Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations and financial condition should be read together with our consolidated financial statements and the notes thereto and other financial information, which are included elsewhere in this Report. Our financial statements have been prepared in accordance with U.S. GAAP. In addition, our financial statements and the financial information included in this Report reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.
Overview
We are a provider of automobile transaction and related services, connecting auto dealers, financial institutions, and consumers, who are mostly existing and prospective ride-hailing drivers affiliated with different operators of online ride-hailing platforms in the People’s Republic of China (“PRC” or “China”). We provide automobile transaction and related services through our wholly owned subsidiaries, Yicheng Financial Leasing Co., Ltd., a PRC limited liability company (“Yicheng”), Chengdu Corenel Technology Limited, a PRC limited liability company (“Corenel”), and Hunan Ruixi Financial Leasing Co., Ltd. (“Hunan Ruixi”), a PRC limited liability company, and its equity-investment, also its former variable interest entity (“VIE”), Sichuan Jinkailong Automobile Leasing Co., Ltd. (“Jinkailong”). Since October 2020, we also operate an online ride-hailing platform through Hunan Xixingtianxia Technology Co., Ltd. (“XXTX”), a wholly-owned subsidiary of Sichuan Senmiao Zecheng Business Consulting Co., Ltd., our wholly-owned subsidiary (“Senmiao Consulting”). Our platform enables qualified ride-hailing drivers to provide application-based transportation services mainly in Chengdu, Changsha, Guangzhou, and other 18 cities in China. Substantially all of our operations are conducted in China.
Our Automobile Transactions and Related Services
Our Automobile Transaction And Related Services are mainly comprised of (i) automobile operating lease where we provide car rental services to individual customers to meet their personal needs with lease term no more than twelve months (the “Auto Operating Leasing”); (ii) automobile financing where we provide our customers with auto finance solutions through financing leases (the “Auto Financing”); (iii) automobile sales where we sell new purchased or used cars to our customers (the “Auto Sales”); (iv) facilitation of automobile transaction and financing where we used to connect the prospective ride-hailing drivers to financial institutions to buy, or get financing on the purchase of, cars to be used to provide online ride-hailing services (the “Auto Financing and Transaction Facilitation”); and (v) other supporting services provided to online ride-hailing drivers. We started our facilitation and supporting services in November 2018, the sale of automobiles in January 2019, and financial and operating leasing in March 2019, respectively.
Since November 22, 2018, the acquisition date of Hunan Ruixi, and as of March 31, 2022, we have facilitated financing for an aggregate of 1,687 automobiles with a total value of approximately $26.1 million, sold an aggregate of 1,423 automobiles with a total value of approximately $13.8 million and delivered approximately 2,321 automobiles under operating leases (including 1,826 automobiles delivered by Jinkailong) and 131 automobiles under financing leases to customers, the vast majority of whom are online ride-hailing drivers.
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The table below provides a breakdown of the number of vehicles sold or delivered under different leasing arrangements or managed/guaranteed by us and corresponding revenue generated for the years ended March 31, 2022 and 2021:
For the Years Ended
March 31 ，
2022
2021
Number of
Number of
Vehicles
Revenue*
Vehicles
Revenue*
Auto Operating Leasing
>2,300
$
7,175,000
>1,200
$
3,435,000
Auto Financing
131
$
102,000
131
$
228,000
Auto Sales
6
$
26,000
36
$
487,000
Auto Financing and Transaction Facilitation
—
$
—
61
$
189,000
Other Services
>1,800
$
1,775,000
>2,500
$
919,000
* The number included operation information of our former VIE and was rounded to the nearest thousand for disclosure purpose.
As of March 31, 2022, we deconsolidated Jinkailong and its operation result was separately disclosed in our consolidated statements of operations and comprehensive loss. However, although Jinkailong was ceased from our consolidation scope since March 31, 2022, Huana Ruixi, Corenel and Jiekai continuously provide automobile transaction and related services, mainly Auto Operating Leasing, similar to Jinkailong in Changsha and Chengdu. During the year ended March 31, 2022, our Auto Operating Leasing, Auto Financing, automobile management services, and Auto Sales accounted for approximately 76.6%, 4.5%, 3.3% and 1.2% of our total revenue from our automobile transactions and related services, respectively, for the year ended March 31, 2022, while our Auto Sales, Auto Operating Leasing, Auto Financing and Transaction Facilitation, Auto Financing and automobile management services accounted for approximately 38.0%, 17.5%, 14.7%, 14.3% and 6.2% for the year ended March 31, 2021, respectively, excluding the income which Jinkailong generated.
Our Ride-Hailing Platform S ervices
As part of our goal to provide an all-round solution for online ride-hailing drivers as well as to increase our competitive power in an increasingly competitive online ride-hailing industry and to take advantage of the market potential, in October 2020, we began operating our own online ride-hailing platform in Chengdu. The platform (called Xixingtianxia) was owned and operated by XXTX, of which Senmiao Consulting acquired a 78.74% equity interest pursuant to a supplementary agreement to XXTX Investment Agreement with all the original shareholders of XXTX on February 5, 2021 (the “XXTX Increase Investment Agreement”).
Pursuant to the XXTX Increase Investment Agreement, Senmiao Consulting agreed to make an investment of RMB40 million (approximately $6 million) in XXTX in cash in exchange for a 78.74% equity interest in XXTX. The registration procedures for the change in shareholders and registered capital of XXTX were completed on March 19, 2021. After the transaction, the total registered capital of XXTX increased to RMB50.8 million (approximately $7.8 million).
On October 22, 2021, Senmiao Consulting further entered into a Share Swap Agreement (the “Share Swap Agreement”), pursuant to which the Senmiao Consulting shall acquire all of the remaining equity interests the original shareholders hold in XXTX at a total purchase price of $3.5 million, payable in the Company’s shares of common stock, par value $0.0001 per share (the “Common Stock”) at a per share price of the average closing price of a share of Common Stock reported on the Nasdaq Capital Market for ten (10) trading days immediately preceding the date of the Share Swap Agreement. On November 9, 2021, the issuance of 5,331,667 shares of the Company’s common stock for this transaction has been completed and on December 31, 2021, the registration procedures for the change in shareholders and thee record-filing of the local PRC government have been completed. Upon the completion of the transaction, Senmiao Consulting holds 100% equity interest in XXTX.
As of the date of this Report, Senmiao Consulting has made capital contribution of RMB36.86 million (approximately $5.81 million) to XXTX and the remaining amount is expected to be paid before December 31, 2025.
XXTX operates Xixingtianxia and holds a national online reservation taxi operating license. The platform is presently servicing online ride-hailing drivers in 21 cities in China, including Chengdu, Changsha, Guangzhou and so on, providing them with a platform to view and take customer orders for rides. We currently collaborate with Gaode Map, a well-known aggregation platform in China on our ride-hailing platform services. Under our collaboration, when a rider uses the platform to search for taxi/ride-hailing services on the aggregation platform, the platform provides such rider a number of online ride-hailing platforms for selection, including ours and if our platform is selected by the rider, the order will then be distributed to registered drivers on our platform for viewing and acceptance. The
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rider may also simultaneously select multiple online ride-hailing platforms in which case, the aggregation platform will distribute the requests to different online ride-hailing platforms which they cooperate with, based on the number of available drivers using the platform in a certain area and these drivers’ historical performance, among other things. XXTX generates revenue from providing services to online ride-hailing drivers to assist them in providing transportation services to the riders looking for taxi/ride-hailing services. XXTX earns commissions for each completed order as the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. XXTX settles its commissions with the aggregation platforms on a weekly basis.
Meanwhile, in order to strengthen our market position in certain cities, our collaboration model with Meituan has been changed from the one same as Gaode, to the one focusing on automobile operating lease and drivers’ management services since August 2021. Since early August 2021, our equity investee company and former VIE, Jinkailong, signed a new contract with an affiliate of Meituan, whereby the online ride-hailing requests and orders shall be completed on Meituan’s platform utilizing our network of cars and drivers. Jinkailong earned rental income from drivers and earned commissions from Meituan.
