants.

 

The Company has only registered a small number of the ordinary shares issuable upon exercise of our warrants, and has not registered any of our ordinary shares underlying the preferred shares under the Securities Act or any state securities laws at this time. We have agreed to use our best efforts to file with the SEC a registration statement for the registration, under the Securities Act, covering these securities as soon as practicable after the closing of the Business Combination and cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto.

 

11

 

 

Warrants we sold will become exercisable for the Company’s ordinary shares, which would increase the number of shares eligible for future resale in the public market and result in dilution to our shareholders.

 

In addition to the warrants issued before January 1, 2018, at an exercise price of $6.00 per one-half of one share ($12.00 per whole share), the Company issued in July 2018 Series A Warrants at an exercise price of $2.6 per one share and adjusted to $1.18 on January 19, 2019. All warrants are subject to adjustments. Warrants may be exercised only for a whole number of the Company’s ordinary shares. No fractional shares will be issued upon exercise of warrants. To the extent such warrants are exercised, additional ordinary shares will be issued, which will result in dilution to the then existing holders of ordinary shares of the Company and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our ordinary shares.

 

The Company’s charter permits the Board by resolution to amend our charter, including to create additional classes of securities, including shares with rights, preferences, designations and limitations as they determine which may have an anti-takeover effect.

 

The Company’s charter permits the Board by resolution to amend the charter including to designate rights, preferences, designations and limitations attaching to the preferred shares as they determine in their discretion, without shareholder approval with respect the terms or the issuance. When issued, the rights, preferences, designations and limitations of the preferred shares are set by the Board and can operate to the disadvantage of the outstanding ordinary shares the holders of which would not have any pre-emption rights in respect of such an issue of preferred shares. Such terms could include, among others, preferences as to dividends and distributions on liquidation, or can be used to prevent possible corporate takeovers.

 

The Company may redeem certain warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making their warrants worthless.

 

The Company has the ability to redeem certain warrants prior to their expiration at a price of $0.01 per warrant, provided that (i) the last reported sale price of our ordinary shares equals or exceeds $18.00 per share for any 20 trading days within the 30 trading-day period ending on the third business day before we send the notice of such redemption and (ii) on the date we give notice of redemption and during the entire period thereafter until the time the warrants are redeemed, there is an effective registration statement under the Securities Act covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to them is available unless warrants are exercised on a cashless basis. Redemption of such warrants could force holders of the warrants:

 

  to exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so;

 

  to sell their warrants at the then-current market price when they might otherwise wish to hold their warrants; or

 

  to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of their warrants.

 

12

 

 

The Company is no longer a Nasdaq listed company and, as a result, the Company may not be required to, and may choose not to, obey certain corporate governance requirements of Nasdaq.

 

The Company’s ordinary shares have not been listed on the Nasdaq since September 2019. As a result, the Company is no longer subject to Nasdaq rules. While the Company plans to continue following certain corporate governance requirements of Nasdaq, it has the discretion not to and may elect to not obey any Nasdaq rules. Its shareholders will not be afforded the same protections generally as shareholders of Nasdaq-listed companies for so long as the Company is not a Nasdaq listed company.

 

Risks Related to Doing Business in China   

 

PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from making loans or additional capital contributions to our PRC operating subsidiaries and thereby prevent us from funding our business.

 

As an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries by means of loans or capital contributions. Any loans to these PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered with SAFE, or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are foreign-invested enterprises, shall be approved by MOFCOM, or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital to increase contributions to our PRC subsidiaries may be negatively affected, which could adversely affect their liquidity and our ability to fund and expand their business.

 

A slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially adversely affect our business.

 

All of the Company’s operations are entirely conducted in the PRC. Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. The annual rate of growth in the PRC declined from 7.3% in 2014 to 6.9% in 2015 to 6.7% in 2016, to 6.9% in 2017, to 6.6% in 2018, and to 6.1% in 2019. According to a recent article, due to the COVID-19, China’s economic growth rate in 2020 may slow to 5%, its lowest since 1990. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for the Company’s services and may have a materially adverse effect on its business.

 

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China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.

 

The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy or the economy of the region the Company serves, which could materially adversely affect the Company’s business.

 

Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business the Company may be able to conduct in the PRC and accordingly on the results of its operations and financial condition.

 

The Company’s business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which the Company must conduct its business activities. The Company’s ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue to pursue these policies, or may significantly alter these policies from time to time without notice.

 

There are certain uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing the Company’s business, or the enforcement and performance of the Company’s arrangements with clients. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and may affect the Company’s business. Consequently, we cannot predict the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors.

 

The Company’s business is subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere with the way the Company conducts its business and may negatively impact its financial results.

 

The Company conducts its business in the financial industry which is highly regulated. It is subject to extensive and complex state, provincial and local laws, rules and regulations with regard to its financing guaranties, capital structure, and asset management, among other things. These laws, rules and regulations are issued by different central government ministries and departments, provincial and local governments and are enforced by different local authorities. Therefore, the interpretation and implementation of such laws, rules and regulations may not be clear and occasionally the Company has to depend on oral inquiries with local government authorities. As a result of the complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation and implementation of such, the Company’s business activities and growth may be adversely affected if they do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different position from theirs taken by the competent authority in the interpretation of such applicable laws, regulations and policies. If the Company is found to be not in compliance with these laws and regulations, they may be subject to sanctions by regulatory authorities, monetary penalties and/or reputation damage, which could have a material adverse effect on the Company’s business operations and profitability.

 

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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions against us or our management, in China, based upon United States laws, including the U.S. federal securities laws, or other foreign laws.

 

We are a company organized under the laws of the British Virgin Islands. Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. All of our directors and officers reside in China, and substantially all of the assets of those persons are located outside of the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

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 form of reciprocity with the United States providing for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors or officers if they decide that the judgment violates the basic principles of PRC laws, 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.

 

Lastly, in the event shareholders originate an action against a company without domicile in China for disputes related to contracts or other property interests, the PRC courts may accept a cause of action if (a) the disputed contract is concluded or performed in the PRC or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that can be seized within the PRC, (c) the company has a representative organization within the PRC, or (d) the parties chose to submit to the jurisdiction of the PRC courts in the contract on the condition that such submission does not violate the requirements of jurisdiction under the PRC Civil Procedures Law. The action may be initiated by the shareholder by filing a complaint with the PRC courts. The PRC courts would determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in such an action unless such foreign country restricts the rights of PRC citizens and companies.

 

Our Chinese subsidiaries’ ability to pay dividends to us may be restricted due to foreign exchange control and other regulations of China.

 

As an offshore holding company, we will rely principally on dividends from our subsidiaries in China, for our cash requirements. Under the applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular, at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.

 

Furthermore, our Chinese subsidiaries’ ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially all of the Company’s operations are conducted in China and all of the revenue we recognize will be denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, our Chinese subsidiaries may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.

 

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The lack of dividends or other payments from our Chinese subsidiaries may limit our ability to make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from our Chinese subsidiaries, our liquidity and financial condition will be materially and adversely affected.

 

Dividends payable to our foreign investors and gains on the sale of our ordinary shares by our foreign investors may become subject to tax by the PRC.

 

Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council of the PRC, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our shares, and any gain realized from the transfer of our shares, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether we or any of our subsidiaries established outside of China are considered a PRC resident enterprise, holders of shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our shares by such investors are subject to PRC tax, the value of your investment in our shares may decline significantly.

 

Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.

 

Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, which became effective in January 2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and acquisition and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation (the “SAT”), issued a circular, 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. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the resident status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be subject to the 25% enterprise income tax on our global income, which could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive effect.

 

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We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

On February 3, 2015, the State Administration of Taxation issued an Announcement on Several Issues Concerning Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-PRC Resident Enterprises, or Announcement 7, with the same effective date. Under Announcement 7, an “indirect transfer” refers to a transaction where a non-resident enterprise transfers its equity interest and other similar interest in an offshore holding company, which directly or indirectly holds Chinese taxable assets (the assets of an “establishment or place” situated in China; real property situated in China and equity interest in Chinese resident enterprises) and any indirect transfer without reasonable commercial purposes are subject to the PRC taxation. In addition, Announcement 7 specifies the conditions under which an indirect transfer is deemed to lack a reasonable commercial purpose which include: (1) 75% or more of the value of the offshore holding company’s equity is derived from Chinese taxable assets, (2) anytime in the year prior to the occurrence of the indirect transfer of Chinese taxable assets, 90% or more of the total assets (excluding cash) of the offshore holding company are direct or indirect investment in China, or 90% or more of the revenue of the offshore holding company was sourced from China; (3) the functions performed and risks assumed by the offshore holding company(ies), although incorporated in an offshore jurisdiction to conform to the corporate law requirements there, are insufficient to substantiate their corporate existence and (4) the foreign income tax payable in respect of the indirect transfer is lower than the Chinese tax which would otherwise be payable in respect of the direct transfer if such transfer were treated as a direct transfer. As a result, gains derived from such indirect transfer will be subject to PRC enterprise income tax, currently at a rate of 10%.

 

Announcement 7 grants a safe harbor under certain qualifying circumstances, including transfers in the public securities market and certain intragroup restricting transactions, however, there is uncertainty as to the implementation of Announcement 7. For example, Announcement 7 requires the buyer to withhold the applicable taxes without specifying how to obtain the information necessary to calculate taxes and when the applicable tax shall be submitted. Announcement 7 may be determined by the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved. Though Announcement 7 does not impose a mandatory obligation of filing the report of taxable events, the transferring party shall be subject to PRC withholding tax if the certain tax filing conditions are met. Non-filing may result in an administrative penalty varying from 50% to 300% of unpaid taxes. As a result, we and our non-resident enterprises in such transactions may become at risk of being subject to taxation under Announcement 7, and may be required to expend valuable resources to comply with Announcement 7 or to establish that we and our non-resident enterprises should not be taxed under Announcement 7, for any restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.

 

Restrictions on currency exchange may limit our ability to utilize our revenue effectively.

 

Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE or banks and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries.

 

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Fluctuations in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against the U.S. dollar. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Since June 2010, the RMB has appreciated more than 10% against the U.S. dollar. In April 2012, the PRC government announced it would allow greater RMB exchange rate fluctuation. On August 11, 12 and 13, 2015, the PRC government successively set the central parity rate for the RMB more than 3% lower in the aggregate than that of August 10, 2015 and announced that it will begin taking into account previous day’s trading in setting the central parity rate. In 2015, the yuan experienced a 4.88% drop in value, and on January 4, 2016 the PRC government set the U.S. dollar-Chinese yuan currency pair to a reference rate of 6.5%, the lowest rate in 4.5 years. The average desperation rate of RMB exchange rate is 4.1% in 2019. (Source: website of National Bureau of Statistics Annual Statistic Report, dated February 28, 2020). However, 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. As significant international pressure remains on the PRC government to adopt a more flexible currency policy, greater fluctuation of the RMB against the U.S. dollar could result.

 

Our revenues and costs are mostly denominated in RMB, and a significant portion of our financial assets are also denominated in RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our shares in U.S. dollars. Fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

If you are a U.S. holder of our ordinary shares, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency such as the RMB, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

Future inflation in China may inhibit economic activity and adversely affect the Company’s operations.

 

The Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation. This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part of the PRC government that seeks to control credit and/or prices may adversely affect the Company’s business operations.

 

PRC laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for the Company to pursue growth through acquisitions in China.

 

Further to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review and or security review.

 

The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through agreements control or offshore transactions.

 

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Further, if the business of any target company that the Company seeks to acquire falls into the scope of security review, the Company may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any VIE Agreement. The Company may grow its business in part by acquiring other companies operating in its industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit its ability to complete such transactions, which could affect its ability to maintain or expand its market share.

 

In addition, SAFE promulgated the Circular on the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 19, on June 1, 2015. Under Circular 19, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and the equity investments in the PRC made by the foreign-invested company shall be subject to the relevant laws and regulations about the foreign-invested company’s reinvestment in the PRC. In addition, foreign-invested companies cannot use such capital to make the investments on securities, and cannot use such capital to issue the entrusted RMB loans (except approved in its business scope), repay the RMB loans between the enterprises and the ones which have been transferred to the third party. Circular 19 may significantly limit our ability to effectively use the proceeds from future financing activities as the Chinese subsidiaries may not convert the funds received from us in foreign currencies into RMB, which may adversely affect their liquidity and our ability to fund and expand our business in the PRC.

 

Failure to comply with the United States Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.

 

As our shares are quoted on OTC, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Non-U.S. companies, including some that may compete with us, may not be subject to these prohibitions. In addition, in 2012, the central government of the PRC commenced a far-reaching campaign against corruption. That ongoing campaign involves aggressive enforcement of existing Chinese anti-corruption laws. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. Our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

  

Our management may have to expend time and resources becoming familiar with United States securities laws, which could lead to various regulatory issues.

 

Management of the Company has limited familiarity with United States securities laws. They may have to expend time and resources becoming more familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues, which may adversely affect our operations.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.

 

U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our Company and business operations will be severely hampered and your investment in our stock could be rendered worthless.

 

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

 

Our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our Company, our SEC reports, other filings or any of our other public pronouncements.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

Corporate History and Structure of our PRC Operation

 

Roan Holdings Group Co., Ltd. (formerly DT Asia Investments Limited, or “DT Asia,” and subsequently China Lending Corporation) (the “Company,” “Roan,” “we,” “us” or “our”) is a British Virgin Islands company limited by shares. The Company was established on April 8, 2014 under the laws of the British Virgin Islands (“BVI”) as a shell company with the purpose of acquiring, engaging in share exchange, share reconstruction and amalgamation, purchasing all or substantially all of the assets of, entering into contractual arrangements, or engaging in any other similar business combination with one or more businesses or entities.

 

On July 6, 2016, the Company consummated a business combination (the “First Business Combination”) with Adrie Global Holdings Limited (“Adrie”) and its subsidiaries and variable interest entity (“VIE”) by acquiring from the shareholders of Adrie all of outstanding equity interests of Adrie in exchange for 20 million ordinary shares of DT Asia and a purchase price of $200.0 million. Adrie, through its subsidiaries and VIE, was engaged in the business of providing loan facilities to micro, small and medium sized enterprises (“MSMEs”) and sole proprietors in Xinjiang Uyghur Autonomous Region (“Xinjiang Province”) of the People’s Republic of China (“PRC”). As a result of the business combination, shareholders of Adrie became the controlling shareholders of the Company, and Adrie became a subsidiary of the Company. For financial reporting purpose, the consolidated assets, liabilities and results of operations of Adrie became the historical financial statements of the Company, and the Company’s assets, liabilities and results of operations were consolidated with that of Adrie beginning on the acquisition date. Immediately following the First Business Combination, the Company’s name was changed from DT Asia to China Lending Corporation (“CLDC”).

 

In June through December 2019, the Company consummated a second business combination with Lixin Financial Holdings Group Limited (“Lixin Cayman”) and its subsidiaries, pursuant to which the Company acquired a majority interest in Lixin Cayman (the “Second Business Combination” or “Lixin Acquisition”) (discussed below). In connection with the Second Business Combination, the Company was renamed Roan Holdings Group Co., Ltd. (“Roan”) in November 2019. Roan is a holding company and conducts business operations through its direct and indirect subsidiaries.

 

ADRIE Global Holding Limited (“Adrie”) was established under the laws of the BVI as a company limited by shares on November 19, 2014 and became a wholly-owned subsidiary of the Company after the First Business Combination. Adrie is a holding company that has no substantial operations and has no assets other than its ownership of a wholly-owned subsidiary.

 

China Roan Industrial-Financial Holdings Group Co., Limited (中国融安产融控股集团有限公司) (“Roan HK or RAHK”) (formerly China Feng Hui Financial Holding Group Co., Ltd, and subsequently, China Fenghui Industrial-Financial Holding Group Co. Limited) is a wholly-owned subsidiary of Adrie. It was established on February 11, 2015 under the laws of the Hong Kong Special Administrative Region (“Hong Kong”) of the PRC. It is a holding company and conducts business through its direct and indirect subsidiaries.

 

Fortis Health Industrial Group Limited (富通健康产业集团有限公司) (“Fortis Health” or “FHIG”) was established on December 30, 2019 under the laws of Hong Kong. It is owned by Adrie. It has not had operations since its inception.

 

Feng Hui Ding Xin (Beijing) Financial Consulting Co., Limited (丰汇鼎鑫(北京)财务咨询有限公司) (“Ding Xin”) is a wholly-owned subsidiary of Roan HK. It was established on May 20, 2015 under the laws of the PRC and is licensed to provide financial advisory services. Based in Beijing, Ding Xin also has an operating branch office in Urumqi, Xiangjiang. Prior to the Company’s reorganization and termination of the VIE arrangement in July 2019 (discussed below), Ding Xin was also contractually obligated to provide business support, technical services and related services to the VIE entity as provided in the VIE agreements. The Urumqi branch office of Ding Xin primarily provides financial services to third-party direct lending companies in Xingjiang.

 

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Xinjiang Feng Hui Jing Kai Direct Lending Limited (新疆丰汇经开小额贷款有限公司) (“Jing Kai”) is a wholly-owned subsidiary of Roan HK. It was established on May 14, 2015 under the laws of the PRC with the stated purpose of providing direct loans to the MSMEs and sole-proprietors in Xinjiang Province. Jing Kai has not had substantial operations since its inception and is currently in the process of being dissolved pursuant to our plan of reorganization implemented in 2019.