The acquisition of XXTX has brought us a new stream of revenue and enhanced our goal of providing an all-round solution for online ride-hailing drivers. We launched Xixingtianxia in specific markets within Chengdu in late October 2020, focusing on current driver customers. During the year ended March 31, 2022, we have expanded marketing of our ride-hailing platform to a larger pool of potential drivers and riders in Chengdu, Changsha, Guangzhou and other 16 cities through cooperation with certain local car rental companies and through offering attractive incentives and awards to drivers.
During the year ended March 31, 2022, approximately 11.5 million rides with gross fare of approximately $37.3 million were completed through Xixingtianxia and an average of over 9,500 ride-hailing drivers completed rides and earned income through Xixingtianxia (the “Active Drivers”) each month. During the year ended March 31, 2022, we earned online ride-hailing platform service fees of approximately $2.7 million, netting off approximately $3.4 million incentives paid to Active Drivers.
During the period from the acquisition date to March 31, 2021, approximately 4.4 million rides with gross fare of approximately $12.4 million were completed through Xixingtianxia and an average of over 6,000 ride-hailing drivers completed rides and earned income through Xixingtianxia each month. During the period since the acquisition date to March 31, 2021, we achieved revenue of approximately $0.9 million from our Online Ride-hailing Platform Services, after taking into account approximately $1.8 million incentives paid by us to Active Drivers, which were recorded as a reduction to our revenue.
We plan to expand our driver base for the platform and automobile rental business while strengthening the royalty of the drivers who both lease our cars and use our platform while expanding, but our platform is available to others. We plan to launch Xixingtianxia in more cities across China the next 12 months.
Key Factors and Risks Affecting Results of Operations
Ability to Increase Our Automobile Lessee and Active Driver Base
Our revenue growth has been largely driven by the expansion of our automobile lessee base and the corresponding revenue generated from operating and financial leasing. After the acquisition of XXTX, our revenue growth also depends on the number of completed online ride-hailing orders on our platform, which largely depends on the number of Active Drivers who complete ride-hailing transactions on our platform. We acquire customers for our Automobile Transaction and Related Services, as well as for our Online Ride-hailing Platform Services, through the network of third-party sales teams, referral from online ride-hailing platforms and our own efforts including online advertising and billboard advertising. We also send out fliers and participate in trade shows to advertise our services. We plan to increase the number of our Active Drivers by expanding our platform to more cities during the next five years as well as marketing our platform to our existing and prospective automobile lessees. We expect the expansion of our Active Driver base to promote the growth of our automobile rental business because we offer automobile rental solutions/incentives specifically targeted at drivers using our platform. An effective cross-selling strategies between our automobile leasing business and online ride-hailing platform services business is important to our expansion and revenue growth. We also plan to strengthen our marketing efforts through the collaboration with certain automobile dealers and through our own team by employing more experienced staffs and improving the quality and variety of our services. As of March 31, 2022, we had 22 and 52 employees in our own sales department and sales department of our equity investee company, Jinkailong, respectively.
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Management of Automobile Rentals
Due to the fierce competition of online ride-hailing industry in Chengdu and the adverse impact from COVID-19 pandemic across mainland China, a significant number of online ride-hailing drivers exited the ride-hailing business and rendered their automobiles to us for sublease or sales in order to generate income/proceeds to cover their payments owed to the financial institutions and us. We have seen an increasing demand for short-term car rentals since the end of 2019, which remained stable during the three months and year ended March 31, 2022. To meet the demand of business expansion in Chengdu, Changsha and Guangzhou, we also purchased and leased automobiles from third parties for our operating lease. The daily management and timely maintenance of leased automobiles will have a significant effect on the growth of our income from leasing automobiles in the next twelve months. The effective management of our automobiles through our proprietary system and experienced auto-management team could provide qualified automobiles to potential lessees, either for personal use or providing online ride-hailing services. As of March 31, 2022, we had one parking lot and 4 employees in Guangzhou, and one parking lot, and an exhibition hall and 6 employees in Changsha, and our equity investee company, Jinkailong, had one parking lot and 10 employees in Chengdu, for parking and management of automobiles for operating lease. During the year ended March 31, 2022, our average utilization of the automobiles for operating lease, including the ones operated by Jinkailong, was approximately 56.3%. During the year ended March 31, 2021, the average utilization of the automobiles for operating lease was approximately 79.1%.
Our Service Offerings and Pricing
The growth of our revenue depends on our ability to improve existing solutions and services provided, continue identifying evolving business needs, refine our collaborations with business partners and provide value-added services to our customers. The attraction of new automobile leases depends on our leasing solutions with attractive rental price and flexible leasing terms. We have also adopted a stable pricing formula, considering the historical and future expenditure, remaining available leasing months and market price to determine our rental price for varied rental solutions. Furthermore, our product designs affect the type of automobile leases we attract, which in turn affect our financial performance. The attraction of new Active Drivers depends on the comprehensive income they could earn from our own or cooperated platform, which is mainly affected by the number orders distributed to them through our platform and the amount of the incentives paid to them from platforms. Our revenue growth also depends on our abilities to effectively price our services, which enables us to attract more customers and improve our profit margin.
Ability to Retain and Key Business Cooperators
Historically, we have set up a series of strategy and business relationships with certain affiliates of some famous and leading companies of new energy vehicles (“NEVs”) manufacturers, online ride-hailing platforms and travel service providers to develop our Automobile Transaction and Related Services and Online Ride-hailing Platform Services. We earned commission or services fee from them, purchased and leased automobiles for our business at a favorable price. The close relationships have provided us with the necessary capacity to support the development of our online ride-hailing platform and leasing business. To retain these valuable cooperators and continuously explore opportunities to collaborate with them in more areas is important to us to have considerable resources to support the exploration and expansion of our business into new cities.
Ability to Retain Existing Financial Institutions and Engage New Financial Institutions
Historically, the growth of our business is dependent on our ability to retain existing financial institutions and engage new financial institutions. During the year ended March 31, 2022, we did not generate revenue from automobile financing facilitation transactions because of the shift of our business focus to automobile rental. Despite such decrease, we are exploring new collaboration methods with financial institutions in connection with our automobile rental business and for our purchase of NEVs in the next twelve months. Our collaborations with financial institutions may be affected by factors beyond our control, such as perception of automobile financing as an attractive asset, stability of financial institutions, general economic conditions and regulatory environment. To increase the number of our cooperative financial institutions and the availability of financing for our existing and new businesses will enhance the overall stability and sufficiency of funding for automobile transactions.
Ability to Collect Receivables on a Timely Basis
We used to advance the purchase price of automobiles and all service expenses when we provide related services to the purchasers. We collect the receivables due from automobile purchasers from their monthly installment payments and repay financial institutions on behalf of the purchasers every month. As of March 31, 2022, we had accounts receivable, net of allowance of approximately $0.3 million
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and advanced payments of approximately $0.2 million due from the automobile purchasers, net of allowance, which will be collected through installment payments on a monthly basis during the relevant affiliation periods. In accordance with the development of the operating lease business, our cooperated platforms, such as Meituan, agree to temporarily “lock-up” the fares of the rides which Active Drivers earn from the platform to ensure the timely collection of our rental receivables from those Active Drivers. We settle the rental income with each online ride-hailing driver monthly based on the product solutions they chose. Besides, during the year ended March 31, 2022, we settle our commissions with the aggregation platforms on a weekly basis for our online ride-hailing platform services and automobile rental income on a monthly basis. As of March 31, 2022, we had accounts receivable of online ride-hailing service fees of approximately $0.1 million in total.
The efficiency of collection of the monthly and weekly payments has a material impact on our daily operation. Our risk and asset management department has set up a series of procedures to monitor the collection from drivers. Our business department has also set up a stable and close relationship with cooperated platform to ensure the timely collection of commissions. The accounts receivable and advance payments may increase our liquidity risk. We have used the majority of the proceeds from our equity offerings and plan to seek equity and/or debt financings to pay for the expenditure related to the automobile purchase. To pay for the expenditure in advance will enhance the stability of our daily operation and lower the liquidity risk, and attract more customers.
Ability to Manage Defaults and Potential Guarantee Liability Effectively
Our subsidiary, Hunan Ruixi, and its equity investee company and former VIE, Jinkailong are exposed to credit risk as they are required by certain financial institutions to provide guarantee on the lease/loan payments (including principal and interests) of the automobile purchasers referred by us. If a default occurs, they are required to make the monthly payments on behalf of the defaulted purchasers to the financial institution.
We manage the credit risk arising from the default of automobile purchasers by performing credit checks on each automobile purchaser based on the credit reports from People’s Bank of China and third-party credit rating companies, and personal information including residence, ethnicity group, driving history and involvement in legal proceeding. Our risk department continuously monitors the payment by each purchaser and sends them payment reminders. We also keep close communication with our purchasers in particular the online ride-hailing drivers so that we can evaluate their financial conditions and provide them with assistance including the transfer of automobile to a new driver if they are no longer interested in providing ride-hailing services or are unable to earn enough income to make monthly lease/loan payments.
In addition, automobiles are used as collateral to secure purchasers’ payment obligations under the financing arrangement. In the event of a default, Hunan Ruixi and Jinkailong can track the automobile through an installed GPS system and repossess and handover the automobile over to the financial institution so that they can be released from their guarantee liability. However, if a financial institution initiates a legal proceeding to collect payments due from a defaulted automobile purchaser, Hunan Ruixi and Jinkailong may be required to repay the defaulted amount as a guarantor. If they are unable to undertake the responsibility as a guarantor, their own assets, such as cash and cash equivalents, may be frozen by the court if the financial institution successfully requests for an order to freeze our assets or bank accounts, which may adversely affect our operations.
As of March 31, 2022, 100 and 1,227 online ride-hailing drivers we serviced rendered their automobiles to Hunan Ruixi and Jinkailong, respectively, for sublease or sale. In general, most of the defaulted automobile purchasers who want to remain in online ride-hailing business would pay the default amounts within one to three months. Our risk management department typically starts to interact with overdue purchasers if they have missed one monthly installment payment. However, if the balances are overdue for more than two months or the purchasers decide to exit the online ride-hailing business and sublease or sell their automobiles, we would fully record an allowance against receivables from those purchasers. As of March 31, 2022, we recognized an accumulated allowance against receivables of approximately $411,528 and $3,374,064 from these purchasers served by Hunan Ruixi and Jinkailong, respectively. For the year ended March 31, 2022, we provided additional allowance for doubtful accounts of $123,744 and $11,746, respectively, based on re-evaluation collection from those drivers served by Hunan Ruixi and Jinkailong. We also recognized approximately $8,000 expenses for the guarantee services as the drivers exited the online ride-hailing business and would no longer make the monthly repayments to us. During the year ended March 31, 2022, we sub-leased approximately 1,300 rendered automobiles in total to other customers. By subleasing automobiles from these drivers, we believe we can cope with the defaults and control associated risks.
Further, the automobiles subject to our financing leases are not collateralized by us. As of March 31, 2022, the total value of non-collateralized automobiles was approximately $877,000. We believe our risk exposure of financing leasing is immaterial as we have experienced limited default cases and we are able to re-lease those automobiles to drivers under financing leases.
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Actual and Potential Impact of Ongoing Coronavirus (COVID-19) in China on Our Business
Due to the lockdown policy and travel restrictions in our areas of operation in China where local resurgences of COVID-19 cases, our Automobile Transaction and Related Services and Online Ride-hailing Platform Services have been adversely impacted. See “Business — Actual and Potential Impact of Ongoing Coronavirus (COVID 19) in China on Our Business.”
Ability to Manage and Grow New Ride-Hailing Business
Due to the fierce competition of online ride-hailing industry in Chengdu and Changsha, our ability to increase our revenue over time may be limited if we focus only on our current Automobile Transaction and Related Services business model. As part of our strategy to provide an all-encompassing solution for online ride-hailing drivers, we have expanded our services to drivers through the operation of Xixingtianxia, our own online ride-hailing platform, which has brought us a new stream of revenue. We generate revenue from commissions earned from each completed order, which represent the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. As the aggregation platforms distribute the demand orders to different online ride-hailing platforms, the flow of drivers in our area of operations is enhanced, leading to a higher probability that more ride orders will be distributed to our platform, which in turn will increase the revenue of the drivers who use our platform (and our revenue). This also allows us to attract more drivers to engage their online ride-hailing business on our platform. Through a series of promotion and effective daily management and training services, we expect our own online ride-hailing platform will offer us a stable revenue source which can also help grow our automobile financing and leasing business. Besides, we are dealing with other trip platforms to attract more riders choosing their trip through our platform.
Pursuant to the cooperation agreement signed with Didi Chuxing Technology Co., Ltd. (“Didi”) for our Automobile Transaction and Related Services, we may be penalized by Didi, or our partnership with Didi may be terminated as we now operate a business competitive with Didi. However, the service fees we earned from Didi for automobile transaction and related services currently represent less than 0.1% of our total revenue. Therefore, we believe that the risk of termination of cooperation with Didi on automobile transaction and related services will not have a material influence on our business or results of operations.
Ability to Compete Effectively
Our business and results of operations depend on our ability to compete effectively. Overall, our competitive position may be affected by, among other things, our service quality and our ability to price our solutions and services competitively. We will set up and continuously optimize our own business system to improve our service quality and user experience. Our competitors may have more resources than we do, including financial, technological, marketing and others and may be able to devote greater resources to the development and promotion of their services. We will need to continue to introduce new or enhance existing solutions and services to continue to attract automobile dealers, financial institutions, car buyers, lessees, ride-hailing drivers and other industry participants. Whether and how quickly we can do so will have a significant impact on the growth of our business.
Market Opportunity and Government Regulations in China
The demand for our services depends on overall market conditions of the online ride-hailing industry in China. The continuous growth of the urban population places increasing pressure on the urban transportation and the improvement of living standards has increased the market demand for quality travel in China. Traditional taxi service is limited, and the emerging online platforms have created good opportunities for the development of the online ride-hailing service market. According to the 49 th Statistical report on Internet Development in China published in February 2022 by the China Internet Network Information Center (CNNIC), the number of online ride-hailing service users had reached 452 million by the end of 2021, increased by 24% from 2020, and took approximately 43.9% of the total number of Chinese internet users. The online ride-hailing industry is facing increasing competition in China and is attracting more capital investment. According to the MOT of the People’s Republic of China, as of March 31, 2022, approximately 267 online ride-hailing platforms have obtained booking taxi operating licenses and the total volume of online ride-hailing orders was approximately 539 million in March 2022 in China. Meanwhile, approximately 1.6 million online booking taxi transportation certificates and approximately 4.1 million online booking taxi driver’s licenses were issued nationwide in China. Since 2019, in addition to the traditional online ride-hailing platforms, automobile manufacturers, offline operation service companies, financial and map service providers, among others, have built cooperation relationships with each other to make the online ride-hailing industry a more aggregated industry.
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The online ride-hailing industry may also be affected by, among other factors, the general economic conditions in China. The interest rates and unemployment rates may affect the demand of ride-hailing services and automobile purchasers’ willingness to seek credit from financial institutions. Adverse economic conditions could also reduce the number of qualified automobile purchasers and online ride-hailing drivers seeking credit from the financial institutions, as well as their ability to make payments. Should any of those negative situations occur, the volume and value of the automobile transactions we service will decline, and our revenue and financial condition will be negatively impacted.
In order to manage the rapidly growing ride-hailing service market and control relevant risks, on July 27, 2016, seven ministries and commissions in China, including the MOT, jointly promulgated the “Interim Measures for the Administration of Online Taxi Booking Business Operations and Services” (“Interim Measures”) and amended it on December 28, 2019, which legalizes online ride-hailing services such as Didi and requires the online ride-hailing services to meet the requirements set out by the measures and obtain taxi-booking service licenses and take full responsibility of the ride services to ensure the safety of riders.