 

Ningbo Ding Tai Financial Leasing Co., Ltd. (宁波鼎泰融资租赁有限公司) (“Ding Tai”) is a wholly-owned subsidiary of Roan HK. It was established in December 19, 2016 under the laws of the PRC. Ding Tai is engaged in financial leasing business.

 

Xinjiang Xin Quan Financial Leasing Co., Ltd. (新疆鑫铨融资租赁有限公司)(“Xin Quan”) was established on January 24, 2017 under the laws of the PRC as a wholly-owned subsidiary of Roan HK and is licensed to engage in financial leasing service. During the year ended December 31, 2018, Roan HK’s ownership interest in Xin Quan was reduced to 60% when the remaining 40% of the interest was transferred to Xinjiang Heli Kaiyuan Construction Co., Ltd. (“Heli Kaiyuan”), an unrelated third party, through Heli Kaiyuan’s capital injection into Xin Quan. Of the 60% Xin Quan equity interest owned by RAHK, 20% are held by a third party on behalf of Roan HK.

 

Zhiyuan Commercial Factoring (Guangzhou) Co., Limited (至元商业保理(广州)有限公司) (“Zhiyuan”) was formed on November 19, 2018 under the laws of the PRC. Zhiyuan is 99% owned by Ding Xin and the remaining 1% is owned by an unrelated third party. Zhiyuan is engaged in business factoring program, financing products design, related corporate financing solutions, investments and asset management.

 

Hangzhou Zeshi Investment Partnership (Limited Partnership) (杭州泽时投资合伙企业(有限合伙)) (“Hangzhou Zeshi”) was formed on November 29, 2018 under the laws of the PRC. It is a limited partnership with 98.04% of its interest owned by Ding Tai, its general partner, and the remaining 1.96% owned by Zeshi Insurance. It is primarily engaged in asset management business.

 

Through Zhiyuan and Zeshi, we provide new supply chain financing services, including a business factoring program, financing products design, related corporate financing solutions, investments and asset management, as part of our restructuring plan implemented in 2019.

 

Ningbo Zeshi Insurance Technology Co., Ltd.(宁波泽时保险科技有限公司) (“Zeshi Insurance”) was incorporated on February 28, 2020 under the laws of the PRC. Ding Tai owns 99% of Zeshi Insurance equity interest with the remaining 1% owned by Hangzhou Zeshi. Its principal business is providing insurance technology services and related services.

 

Zeshi (Hangzhou) Health Management Co., Ltd. (泽时(杭州)健康管理有限公司) (“Zeshi Health”) was incorporated on March 3, 2020 under the laws of the PRC. Hangzhou Zeshi and Ningbo Dingtai own 99% and 1%, respectively, of its interest. Zeshi Health provides services in health management, health big data management and blockchain technology-based health information management.

 

Contractual Arrangements with the VIE and Termination of the VIE Relationship

 

Urumqi Feng Hui Direct Lending Limited (乌鲁木齐丰汇小额贷款有限公司) (“Feng Hui” or “VIE”) was established under the laws of the PRC on June 12, 2009 with the approval of the Financial Office of Xinjiang Provincial Government. Feng Hui is a microcredit company primarily engaged in providing direct loan services to the MSMEs and sole proprietors in Xinjiang Province as a non-bank direct lending company. Feng Hui is also engaged in innovative financial services, such as supply chain finance in which Feng Hui provides financings for suppliers who purchase inventory from distributors and its customer base has been primarily limited to the tire industry. Feng Hui is owned by fifteen shareholders, including seven individuals and eight entities.

 

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On July 16, 2015, Ding Xin, Feng Hui and Feng Hui’s shareholders executed certain agreements (“VIE Agreements”), pursuant to which the Company obtained control of Feng Hui through its subsidiary, Ding Xin. The VIE Agreements had a term of five years from July 15, 2015 to July 15, 2020 which may be renewed at Ding Xin’s discretion. The VIE Agreements included a Share Pledge Agreement, Exclusive Business Cooperation Agreement, Exclusive Option Agreement and Power of Attorney. The VIE Agreements set forth our relationship with the VIE as follows:

 

Exclusive Business Cooperation Agreement. Pursuant to the Exclusive Business Cooperation Agreement between Feng Hui and Ding Xin, Ding Xin provided Feng Hui with comprehensive business support, technical services and services relating to its day-to-day business operations and management on an exclusive basis. For services rendered to Feng Hui, Ding Xin had the right to collect a service fee calculated based on the complexity, required time, contents and commercial value of the services provided by Ding Xin. Ding Xin, as the primary beneficiary of the VIE, was entitled to absorb losses and to receive benefits of Feng Hui.

 

Share Pledge Agreement. Pursuant to the Share Pledge Agreement among Feng Hui’s shareholders and Ding Xin, Feng Hui’s shareholders pledged all of their equity interests in VIE to Ding Xin to guarantee the performance of obligations by the VIE and the VIE shareholders under the Exclusive Business Cooperation Agreement, Exclusive Option Agreement and Power of Attorney. Any dividend or bonus received by VIE in respect of the Pledged Equity would be deposited into an account designated by Ding Xin. The VIE shareholders also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, Ding Xin would be entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. The VIE shareholders further agreed not to dispose of the pledged equity interests or take any actions that would prejudice Ding Xin’s interest. The Share Pledge Agreement was effective until all obligations under the other VIE Agreements have been performed by VIE, when the VIE Agreements are terminated or when the secured indebtedness has been satisfied in full. In the event that VIE or its shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, Ding Xin, as pledgee, would be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests and absorbs expected losses.

 

Exclusive Option Agreement. Under the Exclusive Option Agreement, VIE shareholders irrevocably granted to Ding Xin (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, part or all of their equity interests in VIE. The option price is equal to the lowest price permissible by PRC laws.

 

Power of Attorney. Under the Power of Attorney, each VIE shareholder authorized Ding Xin to act on the shareholder’s behalf as their exclusive agent and attorney with respect to all rights as a shareholder of VIE, under PRC laws and the Articles of Association of VIE, including but not limited to attending shareholder meetings and voting to approve the sale or transfer or pledge or disposition of shares in part or in whole or to designate and appoint the legal representative, directors, and supervisors of VIE.   

 

Pursuant to the VIE Agreements, substantially all of the Company’s consolidated assets were held, and its consolidated revenues and income were generated, by VIE through contractual arrangements. VIE was based in Urumqi, the capital city and business hub of Xinjiang Province, and most of the lending activities conducted by the VIE were to enterprises and individual proprietors based in Xinjiang. The VIE’s assets were used as collateral for its obligation and the creditors of VIE had no recourse to the general credit of the primary beneficiary.

 

Ding Xin, as the primary beneficiary of the VIE, was the variable interest holder (e.g., a contractual counterparty or capital provider) deemed to have the controlling financial interest(s) in the VIE. These contractual arrangements enabled us to exercise effective control over the VIE, to receive substantially all of the economic benefits and absorb substantially all losses from the VIE, and to have an exclusive option to purchase all of the equity interest in the VIE to the extent permitted by PRC law. Through such arrangements, the VIE had been treated as a subsidiary of the Company and the VIE’s financial statements were consolidated with that of the Company for financial reporting purposes.

 

Termination of VIE Agreements and Disposition of VIE

 

On July 31, 2019, Roan HK and Zhejiang Zhongfeng Investment Management Co., Ltd (“Zhongfeng”) entered into a framework agreement (the “VIE Framework Agreement”) to terminate Ding Xin’s contractual relationship with VIE. Pursuant to the VIE Framework Agreement, Zhongfeng agreed to acquire 100% of the equity interest in the VIE, or obtain control over and become the primary beneficiary of VIE through contractual arrangements for a cash consideration of not less than RMB 15.0 million. On November 22, 2019, the parties entered into a supplemental agreement to the VIE Framework Agreement such that the minimum cash consideration was reduced to RMB 10.0 million based on the amount of accounts receivable debt associated with the VIE. For the year ended December 31, 2019, the Company received an aggregate of $504,713 (RMB 3.5 million). On April 23, 2020, the Company received an additional $0.43 million (RMB 3.0 million) from Zhongfeng.

 

On November 22, 2019, Ding Xin, Feng Hui, shareholders owning 78.73% of Feng Hui equity interest, and Zhongfeng entered into a Share Transfer and VIE Termination Agreement (the “VIE Termination Agreement”), pursuant to which Ding Xin agreed to no longer benefit from controlling financial interests in Feng Hui in exchange for a minimum consideration of RMB 10.0 million, and Zhongfeng agreed to acquire 100% equity interest in or have control over and become a primary beneficiary of Feng Hui through contractual arrangements. On the same date, Ding Xing transferred all of its interests in and effective control of Feng Hui to Zhongfeng for a final consideration of RMB 10.0 million, and the VIE termination notice was sent to the shareholders owning the remaining 21.27% Feng Hui equity interest. The VIE agreements with the 21.27% shareholders terminated on Dec 21, 2019, the effective date of termination pursuant to the notice.

 

Ding Xin has released all equity interests in Feng Hui to Feng Hui’s shareholders, which were transferred to Zhongfeng by Feng Hui’s shareholders.

 

As a result of the above series of transactions, the Company ceased its rights in and control of Feng Hui, and Zhongfeng obtained the controlling financial interest in Feng Hui. Therefore, the Company’s VIE contractual relationship with Feng Hui has been terminated.

 

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Business Combination with Lixin Financial Holdings Group Limited and Subsidiaries

 

Lixin Financial Holdings Group Limited (“Lixin Cayman”) was established on October 25, 2017 under the laws of the Cayman Islands as an exempt company. It is a holding company and does not have substantial operations. It conducts its business through its direct and indirect subsidiaries.

 

In January 2019, the Company acquired 1% of the equity interest in Zhejiang Lixin (defined below) for RMB 2,858,600. On June 14, 2019, the Company entered into a Share Purchase Agreement (the “SPA”) with Lixin Cayman and certain shareholders of Lixin Cayman to acquire a controlling interest in Lixin Cayman. Pursuant to the SPA, the Company acquired a 65.0177% interest in Lixin Cayman from its selling shareholders in exchange for ordinary shares of the Company to be issued to the selling shareholders for a total value of RMB 276.00 million (later adjusted to $31.09 million (RMB 217.88 million). See Note 4 to the Consolidated Financial Statements) (“Lixin Acquisition”).  On August 23, 2019, the parties entered into a supplementary agreement to amend the form of payment of the purchase price. Pursuant to the supplementary agreement, Lixin shareholders agreed to receive non-voting preferred shares that will have the right to be converted into common shares after two years from the closing date of the acquisition. The transaction was closed on December 20, 2019 upon the Company’s issuance of 291,795,150 Class B convertible preferred shares to the selling shareholders. These convertible preferred shares are embedded with liquidation preference and dividend preference but with no voting rights. Following the second anniversary of the closing date, preferred shares may be convertible to the equal number of ordinary shares or can be redeemed at a conversion price calculated at the average closing price per share for ninety consecutive trading days before the conversion date.

 

Lixin Cayman, through its subsidiaries, provides a wide range of financing solutions and related peripheral services, including financial leasing, commercial factoring, private funding, guarantee and supply chain management, to individuals and MSMEs in the Yangtze River Delta Region of China. Lixin Cayman conducts its business through the following direct and indirect subsidiaries.

 

Lixin Financial Holdings (BVI) Limited (“Lixin BVI”) is a wholly-owned subsidiary of Lixin Cayman. It was established on November 29, 2017 under the laws of the BVI as a company limited by shares. It is a holding company and does not have business operations.

 

Lixin Financial Holdings Group Limited (励信金融控股集团有限公司) (“Lixin HK”) was established on January 15, 2018 under the laws of Hong Kong as a wholly-owned subsidiary of Lixin BVI. It is a holding company and does not have business operations.

 

Zhejiang Lixin Enterprise Management Holding Group Co., Ltd. (浙江励信企业管理集团有限公司) (“Zhejiang Lixin”) was incorporated on July 3, 2015 under the laws of the PRC. Lixin HK owns 99% of Zhejiang Lixin equity interest and RAHK owns the remaining 1%. Following its reorganization completed in 2018, it became the controlling shareholder of Zhejiang Jingyuxin (discussed below). It is a financial service company providing comprehensive financial solutions and services including guarantee services and related assessment and management services.

 

Zhejiang Jing Yu Xin Financing Guarantee Co., Ltd. (浙江京虞信融资担保有限公司) (“Zhejiang Jingyuxin”) was incorporated on January 5, 2013 under the laws of the PRC. Zhejiang Lixin owns 93.4% of Zhejiang Jingyuxin equity interest, with the remaining 6.6% interest owned by an unrelated third party individual. It provides guarantee services and related assessment and management services.

 

Lixin (Hangzhou) Asset Management Co., Ltd. (励信(杭州)资产管理有限公司) (“LAM”) is a wholly-owned subsidiary of Zhejiang Jingyuxin. It was incorporated on March 21, 2017 under the laws of the PRC. LAM provides consulting and assessment services to customers and facilitates financial guarantee services between customers and guarantors.

 

Lixin Supply Chain Management (Tianjin) Co., Ltd. (励信供应链管理(天津)有限公司) (“(“Lixin Supply Chain”) is a wholly-owned subsidiary of LAM. It was incorporated on December 19, 2017 under the laws of the PRC and its principal business is providing supply chain management services.

 

On December 31, 2019, the Company changed its address of principal executive office to 147 Ganshui Lane, Yuhuangshannan Fund Town, Shangcheng District, Hangzhou, Zhejiang, China. The Company also changed its phone number to +86 571 8662 1775.

 

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B.Business Overview

 

Our Business

 

We are a non-bank financial corporation serving individuals and micro-, small- and medium-sized enterprises (“MSMEs”) in China. We also provide health management, insurance technology, healthcare and consumer financing services to the employees of large institutions.

 

Our business has experienced substantial changes in the recent years. Immediately following the consummation of the Business Combination, with Adrie formed as a non-operational holding company, the original China Lending Group was a PRC-based group of companies specializing in providing loan facilities to MSMEs and sole proprietors in Xinjiang. However, we decreased direct loan business from 2018 and didn’t conduct or renew any loans in 2019. Zhiyuan and Zeshi continued their factoring, financing services and asset management business and generated revenues of $3.24 million from the customers located in Zhejiang, Shanghai, Jiangsu, Guangdong, Xizang and Xinjiang in 2019.

 

For the year ended December 31, 2019, the Company conducted management and assessment services, financial guarantee and financial consulting business and maintained existing direct loan business. Prior to the Lixin Acquisition closed in December 2019, most of our customers were MSMEs and individual proprietors located in Zhejiang Province and Guangdong Province. Those customers were involved in the commerce and service, real estate, technology promotion and application services, construction, finance, wholesale and retail and other industries.

 

On December 20, 2019, the Company completed the Lixin Acquisition. Lixin Cayman and its subsidiaries are engaged in guarantee business, asset management, supply chain financing, and factoring through its subsidiaries based in Zhejiang Province, China. The revenue from these entities only constituted a small portion of our total revenues in 2019, because only the revenues from December 21, 2019 to December 31, 2019 were included in our consolidated financial statements.

 

As of December 31, 2019, the Company had cash balance of $6,911,592 and a positive working capital of $39,449,021. In addition to the cash balance, the working capital was mainly comprised of restricted cash of $15,233,933, short-term investments in financial products of $8,610,796 and loan receivable due from third parties of $5,952,223. The balances of these assets are expected to be repaid on maturity dates and will also be used for working capital.

 

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Our Major Services

 

1. Management & assessment services and factoring business -Adrie Subsidiaries

 

In 2019, Zeshi and Zhiyuan, the Chinese subsidiaries under Adrie provided the following management and assessment services and factoring business:

 

1)Asset management services focus on providing account receivable collection plans, collection, investigation on assets such as guaranty, assisting litigation mitigation, process assets and asset supervision.

 

Among the asset management services, Zeshi was involved in consulting service relating to debt collection with one factoring company. The debt collection service involved one performance obligation which is to assist the customer to receive repayment on outstanding debt, and the Company recognized revenues upon completion of the performance obligation.

 

2)Financing services focus on designing financing plans, recommending fund sources and assisting funds to arrange project due diligence.

 

  3) Factoring business focuses on financing invoices from businesses that have cash flow problems due to slow-paying customers.  The client gets immediate funds for the receivable from us. We hold the invoice and make certain profit when the invoice is paid by the clients’ customers. In this process, we also provide related services such as assessing the buyers’ credit risks.

 

During the year ended December 31, 2019, Zhiyuan generated interest income from factoring business of $2.78 million and Zeshi generated management and assessment service income of $0.45 million.

 

For the year ended December 31, 2019, the Company disbursed loans of $43,422,881 to four factoring customers. As of December 31, 2019, the Company collected all principals and interests from these factoring customers.

 

In the first few months of 2020, affected by COVID-19, our due diligence work for factoring customers were delayed and some offline visits were cancelled. Meanwhile, the Company evaluated the impacts of COVID-19 of customers and decided to further control and reduce the operating risk. Nevertheless, the Company still plans to develop factoring business as a major service.  From June 2020, the Company cooperates with local banks and financial institutes to develop supply chain finance and financial assets exchange business. Zhiyuan plans to enhance factoring business with Zhejiang Lixin and develop highly qualified customers from local state-owned enterprises and public companies. 