On November 5, 2016, the Municipal Communications Commission of Chengdu City and a number of municipal departments jointly issued the “Implementation Rules for the Administration of Online Booking Taxi Management Services for Chengdu”, which was abolished and replaced by the updated version issued on July 26, 2021. On August 10, 2017, the Transportation Commission of Chengdu further issued the detailed guidance “Working Process for the Online Booking Taxi Drivers Qualification Examination and Issuance” and the “Online Booking Taxi Transportation Certificate Issuance Process”. On November 28, 2016, Guangzhou Municipal People’s Government promulgated Interim Measures for the Management of Online Ride Hailing Operation and Service in Guangzhou, as amended on November 14, 2019. According to these regulations and guidelines, three licenses /certificates are required for operating the online ride-hailing business in Chengdu: (1) the ride-hailing service platform such as Didi should obtain the online booking taxi operating license; (2) the automobiles used for online ride-hailing should obtain the online booking taxi transportation certificate (“automobile certificate”); (3) the drivers should obtain the online booking taxi driver’s license (“driver’s license”). Besides, all the new cars used for online ride-hailing should be NEVs.
On July 23, 2018, the General Office of Changsha Municipal People’s Government issued the “Detailed Rules for the Administration of Online Booking Taxi Management Services for Changsha.” On June 12, 2019, the Municipal Communications Commission of Changsha City further issued “Transfer and Registration Procedures of Changsha Online Booking of Taxi.” According to the regulations and guidelines, to operate a ride-hailing business in Changsha requires similar licenses in Chengdu, except those automobiles used for online ride-hailing services are required to meet certain standards, including that the sales price (including taxes) is over RMB120,000 (approximately $17,000). In practice, Hunan Ruixi is also required to employ a safety administrator for every 50 automobiles used for online ride-hailing services and submit daily operation information of these automobiles such as traffic violation to the Transport Management Office of the Municipal Communications Commission of Changsha City every month.
In addition to the national online reservation taxi operating license, XXTX and its subsidiaries also obtained the online reservation taxi operating license in 25 cities, including Chengdu, Changsha, Guangzhou, Tianjin, Shenyang, Harbin, Nanchang, Haikou, Hezhou, two cities in Zhejiang, Shandong, and Guizhou Province, respectively, five cities in Jiangsu Province and other five cities in Sichuan Province from June 2020 to April 2022, to operate the online ride-hailing platform services.
However, approximately 45% of our ride-hailing drivers have not obtained the driver’s license as of March 31, 2022 while all of the cars used for online ride-hailing services which we provided management services have the automobile certificate. Without requisite automobile certificate or driver’s license, these drivers may be suspended from providing ride-hailing services, confiscated their illegal income and subject to fines of up to 10 times of their illegal income. Starting in December 2019, Didi began to enforce such limitation on drivers in Chengdu who have a driver’s license but operate automobiles without the automobile certificate.
Furthermore, according to the Interim Measures, no enterprise or individual is allowed to provide information for conducting online ride-hailing services to unqualified vehicles and drivers. Pursuant to the Interim Measures, XXTX and its subsidiaries may be fined between RMB5,000 to RMB30,000 (approximately $789 to $4,732) for violations of the Interim Measures, including providing online ride-hailing platform services to unqualified drivers or vehicles. During the year ended March 31, 2022, we have been fined by approximately $178,000 by Traffic Management Bureaus in Chengdu and Changsha, of which, approximately $16,000 was further compensated by drivers or cooperated third parties. If we are deemed in serious violation of the Interim Measures, our Online Ride-hailing Platform Services may be suspended and the relevant licenses may be revoked by certain government authorities.
We are in the process of assisting the drivers to obtain the required certificate and license both for our Automobile Transaction and Related Services and our Online Ride-hailing Platform Services. However, there is no guarantee that all of the drivers affiliated with us
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would be able to obtain all the certificates and licenses. Further, there is no assurance that each of the drivers who uses our platform or the cars can possess the requisite license or certificate. Our business and results of operations will be materially and adversely affected if our affiliated drivers are suspended from providing ride-hailing services or imposed substantial fines or if we are found to be in serious violation of the Interim Measures due to the drivers’ failure to obtain requite licenses and/or automobile certificates in connection with providing services through our platform.
The Chinese government has exercised and continued to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. For example, the Chinese cybersecurity regulator announced on July 2, 2021 that it had begun an investigation of Didi and two days later ordered that the company’s app be removed from smartphone app stores. We believe that our current operations are in compliance with the laws and regulations of the Chinese cybersecurity regulator. However, the Company’s operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry.
Results of Continuing Operations for the Year Ended March 31, 2022 Compared to the Year Ended March 31, 2021
For the Years Ended
March 31,
2022
2021
Change
Revenues
$
4,913,102
$
2,188,840
$
2,724,262
Cost of revenues
(6,511,031)
(1,984,079)
(4,526,952)
Gross profit (loss)
(1,597,929)
204,761
(1,802,690)
Operating expenses
Selling, general and administrative expenses
(9,525,408)
(5,905,579)
(3,619,829)
Provision for doubtful accounts
(235,279)
(299,658)
64,379
Impairments of inventories
(60,398)
—
(60,398)
Impairments of long-lived assets
(142,974)
(10,953)
(132,021)
Total operating expenses
(9,964,059)
(6,216,190)
(3,747,869)
Loss from operations
(11,561,988)
(6,011,429)
(5,550,559)
Other income (expenses), net
(107,444)
301,269
(408,713)
Interest expense
(5,893)
—
(5,893)
Interest expense on finance leases
(55,844)
(46,518)
(9,326)
Change in fair value of derivative liabilities
6,951,482
(1,710,415)
8,661,897
Issuance costs for issuing series A convertible preferred stock
(821,892)
—
(821,892)
Loss before income taxes
(5,601,579)
(7,467,093)
1,865,514
Income tax expenses
(4,566)
(8,332)
3,766
Net loss from continuing operations
$
(5,606,145)
$
(7,475,425)
$
1,869,280
Revenues
We started generating revenue from Automobile Transaction and Related Services from our acquisition of Hunan Ruixi on November 22, 2018 and revenue from Online Ride-hailing Platform Services from our acquisition of XXTX on October 23, 2020, respectively.
Revenue for the year ended March 31, 2022 increased by $2,724,262, or approximately 124%, as compared with the year ended March 31, 2021. The increase was mainly due to the increase of operating lease revenues from automobile rentals and revenues from online ride-hailing platform services. In an effort to mitigate the negative impact on our daily cash flow resulting from the rendering of automobiles from drivers who exited the ride-hailing business due to the COVID-19 pandemic in China and develop the new business, we shifted our business focus to automobile rentals from facilitation of automobile transaction and financing since the fiscal year 2021. The online ride-hailing market has gradually recovered since April 15, 2020 as COVID-19 is generally under control in our operation areas in China and the sporadic local resurgences of COVID-19 did not have material impact on the local market. As a result, the number of additional automobiles rendered to us by the ride-hailing drivers exiting the business kept decreasing while the number of automobiles for operating leases increased during the year ended march 31, 2022 as compared with the year ended March 31, 2021. We had revenue of $1,722,480 from automobile rental and $2,665,457 from online ride-hailing platform services during the year ended March 31, 2022, which offset the negative impact of the decrease in our revenue in automobile sales and facilitation of automobile transaction and financing.
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As we plan to focus more on our automobile rental and Online Ride-hailing Platform Services business, we expect revenue from our Online Ride-hailing Platform Services to keep stable and our revenue from automobile rental income to increase over the next twelve months. We also expect them to continuously account for a majority of our revenues. We plan to provide a series of product solutions to increase the number of our automobiles for operating leases.