 

2. Direct Loan Business-Adrie Subsidiaries

 

We had minimal direct loan business in 2019 and the balance of the loan ended as of December 31, 2019 represents minimal revenues received from loans.

 

3. Guarantee and consulting services-Lixin Cayman Subsidiaries

 

Although only a small portion of the revenues generated by the guarantee and consulting services conducted by Lixin Cayman subsidiaries (mainly Zhejiang Jingyuxin and LAM) in 2019 was included in our total revenues due to the timing of the Lixin Acquisition, we expect this part will be a material source of our revenues going forward.

 

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(1) Guarantee services: financial and non-financial

 

These services are mainly conducted by Zhejiang Jingyuxin. Zhejiang Jingyuxin received the commissions from guarantee services either in full at inception or in instalments during the guarantee period. Its guarantee services are divided into financial guarantee and non-financial guarantee. However, there were no non-financial guarantee revenues contributed by Lixin Cayman subsidiaries from December 20, 2019 to the end of 2019.

 

Financial guarantee service contracts provide guarantees which protects the holder of a debt obligation against default in the financing process. Pursuant to such guarantee, the Company makes payments if the obligor responsible for making payments fails to do so as scheduled. The contract amounts reflect the extent of involvement Zhejiang Jingyuxin has in the guarantee transaction and also represent the Company’s maximum exposure to credit loss in its guarantee business.

 

To mitigate the potential credit risks exposure to the financial guarantee services, Zhejiang Jingyuxin requires the guarantee service customers to make a deposit to Zhejiang Jingyuxin of the same amount as the deposit Zhejiang Jingyuxin pledged to the banks for their loans if the customer does not pledge or collateralize other assets with Zhejiang Jingyuxin. The deposit is returned to the customer after the customer repays the bank loan and the Zhejiang Jingyuxin’s guarantee obligation expires.

 

In addition, Zhejiang Jingyuxin also provides non-financial guarantee services to clients by giving credit guarantee. It is used to improve the contract enforcement. This business includes litigation preservation guarantee, bid guarantee, project performance guarantee and other contract performance business. This is not its key business and it does not take the core resources. It has lower risks.

 

(2) Consulting services

 

a. Consulting services for financial guarantee customers

 

Lixin Cayman subsidiaries provided financial consulting services to financial guarantee customers. Pursuant to the contracts with customers, Lixin Cayman subsidiaries facilitated financial guarantee services between customers and financial guarantors, and charged referral fees at a fixed amount. The performance obligations are completed and control of the service is transferred at the inception of financial guarantee period. Transaction prices are generally paid upon successful facilitation. 

  

b. Consulting services relating to debt collection   

 

For the year ended December 31, 2019, Lixin Cayman subsidiaries also provide consulting services relating to debt collection with certain factoring companies. The debt collection services involved commitments of 1) assisting the customers to obtain court judgments on outstanding debt, and the Company recognized revenue over period towards completion of the performance by using input method based on the staff cost incurred, and 2) assisting the customers to receive repayment on outstanding debt, the Company recognized revenues upon collection of outstanding debts. The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the services being provided to the customer.

 

The company will continuously develop management & assessment services and factoring business in 2020. After Lixin Acquisition, the subsidiaries of both Adrie and Lixin Cayman plan to cooperate closely to expand business territories, share business resources of each other and strengthen the Company’s competitiveness.

 

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New Services

 

In line with our 2020 innovative insurance service and healthcare program growth strategy, we have begun providing health management, innovation insurance, healthcare and consumer financing services to the employees of large institutions.

 

On December 30, 2019, we incorporated Fortis Health Industrial Group Limited (“Fortis Health” or “FHIG”) in Hong Kong. On February 28, 2020, we incorporated Zeshi Insurance to conduct insurance technology business. On March 3, 2020, we incorporated Zeshi Health to conduct health management, health big data management, and health information management based on blockchain technology.

 

In April 2020, we officially launched a one-stop internet insurance and health care service platform after nearly eight months of preparation and systems development. The platform aims to provide modern households with one-stop systematic “customized insurance + health management + family doctor + home medical testing” health management service solutions. This platform will enable households and employees of medium to large-sized enterprises to access highly cost-effective, customized health care and insurance solutions, customized insurance products, as well as data management and operational services.

 

We have established long-term partnerships for innovative insurance services, smart health medical services, data mining, and operations with a variety of insurance service partners, medical service partners, and technology and big data partners, including Kunlun Health Insurance Co., Ltd. (Zhejiang Branch) (“Kunlun Health Insurance Zhejiang Branch”), Qidi Blockchain Technology Development Corporation (“Qidi Blockchain Corporation”), Ruixin Insurance Technology (Ningbo) Co., Ltd (“Ruixin Insurance Technology”), and Yunxin Internet Hospital (Yinchuan) Co., Ltd (“Yunxin Internet Hospital”).

 

The following sections outline the various partnerships that we are currently engaged in.

 

lJointly-Established Special Public Welfare Fund for Fetal and Neonatal Diseases and Teamed Up With Top Medical Expert Team for Children’s Diseases and Local Hospitals in China to Promote the Establishment of a Nationwide Diagnostic and Treatment Service Network for Children’s Diseases

 

In January 2020, Zhejiang Lixin and Zeshi entered into a cooperation agreement with five other companies including Qidi Blockchain Corporation and Kunlun Health Insurance Zhejiang Branch to work with Beijing Sunshine Health Foundation to jointly establish a special public welfare fund named Women and Children’s Health Care for fetal and neonatal diseases. This fund aims to support the screening, diagnosis, and treatment of fetal and newborn birth defects in China as well as the development of related medical institutions service networks, treatments of children’s diseases, as well as other scientific work and research.

 

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lPartnership to Promote the Application of Blockchain and Artificial Intelligence Technology in Health Care and Insurance Finance

 

In February 2020, Zhejiang Lixin and Fuyi Digital Technology (Hangzhou) Co., Limited (“Fuyi Digital Technology”) entered into a strategic cooperation agreement with Qidi Blockchain Corporation to cooperate in the areas of data management and operations, data transformation, and data service platform development. The partnership will pair Qidi Blockchain Corporation’s capabilities in AI medical technology, application development, data mining, operations, and management with Zhejiang Lixin’s market resources, product development experience, and marketing proficiency to drive the development of blockchain and artificial intelligence applications within both the health care and insurance industries.

 

  l Partnership to Build a Closed-Loop “Financial Insurance + Health Care + Technology” Service System

 

In March 2020, each of Zhejiang Lixin and Zeshi Health entered into separate agreements with Yunxin Internet Hospital, a provider of online and offline medical consultation and health management services to individuals, banks, insurance brokerages, and employees of large-sized institutions. In addition to its physical facilities, Yunin Internet Hospital is licensed to provide telemedicine services in China. Under these two agreements, each of Zhejiang Lixin and Zeshi Health will cooperate closely with Yunxin Internet Hospital in such areas as financial insurance and internet medical services while establishing a closed-loop “Financial Insurance + Health Care + Technology” service system.

 

lAgreement to Establish Special Newborn Congenital Insurance Cooperation Program

 

In April 2020, Zhejiang Lixin and Ruixin Insurance Technology agreed upon the terms of cooperation for developing a special program in support of newborn congenital insurance projects. As part of the agreement, Ruixin Insurance Technology will provide customer service support and insurance products that have been jointly designed with Kunlun Health Insurance Zhejiang Branch. Zhejiang Lixin will be responsible for product marketing channel exploration and management, marketing and promotion services, as well as customer relationship services.

 

lAgreement to Build an Online Platform for Home Medical Testing

 

On March 12, 2020, Zeshi Health and Guangzhou Jingke Biotech Co., Ltd. (“Jingke Biotech”) reached a strategic cooperation agreement to jointly build an online medical testing service platform to meet the home medical testing demands of households. According to the agreement, Zeshi Health will provide support for platform operations, market development, marketing channel management, and early-stage customer services. In addition, Jingke Medical Testing will provide testing service products and prioritize the delivery of supplies and services to customers on Zeshi Health’s service platform.

 

Business Strategies

 

We closed the Lixin Acquisition in December 2019. We plan to take advantage of the strength of Lixin Cayman and its subsidiaries in market and channels, and apply latest technology related to healthcare big data, artificial intelligence and blockchain to the combination of medical and healthcare management and insurance. We intend to implement the following three strategies to expand and grow the size of our businesses:

 

(i) Explore the business scope of guarantee and financing services

 

We plan to add categories of guarantee business, mainly consumption financial guarantee, but also contract performance guarantee for medical testing service, health management service and insurance-related service. We also would like to expand the geographic areas of our financial guarantee business to more areas in China.

 

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In the future, Zhejiang Jinyuxin will be the major entity to conduct financial guarantee, and Zeshi and LAM will be the major entities to conduct financing services.

 

(ii) Initiate insurance service and healthcare program growth strategy

 

We plan to develop insurance service and healthcare program and explore our business in this area because of the following reasons:

 

a. We have built the insurance technology and health management platform.

 

In April 2020, we officially launched a one-stop internet insurance and health care service platform. This platform will enable households and employees of medium to large-sized enterprises to access highly cost-effective, customized health care and insurance solutions, customized insurance products, as well as data management and operational services.

 

b. We have established strategic cooperation relationship with other companies.

 

We have established long-term partnerships for innovative insurance services, smart health medical services, data mining, and operations with a variety of insurance service partners, medical service partners, and technology and big data partners.

 

c. The macro policy benefits our business development.

 

On October 25, 2016, China formally passed the blueprint of “Healthy China 2030,” working towards the national goal of reaching a health standard on par with developed countries by 2030. The five specific targets of Healthy China 2030 are to improve the level of health, control major risk factors, increase health service capacity, expand health industry scale, and perfect the health service system. The demand of fair, efficient, good, reasonable healthcare service by Chinese people will keep increasing.

 

In the recent years, Chinese government has issued a series of Internet + Healthcare development polices. The outbreak of COVID-19 at the beginning of 2020 reveals some shortcomings of Chinese medical system, and has promoted the diagnose service of internet hospital.

 

d. We start from Zhejiang Province.

 

Zhejiang Province is the frontline of internet development in China and an economically active area. It has a relatively stable market of internet healthcare. We are based in Hangzhou, the capital city of Zhejiang and are developing the new business in Zhejiang. We plan to promote the our successful experience in Zhejiang to Shanghai, Guangzhou, Tianjin, Xinjiang and other business areas, cooperate with our clients, industry organizations and partners and facilitate the deep infusion of insurance, medical healthcare and artificial intelligence.

 

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Intellectual Property

 

We own and have the right to use the domain name “www.roanholdingsgroup.com”.

 

We have registered the following trademarks:

 

Owner   Trademark   Issuance Entity   Term
Lixin Cayman     Trademark Office of PRC State Administration for Industry and Commerce   March 7, 2019 – March 6, 2029
             
Lixin HK     HK Trade Marks Registry Intellectual Property Department   February 2, 2018 – February 1, 2028
             
Zhejiang Jingyuxin     Trademark Office of PRC State Administration for Industry and Commerce   July 28, 2016 – July 27, 2026

 

Certificates

 

Our subsidiary Zhejiang Jingyuxin was issued a PRC Financing Guarantee Organization Operation Permit by Zhejiang Commission of Economy and Informatization on May 17, 2016 with a term of five years. We plan to renew it before it expires. The permit authorizes Zhejiang Jingyuxin to operate the guarantee business, and related financial consulting and consulting agent business in China.

 

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Competition

 

The Company faces competition in the financial industry. We believe that the financial industry is becoming more competitive as this industry matures and begins to consolidate, especially under the heavy regulation by policies and macroeconomic downturn. The Company competes with other financial guarantee companies, other financial consulting companies, and some cash-rich state-owned companies or individuals that provide financial services to MSMEs. Some of these competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have. As a result, we could lose market share and our revenues could decline, thereby adversely affecting our earnings and potential for growth.

 

While we plan to achieve a competitive advantage by adopting various business strategies including exploring business in the Internet + Healthcare area, we face the competition from the companies much bigger than us and with a longer history. For example, Ping’an good doctor focuses on online diagnosis, consumption diagnosis, health mall, health management and health interaction. Ali Health started from online medicine, and is building a big health closed loop by developing internet diagnosis, intelligent treatment, consumption diagnosis and source tracking service. Huarun Medicine, as a top medicine enterprise, has strong supply chain and rich client resources and is developing its platform by applying internet technology.

 

Seasonality

 

Our main business does not have significant seasonality. 

 

Government Regulation

 

The Company’s operations are subject to extensive and complex state, provincial and local laws, rules and regulations. We are supervised by a variety of provincial and local government authorities, including CBRC, PBOC, local tax bureaus, local Administration of Industry and Commerce, local Bureau of Finance, local Administration of Foreign Exchange and local employment departments. The areas include Zhejiang Province, Guangdong Province, Tianjin City and Xinjiang Uyghur Autonomous Region.

 

Summaries of Certain Key PRC Laws

 

Below are summaries of the material terms of PRC laws applicable to our businesses.

 

No.   Regulation name   Main regulatory content
1   Regulations on the supervision and administration of financial guarantee companies  

Article 15 The balance of guarantee responsibility of a financial guarantee company shall not exceed 10 times its net assets.

 

Article 16 The ratio of the balance of guarantee liabilities of the financial guarantee company to the same guaranteed person and the net assets of the financial guarantee company shall not exceed 10%, and the ratio of the balance of guarantee liabilities of the same guaranteed person and its related parties to the net assets of the financial guarantee company shall not exceed 15%.

 

Article 17 A financial guarantee company shall not provide financial guarantees for its controlling shareholders and actual controllers, and the conditions for providing financial guarantees for other related parties shall not be better than the conditions for providing similar guarantees for non-related parties.

         
2   Measures for the administration of financial guarantee business license   Article 7 The establishment, merger, division or reduction of registered capital of a financial guarantee company shall issue and renew a business license for financial guarantee business after approval by the supervision and management department.

 

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3   Measures for measuring the Balance of Financial Guarantee Liability  

Article 11 The balance of loan guarantee liability = loan guarantee balance of small and micro enterprises for a single under guaranteed balance of RMB 5 million × 75% + loan guarantee balance of farmers for a single under guaranteed balance of RMB 2 million × 75% + other loan guarantee balance × 100%.

 

Article 15 The balance of the financial guarantee companys financial guarantee liability shall not exceed 10 times its net assets.

 

Article 16 The balance of the financial guarantee company’s financial guarantee liability for the same guaranteed person shall not exceed 10% of its net assets, and the balance of financial guarantee liability for the same guaranteed person and its related parties shall not exceed 15% of its net assets.

         
4   Measures for the Management of Asset Ratio of Financial Guarantee Companies  

Chapter 2 Asset Classification


Article 4 The main assets of the financial guarantee company are classified into grades I, II, and III according to the form.


Chapter 3 Asset Proportion Management


Article 8 The sum of the net assets, the unexpired liability reserve and guarantee compensation reserve of the financial guarantee company shall not be less than 60% of the total assets.


Article 9 The sum of the level I assets and level II assets of the financial guarantee company shall not be less than 70% of the total assets after deducting the receivables; the level I assets shall not be less than 20% of the total assets after deducting the receivables; Level III assets shall not be higher than 30% of the total assets after deducting the receivables.

         
5   Guidelines for Business Cooperation between Banking Financial Institutions and Financial Guarantee Companies  

Article 9 both parties of banks and financial guarantee companies may agree to carry out business cooperation within the following scope:

(1) Financial guarantee business: including loan guarantee, bill acceptance guarantee, letter of credit guarantee and other financial guarantee business;

(2) Non-financial guarantee business: including bid guarantee, project performance guarantee, litigation preservation guarantee and other non-financial guarantee business;

(3) Other legal compliance business.

         
6   China Banking Insurance Regulatory Commission, Notice on Strengthening the Supervision and Management of Commercial Factoring Enterprises (ybjf [2019] No. 205)  

(4) Commercial factoring enterprises shall not have the following behaviors or operating the following businesses:

1. Absorbing or absorbing public deposits in disguised form;

2. Financing through Internet lending information intermediaries, local trading places, asset management agencies, and private investment funds institutions;

3. Lending or borrowing funds in disguised form with other commercial factoring enterprises;

4. Making loans or entrusted loans;

5. Specially engaged in or entrusted to carry out collection business and debt collection business unrelated to commercial factoring;

6. Carrying out factoring financial business based on illegal basic transaction contract, consignment contract, accounts receivable with unclear ownership, payment claim arising from bills or other securities, etc;

7. Other activities not allowed by the state.

 

(7) Commercial factoring companies should comply with the following regulatory requirements:
1. The receivables of the same debtor shall not exceed 50% of the total risk assets;

2. The receivables of which the affiliated enterprise is the debtor shall not exceed 40% of the total risk assets;

3. Incorporate factoring Financial funds not recovered or unrealized that are overdue for 90 days into non-performing asset management;

4. The withdrawn risk reserve shall not be less than 1% of the closing balance of the financial factoring business;
5. Risk assets shall not exceed 10 times the net assets.