The following table sets forth the breakdown of revenues by revenue source for the years ended March 31, 2022 and 2021:
For the Years Ended
March 31,
2022
2021
Revenue from automobile transactions and related services
$
2,247,645
$
1,285,586
- Operating lease revenues from automobile rentals
1,722,480
224,590
- Service fees from NEVs leasing
126,227
—
- Financing revenues
101,828
184,115
- Service fees from automobile management and guarantee services
73,554
79,565
- Service fees from automobile purchase services
1,468
188,822
- Revenues from sales of automobiles
26,019
487,947
- Other service fees
196,069
120,547
Revenue from online ride-hailing platform services
2,665,457
903,254
Total Revenue
$
4,913,102
$
2,188,840
Revenue from Automobile Transactions and Related Services
Revenue from our automobile transaction and related services mainly includes operating lease revenues from automobile rentals, service fees from NEVs leasing, financing revenues (representing interest income from financial leasing), service fees from automobile management and guarantee services, sales revenue of automobiles, and other services fees, which accounted for approximately 76.6%, 5.6%, 4.5%, 3.3%, 1.2% and 8.8%, respectively, of the total revenue from automobile transaction and related services during the year ended March 31, 2022. Meanwhile, sales revenue of automobiles, operating lease revenues from automobile rentals, financing revenues, service fees from automobile purchase services, service fees from automobile management and guarantee services, and other services fees, which accounted for approximately 38.0%, 17.5%, 14.3%, 14.7%, 6.2% and 9.3%, respectively, of the total revenue from Automobile Transaction and Related Services during the year ended March 31, 2021.
Operating lease revenues from automobile rentals
We generate revenues from leasing our own automobiles, sub-leasing automobiles leased from third-parties or rendered by online ride-hailing drivers with their authorization for a lease term of no more than twelve months. The increase of rental income was due to the increased number of leased automobiles. We leased over 480 automobiles with an average monthly rental income of $485 per automobile, resulting in a rental income of $1,722,480, for the year ended March 31, 2022. While we leased over 80 automobiles with an average monthly rental income of $526 per automobile, resulting in a rental income of $224,590, for the year ended March 31, 2021.
Service fees from NEVs leasing
We generate revenues of $126,227 from leasing NEVs by charging leases service fees during the year ended March 31, 2022 in accordance with the increasing demand for NEVs in the online ride-hailing industry. The amount of services fees for NEVs leasing is based on our product solutions. We did not have this kind of revenue during the year ended March 31, 2021.
Financing revenues
We started our financial leasing business in March 2019 and began to generate interest income from providing financial leasing services to ride-hailing drivers in April 2019. We also charge the customers of our automobile financing facilitation services interest on their monthly payments which cover purchase price of automobile and our services fees and facilitation fees for terms of 36 or 48 months. We recognized a total interest income of $101,828 from an average monthly number of 75 automobiles and $184,115 from an average monthly number of 89 automobiles during the year ended March 31, 2022 and 2021, respectively. The decrease was further aggravated by the decrease in the monthly amortization of interest income for automobiles leased in prior periods.
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Service fees from automobile management and guarantee services
The majority of our customers are online ride-hailing drivers. They also entered into affiliation service agreements with Hunan Ruixi in Changsha and Jinkailong in Chengdu, pursuant to which Hunan Ruixi provides and Jinkailong provided them post-transaction management services and guarantee services. The slight decrease of $6,011 was due to there was no significant change in the accumulated number of rendered automobiles which were subsequently rented to ride-hailing drivers whom Hunan Ruixi charges rent rather than charging management and guarantee services fee. Hunan Ruixi had management and guarantee services for over 210 and 230 automobiles during the year ended March 31, 2022 and 2021, respectively.
Service fees from automobile purchase services
Service fees from automobile purchase services decreased by $187,354 during the year ended March 31, 2022, mainly due to the decrease in the number of new automobile purchases facilitated by Hunan Ruixi. Hunan Ruixi generates and Jinkailong generated revenues from providing a series of automobile purchase services throughout the automobile purchase transaction process. Hunan Ruixi had revenue from only two new automobile transactions during the year ended March 31, 2022 while it serviced 62 new automobile transactions, including purchase, financial leasing and operating leases, with service fees ranging from approximately $140 to $3,550 per automobile during the year ended March 31, 2021.
Sales of automobiles
As we have shifted our business focus to automobile leasing, we sold one new and five used automobile with income of $26,019 during the year ended March 31, 2022. Meanwhile, we sold an aggregate of 36 new automobiles and earned income of $487,947 during the year ended March 31, 2021.
Other service fees
We generate other revenues such as monthly services commissions from insurance companies and other companies and other miscellaneous service fees charged to our customers, which accounted for approximately 53.4% and 46.6% of revenues from other service fees during the year ended March 31, 2022, respectively. The commissions from insurance companies and other miscellaneous service fees charged to the automobile purchasers, which accounted for approximately 78.3%, and 21.7% of revenues from other service fees during the year ended March 31, 2021, respectively. Other service fees increased by $75,522 mainly due to the increase of $70,711 in other miscellaneous service fees also increased in accordance with the expansion of our operating lease.
Revenue from online ride-hailing platform services
We generate revenue from providing services to online ride-hailing drivers to assist them in providing transportation service to the riders though our platform and earn commissions for each completed order equal to the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider since October 2020. During the year ended March 31, 2022, approximately 11.5 million rides with gross fare of approximately $37.3 million were completed through our Xixingtianxia platform and we earned online ride-hailing platform service fees of $2,665,457, netting off approximately $3.4 million incentives paid to Active Drivers.
Cost of Revenues
Cost of revenues represents the amortization, daily maintenance and insurance expense of automobiles leased to online ride-hailing drivers of $2,667,332, technical service charges, insurance and other expenses of online ride-hailing platform services of $3,806,143 and costs of automobiles sold of $37,556. Cost of revenues increased by $4,526,952, or approximately 228%, during the year ended March 31, 2022 as compared with last year, mainly due to the increase of $2,463,990 in costs of automobiles under operating leases and $2,482,999 in direct expense and technical service fees of Online Ride-hailing Platform Services, respectively, as a result of the expansion of those two businesses, partially offset by the decrease in costs of automobile sold of $420,036 as the number of automobiles sold decreased from 36 to 6.
Gross Profit (loss)
We had gross loss of $1,597,929 during the year ended March 31, 2022 as compared with the gross profit of $204,761 in the last year mainly due to the decreased number of automobile sales and facilitated new automobile purchases. The gross loss from automobile
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rentals from operating lease was $944,852 during the year ended March 31, 2022 as compared with the gross profit of $21,478 in the last year. The main reason was the Company leased and sub-leased approximately 400 automobiles to online ride-haling drivers through its former VIE, Jinkailong during the year ended March 31, 2022. The rental income amounted to approximately $1.3 million from Jinkailong was eliminated in the consolidated financial statements while the sub-leasing income from these automobiles of approximately $1.8 million was recorded in the loss of discontinued operations. The gross loss from our Online Ride-hailing Platform Services was $1,140,686, increased by $720,796 due to we paid excess driver incentives to attractive drivers to our platform in the six months ended September 30, 2022, especially from April to June 2021. Meanwhile, the gross profit generated from sales of automobiles and other revenues with no cost of revenues decreased by $115,565 during the year ended March 31, 2022 as compared with the same period in 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salary and employee benefits, office rental expense, travel expenses, and other costs. Selling, general and administrative expenses increased from $5,905,579 for the year ended March 31, 2021 to $9,525,408 for the year ended March 31, 2022, representing an increase of $3,619,829, or approximately 61.3%. The increase was attributable to more employees hired for business expansion for our new online ride-hailing platform services, the daily operations of our automobile transaction and related services business and the management of the increasing number of automobiles for sublease. The increase mainly consists of an increase of $1,510,876 in salary and employee benefits as the number of our employee increased from 120 to 199, an increase of $945,974 in offices rental and charges, an increase of $589,098 in advertising and promotion for the new online ride-hailing platform services, an increase of $165,851 in amortization of intangible assets and automobiles which were rendered to us but have not been sub-leased as we leased more automobiles, an increase of $159,084 in professional service fees such as financial, legal and market consulting, a liquidated damages compensation of $161,250 for investors in November 2021 Private Placement Warrants and a slight increase of $87,696 in other miscellaneous expenses during the year ended March 31, 20221 as compared with the same period in last year.
Provision for doubtful accounts
As a result of the fierce competition in the online ride-hailing markets in Chengdu and Changsha, and the negative impact of COVID-19, additional 25 online ride-hailing drivers we serviced rendered their automobiles to us for sublease or sale during the year ended March 31, 2022, which decreased by 75 as compared with the same period in 2021. We re-evaluated the possibility of collection of unsettled balances from those drivers and provided additional allowance for doubtful accounts of $123,744 for those receivables during the year ended March 31, 2022, decreased by $175,914 as compared with the same period in 2021. Besides, the Company also recognized allowance of $111,536 for a historical business cooperator who did not settle its balance on time.