 

(11) Commercial factoring enterprises shall report to the Financial Supervision Bureau within 10 working days after the occurrence of the following matters:

1. Major related party transactions with a single amount exceeding 5% of net assets;

2. Major debts with a single amount exceeding 10% of net assets;

3. Contingent liabilities with a single amount exceeding 20% of net assets;

4. Major loss or liability for compensation exceeding 10% of net assets;

5. Major pending litigation and Arbitration.

 

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C. Organizational Structure

 

The following is an organizational chart setting forth our corporate structure as of December 31, 2019:

 

 

  

The following is an organizational chart setting forth our corporate structure as of June 26, 2020:

 

 

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 The following table lists the major holders of our Ordinary Shares:

 

    Record   Holder   Ownership Percentage     Beneficial Owner*   Beneficial Ownership in Record Holder  
1   Ruiheng Global Limited     24.7590 %   Yuan Shen     40.637 %
2   Yangwei Global Limited     13.7746 %   Qian Li     87.291 %
3   Jiyi Global Investments Limited     8.0453 %   Qian Li     75.05 %
4   Zhan Zhao Limited     5.0927 %            

 

* Beneficial owners of 30% or more of applicable record holders, where record holder is not an individual.

 

D. Property, Plants and Equipment

 

The Company has the land use rights and the ownership for the following building:

 

Subsidiary Name  City  Address  Size (m2)  Land Use Rights Term
Zhejiang Jinyuxin  Shaoxing, Zhejiang  Building A, 2-8 Jiangdong Rd, Baiguan St.  Land: 286.23; building: 982.21  Until July 24, 2047

 

The Company has signed the following leases:

 

Subsidiary Name   City   Address   Size (m2)     Term  
LAM   Hangzhou, Zhejiang   First floor of No. 147 Ganshui lane, Shangcheng District     145.06     February 18, 2020-August 17, 2020  
                       
LAM   Hangzhou, Zhejiang   Room 401-410, No. 88-1, Marshal Temple Rear, Shangcheng District     635     July 6, 2018-July 5, 2023  
                       
Zhejiang Jingyuxin   Shaoxing, Zhejiang   48th floor of Baiguan Square, Baiguan Street     1,700     May 1, 2020-April 30, 2022   
                       
Zhejiang Jingyuxin   Shaoxing, Zhejiang   Rm 301, Unit 1, Bldg 21, Liulangdongyuan, Shangcheng District     98     September 20, 2018 to September 19, 2020  
                       
Zhiyuan   Hangzhou, Zhejiang   Second floor of No. 147 Ganshui Lane, Shangcheng District     221.03     February 18, 2020-February 17, 2023  
                       
Zhiyuan   Guangzhou, Guangdong   Room 101-211, Building 4, No. 230, Huangge Section, South Road, Huangge Town, Nansha District     23     June 22, 2019-June 30, 2020  

 

The Company does not have any plants, but has office equipment in each office.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.

  

A. Operating results

 

Overview

 

In the fiscal year ended December 31, 2019, we conducted management and assessment services and financial guarantee and consulting business, in addition to existing direct loan business from which we only had minimal income.

 

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Management & assessment services and factoring business

 

We commenced our management & assessment services and factoring business to customers in December 2018. For the years ended December 31, 2019 and 2018, we provided management and assessment services to four customers, generating revenues of $135,938 and $71,568, respectively.

 

  1)

Asset management services focus on providing account receivable collection plans, collection, investigation on assets such as guaranty, assisting litigation mitigation, process assets and asset supervision;

 

  2)

Financing services focus on designing financing plans, recommending fund sources and assisting funds to arrange project due diligence; and

 

  3)

Factoring business focuses on financing invoices from businesses that have cash flow problems due to slow-paying customers. The client gets immediate funds for the receivable. We hold the invoice and make certain profit when the invoice is paid by the clients’ customers. In this process, we also provide related services such as assessing the buyers’ credit risks.

 

Financial guarantee and consulting services

 

In order to diversify the Company’s business and generate additional revenue, on December 20, 2019, the Company completed acquiring 65.0177% equity interest in Lixin Cayman and its subsidiaries (collectively “Lixin”), which were engaged in guarantee and consulting services. The Company is able to consolidate operations of Lixin Cayman effective December 20, 2019 and now operates a separate guarantee and consulting services.

 

Financial guarantee services

 

We received financial guarantee commission by providing financial guarantee services to customers. Pursuant to financial guarantee service contracts, the Company is obligated to make payments if the customers fail to make payments to financial institutions as scheduled. Accordingly, the financial institutions providing capital to customers would claim defaulted amount against Lixin if any potential defaults incurred by customers. The contract amounts reflect the extent of credit losses to which the Company is exposed.

 

Credit risk is controlled by the application of credit approvals, limits and monitoring procedures including due-diligence visits and post-lending visits to the clients. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company requires collateral in the form of rights to cash, securities or property and equipment.

 

The Company has been providing the financial guarantees of loans for limited history. The customer’s deposits or other assets are held as collateral for the repayment of each loan. As of December 31, 2019, the amount of outstanding loans and related interests that the Company has guaranteed is approximately $35.1 million. The Company estimates the fair market value of the collateral to be approximately $61.4 million as of December 31, 2019.

 

For the period from acquisition of Lixin on December 20, 2019 to December 31, 2019, the Company generated financial guarantee commission of $8,797.

 

Consulting services for financial guarantee customers

 

The Company provided financial consulting services to financial guarantee customers. Pursuant to the contracts with customers, the Company facilitated financial guarantee services between customers and financial guarantors, and charged referral fees at a fixed amount. The performance obligations are completed and control of the service is transferred upon successful facilitation of guarantee service, which is at the inception of financial guarantee period. Transaction prices are generally paid upon successful facilitation. The Company recognizes the revenue at the inception of guarantee period.

 

For the period from acquisition of Lixin on December 20, 2019 to December 31, 2019, the Company generated minimal consulting services for financial guarantee customers.

 

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Consulting services relating to debt collection

 

The Company also provides consulting services relating to debt collection with certain factoring companies. The debt collection services involved commitments of 1) assisting the customers to obtain court judgments on outstanding debt, and 2) assisting the customers to receive repayment on outstanding debt. The Company recognized revenues upon completion of each commitment.

 

For the period from the closing of Lixin Acquisition on December 20, 2019 to December 31, 2019, the Company generated consulting services relating to debt collections of $176,984 through Lixin.

 

In addition, Zeshi was involved in consulting service relating to debt collection with one factoring company. The debt collection service involved one performance obligation which is to assist the customer to receive repayment on outstanding debt, and the Company recognized revenues upon completion of the performance obligation. For the year ended December 31, 2019, Zeshi assisted the customer to collect the debt and recognized revenue of $316,795.

 

Interest and fees earned from factoring business

 

We also entered into financing arrangements with our customers through Zhiyuan, which is engaged in business factoring program. We earned interest income from these financing arrangements. For the years ended December 31, 2019 and 2018, we earned interest income from factoring programs of $2,782,332 and $35,229, respectively.

 

We used to engage in disbursement of direct loans to MSMEs located in Xinjiang Uygur Autonomous Region. Our customers covered sectors of commerce and service, real estate, technology promotion and application services, construction, finance, wholesale and retail and other industries. From 2018, we decreased direct loan business and didn’t conduct or renew any loan in 2019. As of December 31, 2019, we had direct loans receivables due from four business customers and two individual customers. For the years ended December 31, 2019 and 2018, we earned interest and fees income from direct loan customers of $1,153 and $15,035, respectively.

 

Recent developments

 

Lixin Acquisition

 

In January 2019, the Company acquired 1% equity interest in Zhejiang Lixin at a cash consideration of $427,318 (RMB 2,858,600).

 

On June 13, 2019 and August 23, 2019, the Company entered into a share purchase agreement (“SPA”) and a supplementary to the SPA with Lixin Cayman and certain shareholders of Lixin Cayman, pursuant to which the Company would acquire 65.0177% equity interests in Lixin Cayman and its subsidiaries at a consideration of approximately $39.38 million (RMB 276.00 million)  (later adjusted to $31.09 million (RMB 217.88 million). See Note 4 to the Consolidated Financial Statements). Lixin Cayman is engaged in financial guarantee business, asset management, supply chain financing, and business factoring through its subsidiaries based in Zhejiang Province, China.

 

The transaction was closed on December 20, 2019 upon the Company’s issuance of 291,795,150 Class B convertible preferred shares. These convertible preferred shares are embedded with liquidation preference and dividend preference but with no voting rights. Upon the second anniversary of the closing date, one Class B preferred share may be convertible to one ordinary share or can be redeemed at a conversion price calculated at the average closing price per share for ninety consecutive trading days before the conversion date. Because the Company’s board has the rights to convert any or all of the Class B Preferred Shares, in whole or in part, into ordinary shares. Accordingly, the redemption provisions are solely at the discretion of the Company.

 

Disposition of Urumqi Fenghui Direct Lending Co., Ltd. (“Feng Hui”)

 

On July 31, 2019 and November 22, 2019, the Company entered into a framework agreement (the “Agreement”) and a supplementary to the Agreement with Zhejiang Zhongfeng Investment Management Co., Ltd. (“Zhongfeng”, or the “Purchaser”), pursuant to which Zhongfeng agreed to acquire a 100% equity interest in Feng Hui, a variable interest entity of the Company, or acquire control over and become a primary beneficiary of Feng Hui through contractual arrangements. Feng Hui primarily provides loan facilitation services to micro, small and medium sized enterprises in the Xinjiang Uygur Autonomous Region. On November 22, 2019, the disposition transaction was closed at a consideration of approximately $1.44 million (RMB 10 million) and transferred control over Feng Hui to Zhongfeng. For the year ended December 31, 2019, the Company received an aggregate of $504,713 (RMB 3.5 million). On April 30, 2020, the Company received an additional $0.43 million (RMB 3.0 million) from Zhongfeng.

 

Upon the closing of the disposition on November 22, 2019, the Company released all Feng Hui equity interests to Feng Hui’s shareholders and those interests were subsequently transferred to Zhongfeng by Feng Hui’s shareholders. Zhongfeng assumed all assets and obligations of Feng Hui. Upon the closing of the transaction, the Company does not bear any contractual commitment or obligation to the microcredit business or the employees of Feng Hui, nor to the Purchaser.

  

Key Factors Affecting Our Results of Operation

 

We have a limited operating history of our current businesses. We commenced management and assessment consulting services in December 2018, and acquired financial guarantee and consulting business in late December 2019. We believe our future success depends on our ability to significantly expand financial market and channels, and apply latest technology related to healthcare big data, artificial intelligence and block chain to the combination of medical and healthcare management and insurance. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving industry. These risks and challenges include, among other things,

 

  our ability to integrate financial guarantee and financial consulting business;

 

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  our ability to expand financial market and channels, especially in individual financial area services: insurance + consumption finance; and

 

  our ability to build the insurance technology and health management platform.

 

In addition, our business requires a significant amount of capital in large part due to needing to continuously grow financial guarantee services, and expand our business in existing markets and to additional markets where we currently do not have operations. We do not know if we will receive the amount of capital needed for our business growth and expansion.

 

Results of Operations

 

The following table sets forth a summary of our consolidated results of operations for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations in any period are not necessarily indicative of our future trends.

 

   For the Years Ended
December 31,
 
   2019   2018   2017 
             
Revenues from services  $639,220   $71,568   $- 
Cost of revenues   (8,080)   -    - 
Net revenues of services   631,140    71,568    - 
                
Commissions and fees on financial guarantee services   8,797    -    - 
Provision for financial guarantee services   (5,008)   -    - 
Commission and fee income on guarantee services, net   3,789    -    - 
                
Interest and fees income               
Interest and fees on direct loans   1,153    15,035    1,628,525 
Interest income on loans due from third parties   34,707    -    - 
Interest income from factoring business   2,782,332    35,229    - 
Interest income on deposits with banks   64,636    418    537 
Total interest and fee income   2,882,828    50,682    1,629,062 
                
Interest expense               
Interest expenses and fees on secured loans   (2,218,815)   (25,118)   - 
                
Net interest income   664,013    25,564    1,629,062 
                
Provision for loan losses   (2,244,601)   (2,176,216)   (565,187)
                
Net interest (loss) income after provision for loan losses   (1,580,588)   (2,150,652)   1,063,875 
                
Operating (loss) income   (945,659)   (2,079,084)   1,063,875 
                
Total operating expenses               
Salaries and employee surcharge   (512,314)   (572,117)   (518,015)
Business taxes and surcharge   (352)   (714)   (9,879)
Other operating expenses   (1,384,907)   (1,468,738)   (1,691,387)
Changes in fair value of warrant liabilities   530,863    748,346    - 
Total operating expenses   (1,366,710)   (1,293,223)   (2,219,281)
                
Loss before income taxes   (2,312,369)   (3,372,307)   (1,155,406)
Income tax expenses   (244,741)   (17,635)   (250,245)
                
Net loss from continuing operations   (2,557,110)   (3,389,942)   (1,405,651)
                
Net income (loss) from discontinued operations, net of income tax   26,846,018    (90,736,365)   (53,377,622)
                
Net income (loss)  $24,288,908   $(94,126,307)  $(54,783,273)

 

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Year ended December 31, 2019 compared to year ended December 31, 2018

 

Revenues

 

Our revenues from services increased by $567,652 or 793%, from $71,568 for the year ended December 31, 2018, to $639,220 for the year ended December 31, 2019. The following table sets forth a breakdown of our revenue by services offered for the years ended December 31, 2019 and 2018:

 

   For the years ended
December 31,
   Variance 
   2019   2018   Amount   % 
Management and assessment services  $135,938   $71,568   $64,370    90%
Consulting services relating to debt collection   493,779    -    493,779    100%
Consulting services relating to financial guarantee services   9,503    -    9,503    100%
Revenues from services  $639,220   $71,568   $567,652    793%

 

Management and assessment services

 

We commenced our management and assessment services in December 2018, which primarily involved factoring services, asset management services and financing services.

 

Revenues from management and assessment services increased by $64,370, or 90% from $71,568 for the year ended December 31, 2018 to $135,938 for the year ended December 31, 2019. The primary reason of the increase was as we launched the services in December 31, 2018 and we recognized management and assessment services using a time-based measure of progress, a majority of revenues from the contracts obtained in 2018 were recognized in the year ended December 31, 2019.

 

Consulting services relating to debt collection

 

The Company provides consulting services relating to debt collection with certain factoring companies, through Lixin Cayman and its subsidiaries which were acquired in late December 2019. The debt collection services involved two performance obligations, and the service fee for each performance obligation are fixed and reflected the stand-alone selling price. In addition, a collected-amount based incentive is rewarded to the Company upon collection of outstanding debt.

 

1)assisting the customers to get court judgements on outstanding debt, and the Company recognized revenues over the period towards the completion of the performance obligation; and
2)assisting the customers to receive repayment on outstanding debt, and the Company recognized revenues upon completion of the performance obligation.

 

For the period from acquisition of Lixin Cayman and its subsidiaries on December 20, 2019 to December 31, 2019, the Company assisted four customers to get court judgments on outstanding debts and recognized revenue of $176,984 through Lixin Cayman and its subsidiaries.

 

In addition, Zeshi was involved in consulting service relating to debt collection with one factoring company. The debt collection service involved one performance obligation which is to assist the customer to receive repayment on outstanding debt, and the Company recognized revenues upon completion of the performance obligation. For the year ended December 31, 2019, Zeshi assisted the customer to collect the debt and recognized revenue of $316,795.

 

Because we were just engaged in consulting services relating to debt collection in December 2019, we did not generate any revenues for the year ended December 31, 2018.

 

Consulting services relating to financial guarantee services

 

The Company provided financial consulting services to financial guarantee customers. Pursuant to the contracts with customers, the Company facilitated financial guarantee services between customers and financial guarantors, and charged referral fees at a fixed amount. The performance obligation is completed and control of the service is transferred at the inception of financial guarantee period. Transaction prices are generally paid upon successful facilitation. The Company recognizes the revenue at the inception of guarantee period.

 

From the acquisition date from December 20, 2019 to December 31, 2019, the Company generated minimal revenue from consulting services relating to financial guarantee services.

 

We were just engaged in consulting services relating to financial guarantee services in December 2019 and we did not generate any revenues for the year ended December 31, 2018.

 

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Interest and fees income

 

Interest and fee income consisted of interest and fee income generated from factoring business and from direct loans. For the year ended December 31, 2019, the interest and fee income was $2,882,828, representing an increase of $2,832,146, or 5,588% from $50,682 for the year ended December 31, 2018. The increase was mainly attributable to an increase of $2,747,103 in interest and fee income generated from factoring business, as we launched our factoring business in December 2018.

 

Interest expenses and fees on secured loans 

 

Interest expenses and fees on secured loans increased by $2,193,697, or 8,734% from $25,118 for the year ended December 31, 2018 to $2,218,815 for the year ended December 31, 2019.

 

The significant increase of interest expenses and fees on secured loans was primarily driven by borrowings of secured loans of $67,258,135 in December 2018 and borrowings of $43,422,881 during the year ended December 31, 2019, leading to a one-month interest expense was recognized for the year ended December 31, 2018, while remaining interest expenses recognized for the year ended December 31, 2019.

 

All secured loans were repaid during the year ended December 31, 2019.

 

Provision for loan losses

 

The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in “provision for loan losses” in the condensed consolidated statements of operations and comprehensive loss.

 

Provision for loan losses increased by $68,385, or 3%, from $2,176,216 for the year ended December 31, 2018 to $2,244,601 for the year ended December 31, 2019. The increase was caused by additional “doubtful” loans rolled to “loss” loans during the year ended December 31, 2019 as compared to that for the same period ended December 31, 2018. The provision for loan losses is maintained at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet date. The provision is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual loans and actual loss, delinquency, and/or risk rating record within the portfolio.

 

Operating expenses

 

Operating expense mainly consisted of salary and employee surcharges, business tax and surcharges, office expenses, travel costs, entertainment expenses, depreciation of equipment, investment impairment, professional fees and office supplies. Non-interest expenses increased by $73,487, or 6% from $1,293,223 for the year ended December 31, 2018 to $1,366,710 for the year ended December 31, 2019.  The increase was primarily attributable by a decrease of $217,483 in changes of fair value of warrant liabilities because the Company was delisted from NASDAQ in September 2019, offset against a decrease of $59,803 in salaries and employee surcharges due to resignation of employees as a result of downsized direct loan business, and a decrease of $83,831 in other operating expenses due to the decrease in expenses related to direct loan business.

 

Income tax expenses

 

We had income tax expenses of $244,741 for the year ended December 31, 2019, as compared with $17,635 for the year ended December 31, 2018.

 

Current income tax expenses increased by $169,432 from $17,635 for the year ended December 31, 2018 to $187,067 for the year ended December 31, 2019. The increase was primarily caused by increase of $168,127 in current income tax expenses incurred by Zeshi and Zhiyuan as a result of increasing taxable income generated during the year ended December 31, 2019.

 

Deferred income tax expenses changed from deferred tax expenses of $nil for the year ended December 31, 2018 to deferred tax expenses of $57,674 for the ended December 31, 2019. The change was mainly caused by the deferred tax expenses of $64,468 from net operating losses generated by Lixin, against deferred tax benefits of $6,794 arising from recognition of intangible assets from the Lixin Acquisition.

 

Net income (loss) from discontinued operations, net of income tax

 

During the year ended December 31, 2019, the net income was comprised of a net loss of $27,904,790 from discontinued operations of Feng Hui and a gain of $54,750,808 from disposal of the discontinued operations of Feng Hui. 

 

During the year ended December 31, 2018, the net loss of $90,736,365 mainly represented a net loss of $90,736,365 from discontinued operations of Feng Hui. 

 

For details of disposition of Feng Hui, please refer to Note 5 to the consolidated financial statements in the Form 20-F.

 

Net income

 

As a result of the foregoing, we had a net income of $24,288,908 for the year ended December 31, 2019, as compared to a net loss of $94,126,307 for the year ended December 31, 2018. 

 

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Year ended December 31, 2018 compared to year ended December 31, 2017

 

Revenues

 

We commenced our management and assessment services on direct loans in December 2018, which primarily involved maintenance services on direct loans over the loan period. The service fee is recognized over loan period. For the year ended December 31, 2018, we obtained contracts with four customers and we generated revenues from management and assessment services on direct loans of $71,568.

 

Because we just launched management and assessment services in December 2018 and we did not generate any revenues for the year ended December 31, 2017.

 

Interest and fees

 

Interest and fees decreased by $1,578,380, or 97% from $1,629,062 for the year ended December 31, 2017 to $50,682 for the year ended December 31, 2018.

 

The sharp decrease of interest and fees on direct loans was attributable to increasing past due loan receivable and interest receivable during the year ended December 31, 2018 which resulted in reversal of interest income.

  

Provision for loan losses

 

The provision for loan losses was determined by comparing the beginning and ending balance of allowance for loan losses for business and personal loans. If the ending balance of the allowance of loan losses after any charge offs (net of recoveries) is less than the beginning balance, it will be recorded as a “reversal”; if it is larger, it will be recorded as a “provision” in the allowance for loan loss. The netting amount of “reversal” and “provision” is presented in “provision for loan losses” in the condensed consolidated statements of operations and comprehensive loss.

 

Provision for loan losses increased by $1,611,029, or 285%, from $565,187 for the year ended December 31, 2017 to $2,176,216 for the year ended December 31, 2018. The increase was caused by additional “doubtful” loans rolled to “loss” loans during the year ended December 31, 2018 as compared to that for the same period ended December 31, 2017. The provision for loan losses is maintained at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet date. The provision is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual loans and actual loss, delinquency, and/or risk rating record within the portfolio.

 

Operating expenses

 

Operating expense mainly consisted of salary and employee surcharges, business tax and surcharges, office expenses, travel costs, entertainment expenses, depreciation of equipment, investment impairment, professional fees and office supplies. Non-interest expenses decreased by $926,058, or 42% from $2,219,281 for the year ended December 31, 2017 to $1,293,223 for the year ended December 31, 2018.  The decrease was primarily attributable a decrease of $748,346 in changes of fair value of warrant liabilities as a result of continuing decrease of the Company’s share price from private placement in July 2018 to December 31, 2018, and a decrease of $222,649 in non-operating expenses as a result of slowdown of direct loan business in the year ended December 31, 2018.

 

Income tax expenses

 

We had income tax expenses of $17,635 for the year ended December 31, 2018, as compared with $250,245 for the year ended December 31, 2017, which was in line with a change from a net income for the year ended December 31, 2017 to a net loss for the same period ended December 31, 2018.

 

Net loss from discontinued operations, net of income tax

 

During the year ended December 31, 2018 and 2017, the net loss from represented a net loss of $90,736,365 and $53,377,622 from discontinued operations of Feng Hui. 

 

For details of disposition of Feng Hui, please refer to Note 5 to the consolidated financial statements in the Form 20-F.

 

Net loss

 

As a result of the foregoing, we had a net loss of $94,126,307 for the year ended December 31, 2018, as compared with a net loss of $54,783,273 for the year ended December 31, 2017.

 

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Taxation

 

Cayman Islands

 

Under the current tax laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.

 

British Virgin Islands

 

Under the current tax laws of BVI, the Company’s subsidiary incorporated in the BVI is not subject to tax on income or capital gains.

 

Hong Kong

 

Roan HK and Lixin HK are incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate for the first HKD$2 million of assessable profits is 8.25% and assessable profits above HKD$2 million will continue to be subject to the rate of 16.5% for corporations in Hong Kong, effective from the year of assessment 2018/2019. Before that, the applicable tax rate was 16.5% for corporations in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax laws, Roan HK and Lixin HK are exempted from income tax on its foreign-derived income and there are no withholding taxed in Hong Kong on remittance of dividends. 

 

PRC

 

PRC subsidiaries are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the relevant PRC income tax laws. The EIT rate for companies operating in the PRC is 25%.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. The use of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places the most significant demands on the judgment of our management.

 

Basis of presentation

 

The accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Principal of consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly and majority owned subsidiaries, and consolidated VIE and its subsidiaries for which the Company is the primary beneficiary.

 

All transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation.

 

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Revenue recognition

 

The Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018, using the modified retrospective approach. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of ASC 605 and therefore there was no material changes.

 

Pursuant to ASC606-10-15-2, the interest income generated from direct loan business, factoring business and financial guarantee income generated by financial guarantee business are scoped out of ASC606.

 

Management and assessment services on loans

 

Service fees for management and assessment services are paid by customers during the service period. The Company recognizes the revenue over the service period using a time-based measure of progress.

 

Consulting services for financial guarantee customers

 

The Company provided financial consulting services to financial guarantee customers. Pursuant to the contracts with customers, the Company facilitated financial guarantee services between customers and financial guarantors, and charged referral fees at a fixed amount. The performance obligations are completed and control of the service is transferred upon successful facilitation of guarantee service, which is at the inception of financial guarantee period. Transaction prices are generally paid upon successful facilitation. The Company recognizes the revenue at the inception of guarantee period. 

 

Consulting services relating to debt collection services  

 

For the year ended December 31, 2019, the Company entered into agreements with certain factoring companies to provide consulting services relating to debt collection services for these customers. The management consulting services either involved two performance obligations which are to assist the customers to obtain court judgments on outstanding debt and to assist the customers to receive repayment on outstanding debt, or one performance obligation which is to assist the customers to receive repayment on outstanding debt. Pursuant to the contracts with customers, the service fees are fixed and payable upon the completion of each performance obligation. In addition, a collection amount based incentive is agreed in the agreements. As of December 31, 2019, the Company did not include incentive in the transaction price because the Company had limited information on the collection amount of outstanding debts. The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the services being provided to the customer.

 

1)For the Company’s assistance with customers to obtain court judgments on outstanding debt, the customers receive and consumes benefits from the services provided by the Company, and thus the Company recognized revenues over period. The Company measures progress towards completion of the performance obligation by using input method based on the staff cost incurred.

 

2)For the Company’s assistance with customers to receive repayment on outstanding debt, the Company recognized revenues upon collection of outstanding debts.

 

Income taxes

 

The Company accounts for income taxes in accordance with the U.S. GAAP for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

 

The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

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Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis. Deferred tax assets are recognized to the extent that it is probable that taxable income to be utilized with prior net operating loss carried forwards. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. As of December 31, 2019, income tax returns for the tax years ended December 31, 2014 through December 31, 2018 remain open for statutory examination.

 

Recent Accounting Pronouncements

 

A list of recently issued accounting pronouncements that are relevant to us is included in Note 3(kk) of our audited consolidated financial statements included elsewhere in this annual report.

 

Inflation

 

To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2017, 2018 and 2019 were increases of 4.5%, 1.9% and 1.8%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future.

 

B. Liquidity and capital resources

 

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. To date, we have financed our operations primarily through cash flows from operations, bank borrowings and equity financing.

 

For the year ended December 31, 2019, the Company incurred net loss from continuing operations of approximately $2.56 million, and cash outflows of approximately $1.07 million from operating activities from continuing operations. The continuing net loss from continuing operations and cash outflow from operating activities caused the management’s consideration of the Company’s liquidity and its ability to continue as a going concern.

 

In assessing the Company’s liquidity, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.

 

As of December 31, 2019, the Company had cash balance of $6,911,592 and a positive working capital of $39,449,021. In addition to the cash balance, the working capital was mainly comprised of restricted cash of $15,233,933, short-term investments in financial products of $8,610,796 and loan receivable due from third parties of $5,952,223. The balances of these assets are expected to be repaid on maturity dates and will also be used for working capital.

 

In addition, the management estimated the operating expenses obligation for the next twelve months after issuance of the consolidated financial statements to be $1.85 million, which will be covered by the cash flows of $7.79 million generated from financial guarantee services and financial consulting services. The Company’s shareholder also committed to provide continuous financial support to the Company whenever necessary.

 

The Company plans to fund its operations through revenue generated from its revenues of management and assessment services, financial guarantee services and financial consulting services, private placements from investors, and financial support commitments from the Company’s shareholders.

 

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Based on above operating plan, the management believes that the Company will continue as a going concern in the following 12 months.

 

The Company’s ability to support its operating and capital expenditure commitments will depend on its future performance, which will be subject in part to general economic, competitive and other factors beyond its control. Recent COVID-19 outbreak and spread is causing lockdowns, quarantines, travel restrictions, and closures of businesses and schools. Due to COVID-19 outbreak, the Company’s facilities remained closed or had limited business operations after the Chinese New Year holiday until early March 2020. In addition, COVID-19 has caused limited access to the Company’s facilities and limited support from workforce employed in the Company’s operations, and as a result, the Company may experience delay of outstanding receivables from customers and limited access to cash to expand its operations. Although the Company has taken all possible measures to overcome the adverse impact derived from the COVID-19 outbreak and have resumed its normal business activities in early March 2020, it is expected that the Company will generate a lower amount of revenue and profit during the period from February to April 2020. The extent to which the coronavirus impacts the Company’s operation results for year 2020 will depend on certain future developments, including the duration and spread of the outbreak, emerging information concerning the severity of the coronavirus and the actions taken by governments and private businesses to attempt to contain the coronavirus, all of which is uncertain at this point.

 

Current foreign exchange and other regulations in the PRC may restrict our PRC entities in their ability to transfer their net assets to the Company and its subsidiaries in Cayman Islands, and Hong Kong. However, these restrictions have no impact on the ability of these PRC entities to transfer funds to us as we have no present plans to declare dividend which we plan to retain our retained earnings to continue to grow our business. In addition, these restrictions have no impact on the ability for us to meet our cash obligations as all of our current cash obligations are due within the PRC.

 

A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade-and service-related foreign exchange transactions.

 

We expect that a substantial majority of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiaries are allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

 

Cash Flows

 

The following table sets forth a summary of our cash flows for the years ended December 31, 2019, 2018 and 2017.

 

   For the Years Ended
December 31,
 
   2019   2018   2017 
Net Cash (Used in) Provided by Operating Activities  $(1,101,143)  $(2,199,042)  $9,897,820 
Net Cash Provided by (Used in) Investing Activities   85,965,056    (66,592,103)   (15,581,951)
Net Cash (Used in) Provided by Financing Activities   (64,138,838)   68,917,541    2,544,458 
Effect of exchange rate changes on cash and cash equivalents   119,326    (5,150)   126,361 
Net increase (decrease) in cash and cash equivalents, and restricted cash in banks  $20,844,401   $121,246   $(3,013,312)

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Operating activities

 

Years Ended December 31, 2019 and 2018

 

Net cash used in operating activities was $1,101,143 for the year ended December 31, 2019, a decrease of $1,097,899 from net cash used in operating activities of $2,199,042 for the year ended December 31, 2018.

 

For the year ended December 31, 2019, we generated a net income of $26,846,018 from discontinued operation and had net cash used in discontinued operation of $26,564, a change of $117,582,383 and $607,750 from net loss of $90,736,365 and net cash used in discontinued operation of $634,314.

 

We had net cash used in operating activities from continuing operations of $1,074,579 for the year ended December 31, 2019, a decrease of $490,149 from $1,564,728 for the year ended December 31, 2018. We incurred a net loss from continuing operations of $2,557,110 for the year ended December 31, 2019, a decrease of $832,832 from $3,389,942 for the year ended December 31, 2018. In addition to the change in profitability, the decrease in net cash used in operating activities was the result of several factors, including:

 

  An increase of $206,442 in accounts receivable for the year ended December 31, 2019, as compared with an increase of $nil for the same period ended December 31, 2018. The change of accounts receivable arose from Lixin’s business, which was acquired in December 2019;
     
  An increase of $273,589 in tax payable for the year ended December 31, 2019, as compared with an increase of $9,410 for the same period ended December 31, 2018. The changes were mainly caused by the increase of change in tax payable of Lixin which was acquired in December 2019.

 

Years Ended December 31, 2018 and 2017

 

Net cash used in operating activities was $2,199,042 for the year ended December 31, 2018, a change of $12,096,862 from net cash provided by operating activities of $9,897,820 for the year ended December 31, 2018.

 

For the year ended December 31, 2018, we incurred a net loss of $90,736,365 from discontinued operation and had net cash used in discontinued operation of $634,314, a change of $37,358,743 and $11,853,085 from net loss of $53,377,622 and net cash provided by discontinued operation of $11,218,771.

 

We had net cash used in operating activities from continuing operations of $1,564,728 for the year ended December 31, 2018, an increase of $243,777 from $1,320,951 for the year ended December 31, 2017. We incurred a net loss from continuing operations of $3,389,942 for the year ended December 31, 2018, an increase of $1,984,291 from $1,405,651 for the year ended December 31, 2018. In addition to the change in profitability, the change in net cash was caused by 1) adjustment of provision of loan losses of $1,611,029 as a result of increasing long-aged loan receivables; 2) adjustment of changes in fair value of warrants of $748,346 which arose from private placements in the year 2018; and 3) An increase of $9,410 in tax payable for the same period ended December 31, 2018, as compared with a decrease of tax payable of $579,719, because the Company prepaid income taxes for the year ended December 31, 207.

 

Investing activities

 

For the year ended December 31, 2019, we had net cash provided by investing activities of $85,965,056 which was primarily attributable to collection of borrowings from customers of $107,833,488 and acquisition of cash, cash equivalents and restricted cash of $21,442,122 through acquisition of Lixin, against disbursement of loans to customers of $43,422,881.

 

For the year ended December 31, 2018, we had net cash used in investing activities of $66,592,103 which was attributable to disbursement of loans to customers of $67,424,391, against collection of borrowings from customers of $1,133,564.

 

For the year ended December 31, 2017, we had net cash used in investing activities of $15,581,951 which was attributable to disbursement of loans to customers of $7,640,381, against collection of borrowings from customers of $4,838,119, and cash used in discontinued operations of $12,779,689.

 

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Financing activities

 

For the year ended December 31, 2019, we had net cash used in financing activities of $64,138,838 which was primarily attributable to borrowings from secured loans of $43,422,281 and borrowings from a related party of $279,020, against repayments of borrowings of secured loans of $107,833,488.

 

For the year ended December 31, 2018, we had net cash provided by financing activities of $68,917,541 which was primarily attributable to borrowings from secured loans of $67,258,135 and proceeds raised in a private placement of $1,690,391.

 

For the year ended December 31, 2017, we had net cash provided by financing activities of $2,544,458 which was primarily attributable to net cash of $4,068,058 raised through short-term bank borrowings by discontinued operations, against repayments of dividends of $873,600 and repayments of convertible promissory note of $650,000.