Impairments of inventories
For the year ended March 31, 2022, we evaluated the net realizable value of our inventories and recognized an impairment loss of $60,398 for certain automobiles for sale based on their selling price in the market. For the year ended March 31, 2021, we did not recognized impairment for inventories.
Impairments of Long-lived Assets and Goodwill
For the year ended March 31, 2022, we evaluated the future cash flow of our right-of-use assets and our own vehicles used for operating leases during their remaining useful life and recognized an additional impairment loss of $3,044 for those assets that could not generate sufficient cash. Meanwhile, we performed impairment test on goodwill and fully recognized impairment of $139,930 against goodwill. We recognized the impairment loss due to regulatory changes in the online ride hailing industry, and forecast an insufficient future cashflow to support the valuation of our goodwill. For the year ended March 31, 2021, we recognized an impairment loss of $10,953 for certain right-of-use assets that could not generate sufficient cash.
Other income (expenses), net
For the year ended March 31, 2022, we had other expenses, net of $107,444, primarily consist of: (1) a donation by Hunan Ruixi of approximately $190,000 (RMB1,200,000) to a public welfare foundation in Changsha, China; (2) penalty fines of $97,000 for our served online ride-hailing drivers who failed to obtain the ride-hailing driver’s licenses approximately; which was offset by (2) income of approximately $198,000 from some leases. For the year ended March 31, 2021, we had other income, net of $301,269, mainly as a result
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of the receipt of a government subsidy of $147,000 from Sichuan Economic and Information Department for our initial public offering in 2018, and a special support fund of $80,000 for government industrial development from Chengdu Municipal people’s Government.
Interest Expense and Interest Expense on Finance Leases
Interest expense for the year ended March 31, 2022 was $5,893, resulting from the borrowings of Corenel from a financial institution for its automobile commercial insurance by installment.
Interest expense on finance leases for the year ended March 31, 2022 was $55,844, representing the interest expense accrued under financing leases for the leased automobiles rendered to us for sublease or sale by the online ride-hailing drivers who exited the ride-hailing business. Interest expense on finance leases increased by $9,326, or approximately 20%, as compared with the year ended March 31, 2021, mainly due to the weighted average number of rendered automobiles during the year ended March 31, 2022 increased.
Change in Fair Value of Derivative Liabilities
Warrants issued in our registered direct offerings that took place in June 2019, February 2021 and May 2021, and the August 2020 underwritten public offering were classified as liabilities under the caption “Derivative Liabilities” in the consolidated balance sheet and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation model. The change in fair value of derivative liabilities the year ended March 31, 2022 was a gain of $6,951,482 in total as our stock price as of March 31, 2022 was lower than the price on March 31, 2021. The gain consists of a gain of $185,727 for the warrants issued in our June 2019 registered direct offering, a gain of $352,944 for the warrants issued in our August 2020 underwritten public offering, a gain of $572,018 for the warrants issued in our February 2021 registered direct offering, a gain of $2,725,530 for the warrants issued in our May 2021 registered direct offering, and a gain of $3,115,263 for the warrants issued in our November 2021 private placement.
The change in fair value of derivative liabilities for the year ended March 31, 2021 was a loss of $1,710,415 in total, mainly due to our stock price as of March 31, 2021 was higher than the price on March 31, 2020, resulting a loss of $1,372,966 for the warrants issued in our June 2019 registered direct offering, a loss of $455,162 for the warrants issued in our August 2020 underwritten public offering. It was offset by a gain of $117,713 for the warrants issued in our February 2021 underwritten public offering.
Issuance costs for issuing series A convertible preferred stock
Issuance costs for the series A convertible preferred stock in our November 2021 private placement in connection with the placement agent warrants, placement commission and other direct costs were expensed. Total issuance costs charged to expense for the year ended March 31, 2022 were $821,892. Issuance costs allocated to the series A convertible preferred (Mezzanie Equity) were recorded as a reduction of the share balance.
Gain on termination of a VIE
As fully described above, we terminated series of VIE agreements with other shareholders of our former VIEs. We had a gain of $23,554 from the termination of Youlu as it suffered loss during the year ended March 31, 2022. On March 23, 2022, Senmiao Consulting and other shareholders with 94.5% equity interests of Sichuan Senmiao terminated the VIE Agreements and purchased Sichuan Senmiao’s 94.5% equity interests with total consideration of zero. The gain of non-controlling interest from acquired equity interest of Sichuan Senmiao amounted to $366,604 was recognized in the consolidated statements of changes in stockholders’ equity.
Income Tax Expense
Generally, our subsidiaries and former VIEs in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. Income tax expense of $4,566 and $8,332 for the year ended March 31, 2022 and 2021, respectively, mainly represented the provision of enterprise income tax resulting from the taxable income of $18,264 from Hunan Ruixi and $33,328 from Hunan Ruixi, and Yicheng, respectively.
Other subsidiaries in China incurred cumulative losses and no tax expense were recorded.
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Net loss
As a result of the foregoing, net loss from our continuing operations for the year ended March 31, 2022 was $5,606,145, representing a decrease of $1,869,280 from net loss of $7,475,425 for the year ended March 31, 2021.
Results of D iscontinued Operations for the Year Ended March 31, 2022 Compared to the Year Ended March 31, 2021
For the Years Ended
March 31,
2022
2021
Change
Revenues
$
6,830,116
3,978,847
$
2,851,269
Cost of revenues
(5,183,806)
(3,985,413)
(1,198,393)
Gross profit (loss)
1,646,310
(6,566)
1,652,876
Operating expenses
Selling, general and administrative expenses
(4,139,800)
(4,455,967)
316,167
Recovery of (Provision for) doubtful accounts
(11,746)
328,016
(339,762)
Impairments of long-lived assets
(32,479)
(119,886)
87,407
Total operating expenses
(4,184,025)
(4,247,837)
63,812
Loss from operations
(2,537,715)
(4,254,403)
1,716,688
Other income (expenses), net
118,344
(191,916)
310,260
Interest expense
(50,472)
(47,916)
(2,556)
Interest expense on finance leases
(277,366)
(686,684)
409,318
Loss before income taxes
(2,747,209)
(5,180,919)
2,433,710
Income tax expenses
—
(6,295)
6,295
Loss from discontinued operations, net of applicable income taxes
(2,747,209)
(5,187,214)
2,440,005
Net gain from deconsolidation of VIEs - discontinued operations
10,975,101
—
10,975,101
Gain (loss) from discontinued operations
$
8,227,892
(5,187,214)
$
304,678
The results of discontinued operations mainly consist of the financial figures of our former VIE, Jinkailong. Its business result was included in our Automobile Transaction and Related Services before we deconsolidated its financial figures.
Revenues
Revenue for the year ended March 31, 2022 increased by $2,851,269, or approximately 71.7%, as compared with the year ended March 31, 2021. The increase was mainly due to the increase of operating lease revenues. The following table sets forth the breakdown of revenues by revenue source for the years ended March 31, 2022 and 2021:
For the Years Ended
March 31,
2022
2021
Revenue from automobile transactions and related services (discontinued operations)
$
6,830,116
$
3,971,694
- Operating lease revenues from automobile rentals
5,452,483
3,207,781
- Commissions from online ride-hailing platforms
399,600
32,797
- Service fees from NEVs leasing
232,295
—
- Service fees from automobile management and guarantee services
217,838
206,248
- Financing revenues
15,855
43,744
- Facilitation fees from automobile transactions
—
1,665
- Other service fees
512,045
479,459
Revenue from Online Lending Services (discontinued operations)
—
7,153
- Transaction fee
—
3,488
- Service and others fees
—
3,665
Total revenues from discontinued operations
$
6,830,116
$
3,978,847
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Revenue from Automobile Transactions and Related Services (discontinued operations)
Revenue from the automobile transaction and related services (discontinued operations) mainly included operating lease revenues from automobile rentals, commissions from online ride-hailing platforms, service fees from NEVs leasing, service fees from automobile management and guarantee services, and other revenues, which accounted for approximately 79.8%, 5.9%, 3.4%, 3.2% and 7.7%, respectively, of the total revenue from discontinued operations during the year ended March 31, 2022. Meanwhile, operating lease revenues from automobile rentals, service fees from automobile management and guarantee services, and other revenues accounted for 80.6%, 5.2% and 12.9%, respectively, of the total revenue during the year ended March 31, 2021.