 

Holding Company Structure

 

Roan Holdings Group Co., Ltd. (“Roan”) is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries. As a result, Roan’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of their registered capital. In addition, our wholly foreign-owned subsidiaries in China may allocate a portion of their after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

 

C. Research and development, Patents and License, etc.

 

As a financial company, our business does not rely on research and development. Accordingly, we have not incurred research and development expenses for the years ended December 31, 2019 and 2018.

 

For our intellectual property and license, please see “Item 4. Information on the Company-B. Business Overview.”

 

D. Trend information

 

Other than as disclosed elsewhere in this Form 20-F, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

E. Off-balance Sheet Arrangements

 

We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. 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 that engages in leasing, hedging or research and development services with us. 

 

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F. Tabular Disclosure of Contractual Obligations

 

Commitments and Contingencies

 

The Company is involved in various legal actions arising from providing financial guarantee services to defaulted guarantees by Lixin Cayman and its subsidiaries. As of December 31, 2019, Lixin Cayman and its subsidiaries initiated an accumulated 18 legal proceedings against financial guarantee customers to collect delinquent balances of payment on behalf of these guarantee customers, with an aggregated claim of $7.92 million. All these legal proceedings have been adjudicated by the PRC courts in favour of the Company. When the Company closed the Lixin Acquisition on December 20, 2019, 17 legal proceedings were concluded after the enforcement, and one case with a claim of approximately $2.95 million (including principal of $2.85 million and interest of $0.1 million) was adjudicated and in the process of enforcement.

 

As of December 31, 2019, the Company provided financial guarantee of $35,103,876 to financial guarantee customers by Lixin Cayman and its subsidiaries, and had a balance of $4,283,608 due from 10 financial guarantee customers, representing payments on behalf of these financial guarantee customers when they defaulted in repayments to financial institutions. The balance of $4,283,608 consisted $2,845,248 due from one financial guarantee customer, against whom the legal case is still in progress of enforcement, and $1,438,360 due from nine financial guarantee customers, against whom the legal cases were concluded. The Company assessed the payment abilities of these customers, and expected it is remote to collect the balance. As of December 31, 2019, the Company fully wrote off the $4,283,608 on the balance of payment on behalf of financial guarantee customers.

 

From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.

 

Contractual obligations

 

As of December 31, 2019, our contractual obligation is as follows:

 

       Less than   1-2   2-3     
Contractual Obligations  Total   1 year   years   Years   Thereafter 
Future lease payments (1)   399,216   $107,397   $112,767   $118,405   $60,647 
Total  $399,216   $107,397   $112,767   $118,405   $60,647 

 

(1) We lease offices which are classified as operating leases in accordance with ASC Topic 842. As of December 31, 2019, our future lease payments totaled $399,216.

 

G. Safe Harbor

 

This annual report on Form 20-F contains forward-looking statements. These statements are made under the “safe harbor” provisions of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “may,” “intend,” “is currently reviewing,” “it is possible,” “subject to” and similar statements. Among other things, the sections titled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects” in this annual report on Form 20-F, as well as our strategic and operational plans, contain forward-looking statements. We may also make written or oral forward-looking statements in our filings with the SEC, in our annual report to shareholders, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements and are subject to change, and such change may be material and may have a material and adverse effect on our financial condition and results of operations for one or more prior periods. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained, either expressly or impliedly, in any of the forward-looking statements in this annual report on Form 20-F. All information provided in this annual report on Form 20-F and in the exhibits is as of the date of this annual report on Form 20-F, and we do not undertake any obligation to update any such information, except as required under applicable law.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and senior management

 

Below are the names of and certain information regarding the Company’s current executive officers and directors.

 

Name    Age   Position
Zhigang Liu   41   Chief Executive Officer and Chairman of Board
Lihua Shen   47   Chief Financial Officer

Jingping Li

  54  

Former Chief Financial Officer (resigned in January 2020) and Former Director (ceased to serve on the Board in March 2020)

Shuangping Feng   57   Director
Jianfeng Yin   50   Independent Director
John Chen   48   Independent Director
Yiguo Xu   48   Independent Director

 

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The principal occupation and business experience during the past five years for our executive officers and directors is as follows:

 

Mr. Zhigang Liu was appointed as the Company’s Chairman and Chief Executive Officer, effective March 18, 2020 and December 1, 2019, respectively. Before that he was a Vice President and Director of the Company since March 26, 2019. Mr. Liu has held numerous positions in sales and marketing with various companies in the PRC. Before joining the Company, he was a vice precedent (sales) of Wei Zhi Information Technology (Shanghai) Co., Ltd., a company in the computer software industry from 2018. He was responsible for the management of sales in the PRC. He was a vice president (sales) of Shanghai Ai Hui Ke Information Technology Co., Ltd., a company in the internet industry, from January 2017 to January 2018, responsible for sales strategy and management. He was a vice president (marketing) of Beijing Yuan Niao Technology Co., Ltd., a company in the internet industry, from December 2014 to January 2017. He earned his bachelor’s degree in computer science and technology from Beijing University of Technology in 1999 and his master’s degree in business management from Xiamen University in 2018.

 

Ms. Lihua Shen was appointed as the Company’s Chief Financial Officer, effective January 17, 2020. She holds over 29 years of accounting experience and has distinguished herself via her thorough knowledge of corporate finance and internal financial controls. Ms. Shen has held a number of senior financial positions with corporations in China, from director of finance to chief accountant. Since 2017 and prior to joining Roan, Ms. Shen served as the director of finance for Lixin (Hangzhou) Asset Management Co., Ltd. From 2002 to 2017, Ms. Shen served as a department manager at Da Hua CPAs (Special General Partnership) Zhejiang Wanbang Branch. From 1998 to 2000, Ms. Shen served as the chief accountant for Wanxiang Qianchao Co., Ltd., before becoming an audit manager at Wanxiang Group. Ms. Shen holds the CICPA designation and is a graduate of Zhejiang University of Finance & Economics.

 

Ms. Jingping Li had served as our former Chief Financial Officer until January 16, 2020 and as a member of the Board of Directors until March 2020. Mr. Li was appointed General Manager of Feng Hui in 2009. From 2000-2009, Ms. Li was Founder and Chairman of Jichen Financial Consultancy Co., Ltd., a financial planning and advisory service provider for business organizations in Xinjiang, China. Ms. Li has also worked for the Urumqi Municipal Mining Bureau.

 

Ms. Shuangping Feng was appointed as an executive director of the Company on March 18, 2020. Ms. Feng has been the representative and executive director of Zhiyuan and Ding Tai since December 2018. Ms. Feng has more than 20 years of experience in pharmaceutical sales. In the most recent five years, she has been providing consulting services to pharmacy companies on promoting pharmaceutical sales in Northwestern China. She received her bachelor degree from East China Petroleum Institute (now called China University of Petroleum (Huadong)) in 1986.

 

Dr. Jianfeng Yin was appointed as an independent director of the Company on March 18, 2020 and serves as the Chairman of our Corporate Governance and Nominating Committee. Dr. Yin has been a professor and doctoral advisor at University of International Business and Economics, a national university in Beijing, since August 2016. He is also a deputy director at National Institution for Finance & Development and the leading economist at China Zheshang Bank Co., Ltd. He was the deputy chief of the Institute of Finance of Chinese Academy of Social Sciences (“CASS”) from July 2010 to July 2016. He was the director and assistant to chief at the research office of the Institute of Finance of CASS from July 2003 to July 2010. Dr. Yin was a visiting scholar at Yale University from July 2008 to Jun 2009. He received his bachelor degree from the Department of Electrical Engineering of Anhui College of Mechanical and Electrical Engineering in July 1991, his master degree from the School of Economics of Anhui University in July 2000, and his doctoral degree from the gradual school of CASS in July 2003.

 

Mr. John Chen is an independent director and serves as Chairman of the Company’s Audit Committee. Mr. Chen is California Certified Public Accountant. Mr. Chen has been the Chief Financial Officer of General Steel Holding Inc. (OTCBB: GSIH) since May 2004. From 1997 to 2003, Mr. Chen was a Senior Accountant at Moore Stephens Frazer and Torbet. Mr. Chen received his Bachelor of Science degree in Business Administration, Accounting from California State Polytechnic University. 

 

Mr. Yiguo Xu is an independent director appointed on March 26, 2019, and serves as Chairman of our Compensation Committee. Mr. Xu is the Secretary General of the National Institution for Finance and Development, the Dean of the Finance Faculty of the Graduate School of Chinese Academy of Social Sciences, the Deputy Director of the Finance Policy Research Centre of the Chinese Academy of Social Sciences and the Secretary General of Beijing CBD International Finance Research Academy. He writes extensively on finance policies and conducts researches in various topics. He earned his master’s degree from the School of Finance of Renmin University of China and his PhD in finance from the Graduate School of Chinese Academy of Social Sciences.

 

Arrangements Concerning Election of Directors; Family Relationships

 

Our current board of directors consists of five directors. We are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships among our executive officers and directors.

 

B. Compensation

 

The aggregate compensation paid and share-based compensation and other payments expensed by us to our directors and executive officers with respect to the year ended December 31, 2019 was $149,992. This amount does not include business travel, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in our industry. We do not currently have a stock option or other equity incentive plan. We may adopt one or more such programs in the future. We do not have any written agreements with any director providing for benefits upon the termination of such director’s relationship with us.

 

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C. Board Practices

 

Board of Directors

 

Our Board of Directors consists of five (5) members. Previously we had a practice of appointing Directors to staggered three (3) year terms. On March 17, 2020, with the shareholders’ consent, we changed all the directors’ terms to one year. Each director holds office for one year, or until his or her earlier death, resignation or removal.

 

Director Independence

 

Even if we elect to be a controlled company, a majority of our Board is independent. An “independent director” is defined under the Nasdaq rules generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our Board has determined that Messrs. Si Shen (term ended on March 18, 2020), John Chen, Yiguo Xu and Jianfeng Yin (newly elected on March 18, 2020) are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent directors are present.

 

Leadership Structure and Risk Oversight

 

The Board does not have a lead independent director. As of December 31, 2019, Ms. Jingping Li was our Chairwoman. Mr. Liu Zhigang was co-chair of the Board and was authorized to execute documents on behalf of the Company on December 15, 2019. On March 18, 2020, Mr. Zhigang Liu was elected as our Chairman.

 

Policy Regarding Board Attendance

 

Our directors are expected to attend Board meetings as frequently as necessary to properly discharge their responsibilities and to spend the time needed to prepare for each meeting. Our directors are expected to attend annual meetings of shareholders, but we do not have a formal policy requiring them to do so.

 

Committees of the Board of Directors

 

The standing committees of our Board currently consists of an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.

 

Audit Committee

 

We have established an Audit Committee of the board of directors. As of December 31, 2019, Messrs. John Chen, Yiguo Xu, and Si Shen (term ended on March 17, 2020 and Jianfeng Yin replaced on March 18, 2020) served as members of our Audit Committee and they are all independent. Mr. John Chen served as chairman of the Audit Committee.

 

Each member of the Audit Committee is financially literate and our board of directors has determined that Mr. John Chen qualifies as an “Audit Committee financial expert” as defined in applicable SEC rules.

 

We have adopted an Audit Committee charter, which details the responsibilities of the Audit Committee, including:

 

  the appointment, compensation, retention, replacement, and oversight of the work of the independent auditors and any other independent registered public accounting firm engaged by us;

 

  pre-approving all audit and non-audit services to be provided by the independent auditors or any other registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;

 

  reviewing and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued independence;

 

  setting clear hiring policies for employees or former employees of the independent auditors;

 

  setting clear policies for audit partner rotation in compliance with applicable laws and regulations;

 

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  obtaining and reviewing a report, at least annually, from the independent auditors describing (i) the independent auditor’s internal quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within, the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;

 

  reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and

 

  reviewing with management, the independent auditors, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our consolidated financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.

 

Compensation Committee

 

As of December 31, 2019, the members of our Compensation Committee were Messrs. John Chen, Yiguo Xu and Si Shen (term ended on March 17, 2020 and Jianfeng Yin replaced on March 18, 2020). Mr. Yiguo Xu served as Chairman of the Compensation Committee. We have adopted a Compensation Committee charter, which details the principal functions of the Compensation Committee, including:

 

  reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer’s based on such evaluation in executive session at which the Chief Executive Officer is not present;

 

  reviewing and approving the compensation of all of our other executive officers;

 

  reviewing our executive compensation policies and plans;

 

  implementing and administering our incentive compensation equity-based remuneration plans;

 

  assisting management in complying with our proxy statement and annual report disclosure requirements;

 

  approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees;

 

  producing a report on executive compensation to be included in our annual proxy statement; and

 

  reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.

 

The charter also provides that the Compensation Committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.

 

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Corporate Governance and Nominating Committee

 

Our Corporate Governance and Nominating Committee will be responsible for, among other matters:

 

  identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors;

 

  overseeing the organization of our board of directors to discharge the board’s duties and responsibilities properly and efficiently;

 

  identifying best practices and recommending corporate governance principles; and

 

  developing and recommending to our board of directors a set of corporate governance guidelines and principles applicable to us.

 

As of December 31, 2019, our Corporate Governance and Nominating Committee consisted of Messrs. John Chen, Yiguo Xu and Si Shen, with Mr. Si Shen serving as the Chairman of the Corporate Governance and Nominating Committee. On March 17, 2020, Jianfeng Yin was elected as Independent Director and appointed as the Chairman of the Corporate Governance and Nominating Committee.

 

D. Employees

 

As of December 31, 2019, the Company had 42 full time employees. Among them, 2 employees are employed by the Ding Xin, 2 employees are employed by Zhiyuan, 3 employees are employed by Zeshi, 35 employees are employed by Zehjiang Jingyuxin and Zhejiang Lixin. They have executed employment contracts with its employees in accordance with PRC Labor Law and Labor Contract Law. There are no collective bargaining contracts covering any of its employees. The Company believes its relationship with its employees is satisfactory.

 

We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. For the years ended December 31, 2019, 2018 and 2017, we contributed approximately $31,012, $33,999, and $88,519, respectively, to the employee benefit plans. The effect on our liquidity by the payments for these contributions is immaterial. We believe that we are in material compliance with the relevant PRC employment laws.

 

E. Share Ownership

 

For information concerning the beneficial ownership of our ordinary shares by our executive officers and directors, see the table in Item 7A. “Major Shareholders and Related Party Transactions—Major shareholders.”  

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major shareholders

 

The following table sets forth information relating to the beneficial ownership of our Ordinary Shares as of June 26, 2020, by: 

 

  Each of our directors and named executive officers;
     
  All of our directors and executive officers as a group;
     
  each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding ordinary shares;

 

The number of ordinary shares beneficially owned by each entity, person, director or executive officer is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any ordinary shares over which the individual has sole or shared voting power or investment power as well as any ordinary shares that the individual has the right to acquire within 60 days of June 26, 2020 through the exercise of any stock options, warrants or other rights. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares held by that person.

 

Ordinary shares that a person has the right to acquire within 60 days of June 26, 2020 are deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. Unless otherwise indicated in the footnotes to the table, the information presented in this table is based on based on 25,287,851 outstanding ordinary shares on June 26, 2020.

 

Named Executive Officers and Directors  Amount of
Beneficial
Ownership(1)
   Percentage
Ownership
   Percentage
Voting
Power(2)
 
Directors and Named Executive Officers:            
Zhigang Liu, Chief Executive Officer and Chairman(3)   1,113,000    4.40%   4.28%
Lihua Shen, Chief Financial Officer   -    -    - 
Jingping Li, Former Chief Financial Officer and Former Director (resigned from the CFO positon in January 2020)(4)   *    *    * 
Shuangping Feng, Director(5)   766,410    3.03%   2.95%
Yiguo Xu, Director   -    -    - 
Jianfeng Yin, Director   -    -    - 
John Chen, Director   -    -    - 
All directors and executive officers as a group (7 persons)   1,879,410    7.43%   7.23%
5% Beneficial Owners:               
Ruiheng Global Limited(6)   6,261,055    24.76%   24.08%
Qian Li (7)   6,157,881    24.35%   23.68%
Yuan Shen(8)   3,506,732    13.87%   13.49%
Yangwei Global Limited(9)   3,483,312    13.77%   13.40%
Jiyi Global Investments Limited(10)   2,034,501    8.05%   1.32%
Zhan Zhao Limited(11)   1,287,830    5.09%   4.95%

 

*Less than 1%.

  

(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the ordinary shares. All shares represent only ordinary shares held by shareholders as no options are issued or outstanding.
   
(2) Ordinary Shares have one vote per share, and Class A Convertible Preferred Shares have one vote per share.
   
(3)

Consists of 60,667 Ordinary Shares held by Yangwei Global Limited in which Mr. Liu owns a 1.74% interest, 338,800 Ordinary Shares held by Jiyi Global Investments Limited in which Mr. Liu owns a 16.653% interest, 105,000 Ordinary Shares held by Ruiheng Global Limited in which Mr. Liu owns a 1.677% interest, 265,533 Ordinary Shares held by Zhan Zhao Limited in which Mr. Liu owns a 20.619% interest, and 343,000 Ordinary Shares held by Zhong Yun Holdings Limited in which Mr. Liu owns a 68.125% interest. All of the above shares were acquired in connection with the Business Combinations.