Operating lease revenues from automobile rentals
Jinkailong generated revenues from leasing its own automobiles, sub-leasing automobiles leased from other companies or from rendered by online ride-hailing drivers with their authorization for a lease term of no more than twelve months. The increase of rental income of $2,244,707 was due to the increased number of leased automobiles. Jinkailong leased over 1,700 automobiles with an average monthly rental income of $442 per automobile, resulting in a rental income of $5,452,483, for the year ended March 31, 2022. Among them, approximately 400 automobiles were leased or sub-leased from Cornel, which brought rental income of approximately $1.8 million to Jinkailong. And the leasing costs of approximately $1.3 million was recorded as costs of revenue in the consolidated financial statements. Jinkailong leased over 1,100 automobiles with an average monthly rental income of $435 per automobile, resulting in a rental income of $3,207,781, for the year ended March 31, 2021.
Commissions from online ride-hailing platforms
Jinkailong earned commissions from online ride-hailing platforms, such as Meituan and XXTX for drivers serviced and introduced by Jinkailong, who ran their business through these platforms. During the year ended March 21, 2022, Jinkailong earned commissions of $399,600 from Meituan. Meanwhile, it earned commissions of $553,760 from XXTX, which was eliminated in the loss of discontinued operations of the consolidated financial statements. During the year ended March 21, 2021, Jinkailong earned commissions of $32,797 from XXTX, before our acquisition of XXTX.
Service fees from NEVs leasing
Jinkailong generated revenues of $232,295 from leasing NEVs by charging leases service fees during the year ended March 31, 2022 in accordance with the increasing demand for NEVs in the online ride-hailing industry in Chengdu. The amount of services fees for NEVs leasing is based on its product solutions. Jinkailong did not have this kind of revenue during the year ended March 31, 2021.
Service fees from automobile management and guarantee services
The majority of Jinkailong’s customers were online ride-hailing drivers. They also entered into affiliation service agreements with Jinkailong pursuant to which Jinkailong provided them post-transaction management services and guarantee services. The service fees from automobile management and guarantee services remained stable mainly attributed because the average number of automobiles which Jinkailong provided management and guarantee services for remained stable during the year ended March 31, 2022 and 2021 as the number of newly rendered automobiles did not increase significantly during the year ended March 31, 2022.
Other service fees
Jinkailong generated other revenues such as monthly services commissions from insurance companies, and other miscellaneous service fees charged to our customers, which accounted for approximately 41.1 and 58.9% of revenues from other service fees during the year ended March 31, 2022, respectively. The commissions from insurance companies and other miscellaneous service fees charged to the automobile purchasers, which accounted for approximately 77.7%, and 22.3% of revenues from other service fees during the year ended March 31, 2021, respectively. Other service fees increased by $32,586 mainly due to the increase of $194,743 of miscellaneous fees charged to leasees as Jinkailong tightened the daily management of them. If was offset by the decrease of $162,157 of commissions from insurance companies due to the unit commission for used automobiles decreased as compared with the year ended March 31, 2021.
Cost of Revenues
Cost of revenues represents the amortization and depreciation, daily maintenance and insurance expense, and rental costs of automobiles leased to online ride-hailing drivers. Cost of revenues increased by $1,198,393, or approximately 30.1%, during the year
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ended March 31, 2022 as compared with the same period of 2021, mainly due to the increase of $658,092 in daily maintenance and insurance expense as the average insurance premium and maintenance costs increased for automobiles with longer used ages. The rental costs increased by $341,434, mainly due to Jinkailong leased approximately another 500 automobiles, including 400 from Cornel, to expand leasing scale during the year ended March 31, 2022. Meanwhile, the rental costs of approximately $1.3 million belong to Corenel was eliminated in the loss of discontinued operations of the consolidated financial statements. Amortization and depreciation increased by $198,867, due to the utilization of rendered automobiles increased during the year ended March 31, 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of salary and employee benefits, office rental expense, travel expenses, and other costs. Selling, general and administrative expenses decreased from $4,455,967 for the year ended March 31, 2021 to $4,139,800 for the year ended March 31, 2022, representing a decrease of $316,167, or approximately 7.1%. The decrease mainly consists of a decrease of $880,375 in amortization of rendered automobiles. The number of automobiles which were rendered to Jinkailong but have not been sub-leased decreased as Jinkailong sub-leased more automobiles during the year ended March 31, 2022 as compared with the same period in last year. The offices rental and charges also decreased by $258,104 due to costs control, which was offset by an increase of $822,312 in salary and employee benefits attributable to more employees with higher salary hired for expansion for the rental business.
Recovery of (Provision for) doubtful accounts
Jinkailong re-evaluated the possibility of collection of unsettled balances from additional 13 online ride-hailing drivers who rendered their automobiles and provided additional allowance for doubtful accounts of $11,746 for those receivables during the year ended March 31, 2022. While during year ended March 31, 2021, Jinkailong recovered allowance for doubtful accounts of $328,016 for those receivables during the year ended March 31, 2021 as some drivers who postpone the monthly installment at the beginning of year 2020 and repaid them in the first half of the year ended March 31, 2021 as the online ride-hailing market recovered since then. So Jinkailong re-evaluated and updated the provision amount.
Impairments of Long-lived Assets
For the year ended March 31, 2022, Jinkailong evaluated the future cash flow of our right-of-use assets and its own vehicles used for operating leases during their remaining useful life and recognized an additional impairment loss of $32,479 for those assets that could not generate sufficient cash. For the year ended March 31, 2021, Jinkailong recognized an impairment loss of $119,886 for certain right-of-use assets that could not generate sufficient cash.
Other income (expenses), net
For the year ended March 31, 2022, Jinkailong had other income, net of $118,344, primarily consist of the penalty income amounted to $302,131 from some online ride-hailing drivers for their violence on the contracts, which was offset by expenditures of approximately $159,000 such as penalty fines for served drivers who failed to obtain the ride-hailing driver’s licenses. The increase of $310,260 during the year ended March 31, 2022 as compared with the same period in 2021, was mainly due to the increase in penalty income of $158,728, a decrease of $79,927 in penalty fines and a $95,183 in guarantee expenses for drivers who rendered their automobiles as a result of the improvement in the daily management of drivers.
Interest Expense and Interest Expense on Finance Leases
Interest expense for the year ended March 31, 2022 was $50,472, resulting from the borrowings from financial institutions, which had no significant change as compared with the same period in 2021.
Interest expense on finance leases for the year ended March 31, 2022 was $277,366, representing the interest expense accrued under financing leases for the leased automobiles rendered to Jinkailong for sublease or sale by the online ride-hailing drivers who exited the ride-hailing business. Interest expense on finance leases decreased by $409,318 as compared with the year ended March 31, 2021, mainly due to the number of rendered automobiles decreasing over 90% during the year ended March 31, 2022, as well as the decrease in the number of automobiles which were rendered to us but have not been sub-leased as we leased more automobiles.
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Loss from discontinued operations, net of applicable income taxes
As a result of the foregoing, net loss from our discontinued operations, net of applicable income taxes, for the year ended March 31, 2022 was $2,747,209, representing a decrease of $2,440,005 from net loss of $5,187,214 for the year ended March 31, 2021.
Net gain from deconsolidation of VIEs - discontinued operations
As fully described above, we terminated series of VIE agreements with other shareholders of our former VIEs. We had a gain of $10,951,545 from the termination of Jinkailong due to its accumulated loss in historical period. We had a gain of $23,556 from the termination of Youlu as it suffered loss during the year ended March 31, 2022. On March 23, 2022, Senmiao Consulting and other shareholders with 94.5% equity interests of Sichuan Senmiao terminated the VIE Agreements and purchased Sichuan Senmiao’s 94.5% equity interests with total consideration of zero. The gain of non-controlling interest from acquired equity interest of Sichuan Senmiao amounted to $366,604 was recognized in the consolidated statements of changes in stockholders’ equity. The detailed analysis were in Note 3 to our consolidated financial statements.