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(4) 

Ms. Jingping Li was previously a member of the Board of Directors and the largest beneficial owner of our Company owning approximately 29.1% of the equity interests in our Company prior to the disposal of substantially all the ordinary shares she owned in 2019. She ceased to serve on the Board of Directors in March 2020.

   

(5)

Consists of 766,410 ordinary shares directly held by Qixiang Global Limited, a company in which Mr. Mengshi Feng owns 3.03% of the equity interest. Mr. Mengshi Feng also owns 500,000 Class A preferred shares. Mr. Mengshi Feng is the son of Shuangping Feng who may be deemed to beneficially own the 766,410 ordinary shares held by Qixiang Global Limited and the Class A preferred shares.

   
(6)

The Ordinary Shares held by Ruiheng Global Limited, a BVI company, are beneficially owned by Ms. Yuan Shen, the controlling shareholder, and Mr. Zhisan Yang, Ms. Wen Qi, Ms. Wen Li, Ms. Guixiang Luo, Mr. Quan  Zhou, Ms. Shiping Gao, Ms. Qiangwei  Yang and Mr. Zhigang Liu.

   
(7)

Consists of (i) 20,549 ordinary shares directly held by Qixiang Global Limited, a company in which Qian Li  owns 2.174% interest; (ii) 1,526,903 ordinary shares directly held by Jiyi Global Investment Limited, a company in which Qian Li owns 75.05% interest; (iii) 1,236,907 ordinary shares directly held by Ruiheng Global Limited, a company in which Qian Li owns 19.756% interest; (iv) 3,040,604 ordinary shares directly held by Yangwei Global Limited, a company in which Qian Li owns 87.291% interest; (v) 332,918 ordinary shares directly held by Zhan Zhao Limited, a company in which Qian Li owns 25.851% interest. The above shares are held by Ms. Shiping Gao on behalf of Qian Li through a contractual arrangement and Qian Li may be deemed to be the beneficial owner of such shares.

   
(8) Consists of (i) 936,354 ordinary shares directly held by Changman Limited, a company in which Yuan Shen owns 94.6% interest; (ii) 616,515 ordinary shares directly held by Favour Plus Global Limited, a company in which Yuan Shen owns 60.0% interest; (iii) 676,667 ordinary shares directly held by Xinglin Limited, a company in which Yuan Shen owns 68.1% interest; (iv) 770,000 ordinary shares directly held by Yimao Enterprises Limited, a company in which Yuan Shen owns 68.1% interest; (v) 158,363 ordinary shares directly held by Qixiang Global Limited, a company in which Yuan Shen owns 16.8% interest; (vi) 135,333 ordinary shares directly held by Yangwei Global Limited, a company in which Yuan Shen owns 3.9% interest; and (vii) 213,500 ordinary shares directly held by Zhan Zhao Limited, a company in which Yuan Shen owns 16.6% interest.
   
(9) The Ordinary Shares held by Yangwei Global Limited, a BVI company, are beneficially owned by Ms.  Qian Li, the controlling shareholder, Ms. Zhihong Zhang, Ms. Yunzhu Chi, Ms. Yuan Shen, Ms. Guifang Li, Ms. Shiping Gao, Mr.  Shuai Guo, Mr. Qiang Jin and Mr. Zhigang Liu. Ms. Gao exercises voting and dispositive power over the Ordinary Shares held by such entity.  
   
(10) The Ordinary Shares held by Jiyi Global Investments Limited, a BVI company, are beneficially owned by Ms. Qian Li, the controlling shareholder, and Mr. Cheng Sui, Mr. Jianfeng Zhang, Ms. Yuhua Liu, Ms. Cuiping Liu, Mr. Zhigang Liu, Mr. Wei Liu and Ms. Shiping Gao. Ms. Gao exercises voting and dispositive power over the Ordinary Shares held by such entity.
   
(11) The Ordinary Shares held by Zhan Zhao Limited, a BVI company, are beneficially owned by Ms. Zhihong Zhang, Ms. Yuquan Zhang, Ms. Xiaolan Zhao, Ms. Hong Chen, Mr. Wei Liu, Ms. Yuan Shen, Ms. Shiping Gao and Mr. Zhigang Liu.

 

Change of Control

 

In January 2020, our prior Chief Financial Officer, Ms. Jingping Li, resigned from such position. In March 2020, Ms. Li ceased to serve on the Board of Directors, and an original shareholder, Shuangping Feng, was elected to the Board to replace Ms. Li. As a result of such departures, Ms. Li has ceased to exercise control over our Company. See the change in Ms. Li’s ownership interests in our Company in the note to the Major Shareholders table above. Our current largest shareholders and Board of Directors exercise effective control of our Company as of the date of this filing. Although we have issued an aggregate of 291,795,150 Class B convertible preferred shares in connection with our acquisition of Lixin Cayman and its subsidiaries, such shares have no voting rights. Such Class B convertible shares may be converted into ordinary shares at the holders’ election after December 20, 2021, or the Company could redeem those Class B convertible shares. If the Class B convertible preferred shares are converted into ordinary shares, the holders of such ordinary shares would likely control our Company. Except as described in this report, no arrangements or understandings exist among present or former controlling shareholders with respect to the election of members of our Board and, to our knowledge, no other arrangements exist that might result in a change of control of the Company.

 

B. Related Party Transactions

 

See Note 17 in Item 18 “Financial Statements” included in this Annual Report.

 

C. Interests of Experts and Counsel

 

Not applicable.

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ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information.

 

Financial Statements

 

See Item 18 “Financial Statements” included in this Annual Report.

 

Legal Proceedings

 

We are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

 

Dividend Policy

 

On March 21, 2017, the Company announced a dividend of $0.036 per ordinary share which represents an amount equal to twenty-five percent (25%) of (i) the Company’s consolidated net income for the period beginning October 1, 2016 through December 31, 2016, less (ii) the amount of dividends paid, payable or otherwise accrued as preferred dividends with respect to the Company’s Class A preferred shares for such period. The dividend was paid on April 24, 2017 to holders of record of the Company’s ordinary shares on March 31, 2017. The dividend was paid in ordinary shares. No fractional shares were issued. All dividends were rounded up to the nearest whole number of ordinary shares. No cash payments were made for any fractional shares.

 

On May 26, 2017, the Company announced a dividend of $0.047 per ordinary share which represents an amount equal to twenty-five percent (25%) of (i) the Company’s consolidated net income for the period beginning January 1, 2017 through March 31, 2017, less (ii) the amount of dividends paid, payable or otherwise accrued as preferred dividends with respect to the Company’s Class A preferred shares for such period. The dividend was paid on June 23, 2017 to holders of record of the Company’s ordinary shares on June 5, 2017. The dividend was payable in ordinary shares. No fractional shares were issued. All dividends were rounded up to the nearest whole number of ordinary shares. No cash payments were made for any fractional shares.

 

The Company intends to pay quarterly dividends dependent on its revenues and earnings, if any, capital requirements and general financial conditions, at the discretion of the Board of Directors.

 

B. Significant Changes

 

Except as disclosed elsewhere in this Annual Report, there have been no other significant changes since December 31, 2019, until the date of the filing of this Annual Report.

 

ITEM 9. THE OFFER AND LISTING

 

A. Offer and Listing Details 

 

Our ordinary shares and warrants have been listed on the OTC Pink Open Market (“OTC Market”) since January 8, 2020 under the symbols “RAHGF” and “RONWF,” respectively. Prior to January 8, 2020, our warrants were quoted under the symbol “CLDCF.” Our ordinary shares were listed on the Nasdaq Capital Market (the “Nasdaq Stock Market”) under the symbol “CLDC” before being delisted on September 6, 2019, and had since been quoted on the OTC Market under the symbol “CLDOF” until the symbol was changed to “RAHGF.”

 

The transfer agent for our ordinary shares and warrants is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.

 

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B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

Our ordinary shares and warrants are currently quoted on the OTC Market the symbols “RAHGF” and “RONWF,” respectively.

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

General

 

We are a company incorporated in the British Virgin Islands as a BVI business company (company number 1819503) and our affairs are governed by our charter, the BVI Business Companies Act, 2004, as amended, (the “Companies Act”) and the common law of the British Virgin Islands. We are authorized to issue an unlimited number of both ordinary shares of no par value and preferred shares of no par value.

 

Ordinary Shares

 

As of December 31, 2019, there were 25,287,851 ordinary shares outstanding. Under the Companies Act, the ordinary shares are deemed to be issued when the name of the shareholder is entered in our register of members.

 

At any general meeting on a show of hands every ordinary shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy will have one vote for each share held on all matters to be voted on by shareholders. Voting at any meeting of the ordinary shareholders is by show of hands unless a poll is demanded. A poll may be demanded by shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed resolution and the chairman shall cause a poll to be taken. Pursuant to the amended Memorandum and Articles of Association effective as of January 20, 2020, our shareholders may pass resolutions in writing without a meeting.

 

Our Board of Directors consists of one class of directors. 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 voted for the election of directors can elect all of the directors (provided, that, holders of at least 75% of the shares can remove a director with or without cause).

 

Our shareholders are entitled to receive ratable dividends when, as and if declared by the Board of Directors out of funds legally available therefor.

 

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In the event of a liquidation or winding up of the Company, our shareholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of shares, if any, having preference over the ordinary shares. Our shareholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the ordinary shares, except that we will provide our shareholders with the redemption rights set forth above.

  

Preferred Shares

 

Our charter authorizes the issuance without shareholder approval of an unlimited number of preferred shares divided into five classes, Class A through Class E, each with such designation, rights and preferences as are set out in the memorandum and articles of association or as may be determined by a resolution of our Board of Directors to amend the charter to create such designations, rights and preferences. We have five classes of preferred shares to give us flexibility as to the terms on which each class is issued. Accordingly, starting with five classes of preference shares will allow us to issue shares at different times on different terms. Our Board of Directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, redemption, voting or other rights, which could adversely affect the voting power or other rights of the holders of ordinary shares. These preferred shares could be utilized as a method of discouraging, delaying or preventing a change in control of us.

 

The rights of preferred shareholders may only be amended by a resolution to amend our charter, provided such amendment is also approved by a separate resolution of a majority of the votes of preferred shareholders who being so entitled attend and vote at the class meeting of the relevant preferred class. If our preferred shareholders want us to hold a meeting of preferred shareholders (or of a class of preferred shareholders), they may requisition the directors to hold one upon the written request of preferred shareholders entitled to exercise at least 30 percent of the voting rights in respect of the matter (or class) for which the meeting is requested. Under BVI law, we may not increase the required percentage to call a meeting above 30 percent.

 

As of December 31, 2019, there were 715,000 Class A Convertible Preferred Shares and 291,795,150 Class B Convertible Preferred Shares issued and outstanding.

  

Class A Convertible Preferred Shares

 

On July 6, 2016, in connection with of the First Business Combination, we issued 715,000 shares of Class A Convertible Preferred Shares in a PIPE offering. The total amount raised from issuance of Class A Convertible Preferred Shares was $8,580,000. Pursuant to the terms of the Share Exchange Agreement, immediately prior to the consummation of the Business Combination, the Company consummated a private placement of 715,000 shares of newly created Class A Convertible Preferred Shares. The Class A Convertible Preferred Shares were sold at a purchase price of $12.00 per share and the Class A Convertible Preferred Shares are entitled to a dividend of 8% per annum. Each Class A Convertible Preferred Shares are convertible at any time into one ordinary share at an initial conversion price of $12.00 per share, subject to adjustment; provided, however that the Class A Convertible Preferred Shares shall automatically convert at such time that the average closing price of the ordinary shares is at least $16.00. In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, each holder of a Class A Convertible Preferred Shares shall be entitled to receive a liquidation preference of $12.00 per share, plus an amount equal to accumulated and unpaid dividends on such shares to (but excluding) the date fixed for liquidation, winding-up or dissolution to be paid out of the assets of the Company available for distribution to its members, after satisfaction of liabilities owed to the Company’s creditors and holders of any senior shares and before any payment or distribution is made to holders of any ordinary shares or other junior shares.

 

Each Class A Preferred Share confers upon the Member (unless waived by such Member): (a) the right to one vote at a meeting of the Members of the Company or on any Resolution of Members; (b) the right to be redeemed on the Redemption Date; (c) the right to the dividends on Class A Preferred Shares; (d) The right to the liquidation preference; and (e) the right to convert to Ordinary Shares and the obligation to convert to Ordinary Shares, pursuant to the M&A.  

 

On December 6, 2019, we amended our Memorandum and Articles of Association to (a) create a new class of shares designated as the Class B Preferred Shares, and (b) amend the rights of the existing Class A Preferred Shares, among other things, to allow for the new Class B Preferred Shares to rank senior to the Class A Preferred Shares on a liquidation.

 

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Pursuant to the Amended and Restated Memorandum and Articles of Association (the “Amended M&A”), the Class A Members shall have the right to convert their Class A Preferred Shares, in whole or in part, into Ordinary Shares at a rate of one Ordinary Share for each Class A Preferred Share (the “Early Conversion Rate”), subject to adjustment and satisfaction of the conversion procedures. The Directors shall have the right to convert any or all of the Class A Preferred Shares, in whole or in part, into Ordinary Shares at the Early Conversion Rate, subject to adjustment and satisfaction of the conversion procedures.

 

Upon the occurrence of any reorganization event, the Directors shall have the right: (a) to convert any or all of the Class A Preferred Shares, in whole or in part, into Ordinary Shares at the Early Conversion Rate subject to adjustment; or (b) to repurchase or redeem any or all of the Class A Preferred Shares, in whole or in part, for a cash amount equal to the value of the Class A Preferred Shares originally issued have converted at the election of their holders, being repurchased or redeemed on an as-converted basis.

 

In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, each Class A Member shall be entitled to receive the Liquidation Preference per Class A Preferred Share, plus an amount (the Liquidation Dividend Amount) equal to accumulated and unpaid dividends on such shares to (but excluding) the date fixed for liquidation, winding-up or dissolution to be paid out of the assets of the Company available for distribution to its Members, after satisfaction of liabilities owed to the Company’s creditors and holders of any Senior Shares and before any payment or distribution is made to holders of any Junior Shares, including, without limitation, Ordinary Shares. None of the sale of all or substantially all of the assets or business of the Company and its subsidiaries taken as a whole (other than in connection with the liquidation, winding-up or dissolution of the Company), the merger or consolidation of the Company into or with any other person, the sale of a majority of the outstanding equity interests of the Company, nor other Reorganization Event or other similar transaction that results in a change in control of the Company shall be deemed to be a liquidation, winding-up or dissolution, voluntary or involuntary, of the Company.

 

As of December 31, 2019, dividend of $686,400 was accrued for Class A Preferred Shares and the balance for Class A Preferred Shares was $10,338,927.

 

Class B Convertible Preferred Share

 

On December 20, 2019, in connection with of the Second Business Combination, we issued 291,795,150 Class B convertible preferred shares in the acquisition of Lixin Cayman and its subsidiaries. Pursuant to the Share Purchase Agreement with Lixin Cayman and certain selling shareholders entered into on June 13, 2019, the Company acquired a 65.0177% interest in Lixin Cayman from its selling shareholders in exchange for ordinary shares of the Company to be issued to the selling shareholders for a total consideration of RMB 276.00 million (later adjusted to $31.09 million (RMB 217.88 million). See Note 4 to the Consolidated Financial Statements). On August 23, 2019, the parties entered into a supplementary agreement to amend the payment term of the purchase price. Pursuant to the supplementary agreement, Lixin shareholders will receive non-voting preferred shares that will have the right to convert into common shares at the holders’ election after two years from the closing date of the acquisition. The transaction was closed on December 20, 2019 upon the Company’s issuance of 291,795,150 Class B convertible preferred shares as the consideration to the selling shareholders for the 65.0177% equity interest in Lixin Cayman. The Class B convertible preferred shares are embedded with liquidation preference and dividend preference but with no voting rights. Upon the second anniversary of the closing date, the preferred shares may be convertible to ordinary shares at a conversion price calculated at the average closing price per share for ninety consecutive trading days before conversion date.

 

Pursuant to the Amended M&A, each Class B Preferred Share confers upon the Member (unless waived by such Member): (a) no right to vote at a meeting of the Members of the Company or on any Resolution of Members; (b) no right to receive any dividends declared on any Shares of the Company; (c) the right to be converted on the Class B Conversion Date; and (d) the right to the liquidation preference. The Class B Preferred Shares shall automatically convert into Ordinary Shares of the Company on the Class B Conversion Date at a rate of one Ordinary Share per Class B Preferred Share, provided that the Directors shall be entitled to amend the definition of ‘Class B Conversion Date’ to alter the date on which each Class B Preferred Share is converted and thereby extending or reducing the term after which each Class B Preferred Share is converted. Upon the occurrence of any reorganization event, the Directors shall have the right: (a) to convert any or all of the Class B Preferred Shares, in whole or in part, into Ordinary Shares at a rate of 1 Ordinary Share per Class B Preferred Share; or (b) to repurchase or redeem any or all of the Class B Preferred Shares, in whole or in part, for a cash amount equal to the value of the Class B Preferred Shares being repurchased or redeemed on an as-converted basis.

 

In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, each Class B Member shall be entitled to receive, in priority to the holders of any other class of Shares in the Company, an amount equal to their pro rata share of the Class B Liquidation Preference Amount (calculated by reference to the number of Class B Preferred Shares held by the relevant Class B Member as a percentage of all issued Class B Preferred Shares held by all Class B Members). In the event that the assets of the Company are insufficient to pay in full the Class B Liquidation Preference Amount, the entitlement of each Class B Member shall be reduced ratably. For the liquidation purposes, the Class B Shares shall be considered Senior Shares. After the payment to any Class B Member of their full entitlement to their pro rata share of the Class B Liquidation Preference Amount for each of such Class B Member’s Class B Preferred Shares, such Class B Member as such shall have no right or claim to any of the remaining assets of the Company.

 

As of December 31, 2019, there were 291,795,150 Class B preferred shares issued and outstanding.

 

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Warrants

 

As of December 31, 2019, there are 9,903,401 warrants of the Company outstanding, of which 6,860,063 are designated “public warrants,” 33,134 are designated “private warrants”, 1,387,126 are designated “Sponsor warrants”, 1,000,000 warrants are transferred to employees of the Company from DeTiger, 576,924 warrant are issued to investors of private placement in July 2018 and 46,154 warrants issued to placement agent of the private placement.

 

Each public warrant entitles the registered holder to purchase one half of one ordinary share at a price of $12.00 per full share, subject to adjustment as discussed below, at any time commencing on the completion of the Business Combination. Pursuant to the Warrant Agreement, a warrant holder may exercise its warrants only for a whole number of shares. This means that only an even number of warrants may be exercised at any given time by a warrant holder. However, no public warrants will be exercisable for cash unless we have an effective and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to such ordinary shares. Notwithstanding the foregoing, if a registration statement covering the ordinary shares issuable upon exercise of the public warrants is not effective within 90 days from the Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act. If an exemption from registration is not available, holders will not be able to exercise their warrants on a cashless basis. The warrants will expire on July 6, 2021 at 5:00 p.m., New York City time. 

 

The private warrants and Sponsor warrants are identical to the public warrants except that such warrants will be exercisable for cash (even if a registration statement covering the ordinary shares issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates.

 

We may call the warrants for redemption (excluding the private warrants and Sponsor warrants but including any outstanding warrants issued upon exercise of the purchase option issued to EarlyBird and/or its designees), in whole and not in part, at a price of $0.01 per warrant:

 

  at any time while the warrants are exercisable,

 

  upon not less than 30 days’ prior written notice of redemption to each warrant holder,

 

  if, and only if, the reported last sale price of the ordinary shares equals or exceeds $18.00 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders, and

 

  if, and only if, there is a current registration statement in effect with respect to the ordinary shares underlying such warrants at the time of redemption and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption.

 

The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.

 

The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of our redemption call, the redemption will not cause the share price to drop below the exercise price of the warrants.

 

If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of ordinary shares equal to the quotient obtained by dividing (x) the product of the number of ordinary shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the ordinary shares for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. Whether we will exercise our option to require all holders to exercise their warrants on a “cashless basis” will depend on a variety of factors including the price of our ordinary shares at the time the warrants are called for redemption, our cash needs at such time and concerns regarding dilutive share issuances.

 

The exercise price and number of ordinary shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below their respective exercise prices.

 

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The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of ordinary shares and any voting rights until they exercise their warrants and receive ordinary shares. After the issuance of ordinary shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.

  

Warrant holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 9.8% of the ordinary shares outstanding.

 

No fractional shares will be issued upon exercise of warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up or down to the nearest whole number the number of ordinary shares to be issued to the warrant holder.

 

In connection with the private placement closed on July 10, 2018, the Company issued Series A warrants to investors to purchase a total of 576,924 ordinary shares with a warrant term of four (4) years. The Series A Warrants have an exercise price of $2.60 per share. On January 9, 2019, the Board of the Company approved an downward adjustment of exercise price from $2.6 to $1.18. The Series A Warrants have customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional shares of common stock, options, warrants or other securities that are convertible into common stock at a price lower than $2.60 per share. The anti-dilution adjustment provision is not triggered by certain “exempt issuances” which among other issuances, includes the issuance of shares of common stock, options or other securities to officers, employees, directors, consultants or service providers.

 

In connection with the private placement closed on July 10, 2018, the investors also received Series B warrants with an initial face amount of 200,000 ordinary shares, which are subject to adjustment not in excess of an aggregate of 462,843 ordinary shares (the “Series B Warrants”) for nominal consideration. If on the 30th day after the closing date of the transaction (the “Adjustment Date”), the closing bid price of the Company’s ordinary shares is less than $2.60, the investors shall have the right to exercise the Series B Warrants and the number of ordinary shares to be issued to the investors upon exercise of the Series B Warrants shall be adjusted (upward or downward, as necessary) based on the closing bid price of the Company’s ordinary shares on such date. On August 9, 2018, the closing bid price of the Company’s ordinary shares was $1.29, and thus the investors exercised the Series B Warrant for 390,579 ordinary shares at $391.

 

On April 6, 2018, the Company entered into a letter agreement with FT Global Capital, Inc., as exclusive placement agent (the “Placement Agent”), pursuant to which the Placement Agent has agreed to act as placement agent on a best efforts basis in connection with the above offering. In addition to the cash payments, the Company has also agreed to issue to the Placement Agent a warrant to purchase a number of ordinary shares equal to 6.0% of the aggregate number of ordinary shares sold in this offering, which warrant will have the same term as Series A Warrants, including exercise price, vesting period and anti-dilution terms.

 

Purchase Option

 

EarlyBird (and/or its designees) was issued an option to purchase up to 600,000 units at $11.75 per unit. The option represented the right to purchase up to 660,000 ordinary shares and 600,000 warrants to purchase 300,000 full shares. The purchase option may be exercised for cash or on a cashless basis, at the holder’s option, at any time prior to September 30, 2019, the five-year anniversary of the effective date of the IPO registration statement. Notwithstanding anything to the contrary, neither the option nor the warrants underlying the option shall be exercisable after September 30, 2019. The option grants to holders demand and “piggy back” rights for periods of five and seven years, respectively, from September 30, 2014 (the effective date of the IPO registration statement) with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions, which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of ordinary shares at a price below its exercise price. We will have no obligation to net cash settle the exercise of the purchase option or the rights or warrants underlying the purchase option. The holder of the purchase option will not be entitled to exercise the purchase option or the warrants underlying the purchase option unless a registration statement covering the securities underlying the purchase option is effective or an exemption from registration is available. If the holder is unable to exercise the purchase option or underlying warrants, the purchase option or warrants, as applicable, will expire worthless. The purchase option was not exercised by the option holder prior to September 30, 2019 and, therefore, was expired in the year ended December 31, 2019.

 

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Registration Rights  

 

Concurrently with the consummation of our IPO, in October 2014, the Company granted certain investors registration rights pursuant to a Registration Rights Agreement. The holders of 25% of the securities subject to the Registration Rights Agreement are entitled to make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities Act. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to our Business Combination.

 

We have agreed that as soon as practicable, but in no event later than ninety (90) days, after the Business Combination, we will use our best efforts to file with the SEC a registration statement for the registration, under the Securities Act, of the ordinary shares issuable upon exercise of the public warrants. We have agreed to use our best efforts to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the public warrants in accordance with the provisions of the Warrant Agreement.

 

We have agreed to use commercially reasonable efforts to have a registration statement registering the resale of the Company’s ordinary shares issuable upon conversion of the Class A Convertible Preferred Shares under the Securities Act declared effective within one hundred eighty (180) days after the closing of the Business Combination.

 

On July 6, 2016 and in connection with the Business Combination, the Company entered into a Registration Rights Agreement with the Sellers. Under the Registration Rights Agreement, the Sellers hold registration rights that will obligate the Company to register for resale under the Securities Act, all or any portion of the shares held by them issued in connection with the share exchange so long as such shares are not then restricted under the Lock-Up Agreement. Subject to certain exceptions, if any time after the closing of the Business Combination, the Company proposes to file a registration statement under the Securities Act with respect to its securities, under the Registration Rights Agreement, the Company shall give notice to the Sellers as to the proposed filing and offer the Sellers an opportunity to register the sale of such number of shares as requested by the Sellers in writing. In addition, subject to certain exceptions, Sellers will be entitled under the Registration Rights Agreement to request in writing that the Company register the resale of their shares on Form F-3 and any similar short-form registration that may be available at such time.

 

Pursuant to a registration statement on Form F-1 declared effective on December 21, 2017, we registered 2,229,572 Ordinary Shares, 2,420,260 Warrants to purchase Ordinary Shares and 1,210,130 Ordinary Shares issuable upon exercise of our warrants.

  

Lock-Up Agreement

 

On July 6, 2016 and in connection with the Business Combination, the Sellers entered into a Lock-Up Agreement. Under the Lock-Up Agreement, each Seller agrees that such Seller will not, from the closing of the Business Combination until the first anniversary of the closing (or if earlier, the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange either equity holdings in us for cash, securities or other property), (i) sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act with respect to any of the shares held by them issued in connection with the share exchange, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of the shares held by them issued in connection with the share exchange, in cash or otherwise, or (iii) publicly announce any intention to effect any transaction specified in clause (i) or (ii). Each Seller further agrees that the shares held in escrow will continue to be subject to such transfer restrictions until they are released from the escrow account. However, each Seller will be allowed to transfer any of the shares held by them issued in connection with the share exchange (other than the shares held in escrow while they are held in the escrow account) by gift, will or intestate succession or to any affiliate, shareholder, members, party or trust beneficiary, provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the Lock-up Agreement. Additionally, each Seller will be allowed to pledge the shares held by them issued in connection with the share exchange (other than the shares held in escrow while they are held in the escrow account) to an unaffiliated third party as a guarantee to secure borrowings made by such third party to Adrie or any of its subsidiaries or and variable interest entities.

 

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Escrow Agreements

 

On September 30, 2014, the Company entered into an Escrow Agreement with certain investors. The shares held by these investors are subject to certain transfer restrictions. The investors have agreed not to transfer, assign or sell any of their ordinary shares (except to certain permitted transferees) until, with respect to 50% of the shares, the earlier of (i) one year after the date of the Business Combination or (ii) the date on which the closing price of our ordinary shares equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after our Business Combination, with respect to the remaining 50% of the shares held by them, upon one year after the date of the consummation of our Business Combination, or earlier, in either case, if, subsequent to our Business Combination, we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property.

 

On July 6, 2016 and in connection with the Business Combination, the Company and the seller representative (on behalf of the Sellers) entered into an Escrow Agreement with Continental Stock Transfer & Trust Company. Pursuant to the Escrow Agreement, the escrow agent will hold the escrow shares in a segregated escrow account, to be held and disbursed as agreed to in the Share Exchange Agreement.

 

C. Material Contracts

 

We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this Annual Report.

 

D. Exchange controls

 

The principal regulations governing foreign currency exchange in the PRC are the Foreign Exchange Administration Regulations promulgated by the State Council, as amended on August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the RMB is freely convertible for current account items, as long as true and lawful transaction basis is provided, but not for capital account items, such as capital transfer, direct investments, loans, repatriation of investments, investments in securities and derivatives outside of the PRC, unless the prior approval of the State Administration of Foreign Exchange, or the SAFE, is obtained and prior registration with the SAFE is made.

 

E. Taxation

 

The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership and disposition of our securities. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.

 

British Virgin Islands Taxation

 

Under the law of the British Virgin Islands as currently in effect, a holder of our shares who is not a resident of the British Virgin Islands is not liable for British Virgin Islands income tax on dividends paid with respect to our shares, and all holders of our securities are not liable to the British Virgin Islands for income tax on gains realized on the sale or disposal of such securities. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.

 

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There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act. In addition, securities of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.

 

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands, although a Tax Information Exchange Agreement is in force.

 

U.S. 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.

 

A beneficial owner of our ordinary shares that is described above is referred to herein as a “U.S. Holder.” 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 material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”

 

This summary is based on the Internal Revenue Code of 1986, as amended (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 discuss the potential application of the alternative minimum tax or 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;

 

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  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 an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;

 

  persons that hold our ordinary shares 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, or 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 generally will depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or other disposition of such ordinary shares will be in U.S. dollars. In addition, this discussion assumes that we will be treated as a foreign corporation for U.S. federal income tax purposes.

 

We have not sought, and will not seek, a ruling from the Internal Revenue Service (“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.

 

THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.

 

U.S. Holders

 

Taxation of Cash Distributions Paid on Ordinary Shares

 

Subject to the passive foreign investment company (“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 such ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares. Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.

 

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With respect to non-corporate U.S. Holders, any such dividends may be subject to U.S. federal income tax at the lower applicable regular 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, (2) we are not a PFIC, as discussed below, for either the taxable year in which such 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 include the Nasdaq Capital Market. Although our ordinary shares are currently listed on the Nasdaq Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability of the lower rate for any dividends paid in respect to our ordinary shares.

 

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 the ordinary shares.

 

The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders generally are 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.

  

Passive Foreign Investment Company Rules

 

A foreign (i.e., non-U.S.) corporation will be a PFIC if either (a) 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, or (b) 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 our income and that of our subsidiaries during the taxable year ended December 31, 2018, we believe that we may be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status for such taxable year, there can be no assurance in respect to our PFIC status for such taxable year. There also can be no assurance in respect to our status as a PFIC for our current taxable year or any future taxable year.

 

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 such U.S. Holder did not make either a timely qualified electing fund (“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 in respect to:

 

  any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and
     
  any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 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).

 

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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 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. 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 in respect to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary 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, as described below), any gain recognized on the sale or other taxable disposition of such 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 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 ordinary 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 ordinary shares in a QEF.

 

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Although a determination as to our PFIC status will be made annually, an initial determination that we are a PFIC generally will 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 ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to such ordinary 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. 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 it would otherwise recognize if the U.S. Holder sold 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 shares on the qualification date. The gain recognized by the purging election generally 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 generally will increase the adjusted tax basis in its shares by the amount of gain recognized and will also have a new holding period in the shares for purposes of the PFIC rules.

 

Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election in respect to such ordinary 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 tax 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 tax 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 adjusted tax 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 will be treated as ordinary income. Special tax rules may also 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) its 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, including the Nasdaq Capital Market, 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. Although our ordinary shares are currently listed on the Nasdaq Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our ordinary shares.

 

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 should 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 in 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. A mark-to-market election generally would not be available in respect to such a lower-tier PFIC. 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) ordinary 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.

 

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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 QEF rules discussed above 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.

 

Non-U.S. Holders

 

Cash dividends paid to a Non-U.S. Holder in respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such 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 such 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).

 

Cash 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 as 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 will apply to cash 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 ordinary shares 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 cash 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:

 

  fails to provide an accurate taxpayer identification number;

 

  is notified by the IRS that backup withholding is required; or

 

  in certain circumstances, fails to comply with applicable certification requirements.

 

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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 applicable.

 

G. Statement by experts

 

Not applicable.

 

H. Documents on display

 

You may inspect our securities filings, including this Annual Report and the exhibits and schedules thereto, without charge at the offices of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of the Annual Report from the Public Reference Section of the SEC, 100 F Street, NE, Washington, D.C. 20549 upon the payment of the prescribed fees. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants like us that file electronically with the SEC. You can also inspect the Annual Report on this website.

  

A copy of each document (or a translation thereof to the extent not in English) concerning our company that is referred to in this Annual Report is available for public view (subject to confidential treatment of certain agreements pursuant to applicable law) at our principal executive offices.

 

I. Subsidiary Information

 

See “Item 4. Information on the Company – C. Organizational Structure.”

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK  

 

Credit Risk

 

Credit risk is one of the most significant risks for the Company’s business. Credit risk exposures arise principally in financial guarantee activities which is an off-balance sheet financial instrument.

 

Credit risk is controlled by the application of credit approvals, limits and monitoring procedures including due-diligence visits and post-lending visits to the clients. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company requires collateral in the form of rights to cash, securities or property and equipment. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.

 

- Financial guarantee activities

 

In measuring the credit risk of financial guarantee services with customers, the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.

 

The Company manages their credit risk guarantee exposure by performing preliminary credit checks of each guarantee customer and ongoing monitoring of payments each month. Management periodically reviews the probability of default of guarantee customer and will accrue a guarantee liability when necessary.

 

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In addition, the Company calculates the provision amount as below:

 

1.General Reserve - is based on total balance of off-balance-sheet guarantee and to be used to cover unidentified probable loan loss. According to management assessment, the General Reserve is required to be no less than 1% of total loan guarantee balance.

 

2.Specific Reserve – is based on a guarantee by guarantee basis covering losses due to risks related to the ability and intention of repayment of guarantee commissions by each customer. The reserve rate was individually assessed based on management estimate of guarantee fee commission collectability. According to management assessment, the Specific Reserve is no less than 50% of guarantee fee commission earned during the year.

 

The Company has been providing the financial guarantees of loans for limited history. The customer deposits or other assets are held as collateral for the repayment of each loan. As of December 31, 2019, the amount of outstanding loans and related interests that the Company has guaranteed is approximately $35.1 million. The Company estimates the fair market value of the collateral to be approximately $61.4 million as of December 31, 2019.

 

- Other operating activities

 

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The