Liquidity and Capital Resources
We have financed our operations primarily through proceeds from our equity offerings, stockholder loans, commercial debt and cash flow from operations.
We had cash and cash equivalents of $1,185,221 as of March 31, 2022 as compared to $4,340,529 as of March 31, 2021 for our continuing operations. We primarily hold our excess unrestricted cash in short-term interest-bearing bank accounts at financial institutions.
On May 13, 2021, we closed a registered direct offering of 5,531,916 shares of our common stock at $1.175 per share, pursuant to a securities purchase agreement with certain accredited investors. As a result, we raised approximately $5.8 million, net of placement agent fees and offering expenses, to support our working capital requirements.
On November 10, 2021, we completed a private placement of 5,000 shares of our series A convertible preferred stock at $1,000 per share, pursuant to a securities purchase agreement with certain institutional investor. As a result, we raised approximately $4.4 million, net of placement agent fees and offering expenses, to support our working capital requirements.
Our business is capital intensive. We have considered whether there is substantial doubt about our ability to continue as a going concern due to (1) net loss of approximately $5.6 million from continuing operations for the year ended March 31, 2022; (2) accumulated deficit of approximately $34.9 million as of March 31, 2022; (3) the working capital deficit of approximately $0.6 million as of March 31, 2022; (4) net operating cash outflows of approximately $9.0 million and $0.1 million from continuing operations and discontinued operations, respectively, for the year ended March 31, 2022; and (5) the purchase commitment of approximately $1.7 million. As of March 31, 2022, we have entered into a purchase contract with an automobile dealer to purchase a total of 200 automobiles for the amount of approximately $3.4 million. As of the date of this Report, 100 automobiles of approximately $1.7 million have been purchased in cash and delivered to us and the remaining purchase commitment of approximately $1.7 million shall be completed with financing option through the dealer’s designated financial institutions.
We have determined there is substantial doubt about our ability to continue as a going concern. If we are unable to generate significant revenue, we may be required to cease or curtail our operations. We are trying to alleviate the going concern risk through the following sources:
● will continue to seek equity financing to support our working capital;
● other available sources of financing (including debt) from PRC banks and other financial institutions; and
● financial support and credit guarantee commitments from our related parties.
Based on the above considerations, we are of the opinion that we will probably not have sufficient funds to meet its working capital requirements and debt obligations as they become due one year from the date of this Report, if we are unable to obtain additional financing. In addition, the maximum contingent liabilities for automobile purchasers we would be exposed to was approximately $0.8 million as of March 31, 2022, assuming all the automobile purchasers were in default. There is no assurance that we will be successful
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in implementing the foregoing plans or that additional financial will be available to us on commercially reasonable terms, or at all. There are a number of factors that could potentially arise and undermine our plans, such as (i) the impact of the COVID-19 pandemic on our business and areas of operations in China; (ii) changes in the demand for our services; (iii) PRC government policies; (iv) economic conditions in China and worldwide; (v) competitive pricing in the automobile transaction and related service and ride-hailing industries; (vi) changes in our relationships with key business partners; (vii) that financial institutions in China may not able to provide continued financial support to our customers; and (viii) the perception of PRC-based companies in the U.S. capital markets. Our inability to secure needed financing when required could require material changes to our business plans and could have a material adverse effect on our viability and results of operations.
For the Years Ended
March 31,
2022
2021
Net Cash Used in Operating Activities
$
(9,159,281)
$
(3,936,067)
Net Cash Used in Investing Activities
(3,477,125)
(2,510,862)
Net Cash Provided by Financing Activities
9,755,410
10,259,777
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(381,858)
(208,800)
Cash and Cash Equivalents at Beginning of Period
4,448,075
844,027
Cash and Cash Equivalents at End of Period
1,185,221
4,448,075
Less: Cash and cash equivalents from discontinued operations
—
(107,546)
Cash and cash equivalents from continuing operations, end of years
$
1,185,221
$
4,340,529
Cash Flow in Operating Activities
For the year ended March 31, 2022, net cash used in operating activities was $9,159,281, which consists of outflows of $9,036,114 from continuing operations and $123,167 discontinued operations. While for the year ended March 31, 2021, net cash used in operating activities was $3,936,067, which consists of $3,196,138 from continuing operations and $739,929 from discontinued operations.
The total net cash used in operating activities from continuing operations primarily comprised of the payment of salary and employee benefits of $3,372,130, other operating costs of $5,505,972, and maintenance fees, insurance and other costs for automobiles and related transactions of $5,697,763, partially offset by revenue received of $4,905,648 and the net collection of $634,103 on automobiles used for financial lease to be collected within the lease terms. The increase of $5,839,976 in net cash used in operating activities from continuing operations for the year ended March 31, 2022 was primarily attributable to (1) decrease of $8,661,897 in the change of fair value of derivative liabilities as our stock price is running below our stock warrant’s exercise price; (2) decrease of $2,500,975 in the change of accrued expenses and other liabilities; (3) increase of $433,090 in the change of inventories; offset by (4) decrease of $1, 869,280 in net loss; (5) increase of $1,481,087 in depreciation and amortization of long-lived assets; (6) issuance cost for issuing series A convertible preferred stock of $821,892 in November 2021 private placement; (7) decrease of $1,394,978 in the change of prepayments, other receivables and other assets; and (8) increase of $192,419 in impairments of inventories and long-lived assets.
For the year ended March 31, 2021, net cash used in operating activities from discontinued operation was primarily the payment to investors of the discontinued P2P platform of $1.7 million, offset by the net cash inflow of approximately $1.0 million for the year ended March 31, 2021.
Cash Flow in Investing Activities
For the year ended March 31, 2022, we had net cash used in investing activities of $3,477,125, which consisted of the net cash used in investing activities of $3,365,915 from continuing operations and $111,210 from discontinued operations. The majority net cash used in investing was for the purchase of automobiles for operating lease purpose and expenditures on the licenses of online ride-hailing platforms in different cities in China.
For the year ended March 31, 2021, we had net cash used in investing activities of $2,510,862, which consisted of the net cash used in investing activities of $2,310,697 from continuing operations and $200,165 from discontinued operations. The majority net cash used in investing was for the purchase of automobiles for operating lease purpose.
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Cash Flow in Financing Activities
For the year ended March 31, 2022, we had net cash provided by financing activities of $9,755,410, which primarily consisted of: (1) total net proceeds of approximately $5.8 million from our registered public offering in May 2021, approximately $4.4 million from our private placement in November 2021, and $22,015 from exercised warrants from investors, respectively; (2) borrowings from a financial institution of $183,390, partially offset by (3) principal payments made for finance lease liabilities of $433,611, and (4) repayments to related parties and the financial institution of $157,374.
For the year ended March 31, 2021, we had net cash provided by financing activities of $10,259,777, which primarily consisted of: (1) total net proceeds of $11.8 million from our underwritten public offering in August 2020 and registered public offering in February 2021; (2) $683,046 from exercised warrants from investors, respectively; partially offset by (3) principal payments made for finance lease liabilities of $2,230,765, (5) repayments to related parties of $138,587; and (5) Net cash received from borrowings from financial institutions of discontinued operations of $103,881.
Off-Balance Sheet Arrangements
As of the date of this Report, we have the following off-balance sheet arrangements that are likely to have a future effect on our financial condition, revenues or expenses, results of operations and liquidity:
● Purchase Commitments
On February 22, 2021, we entered into one purchase contract with an automobile dealer to purchase a total of 200 automobiles for the amount of approximately $3.4 million. Pursuant to the contract, we are required to purchase 100 automobiles in cash with the amount of approximately $1.7 million. The remaining 100 automobiles purchase commitment with the amount of approximately $1.7 million shall be completed with financing option through the dealer’s designated financial institutions. As of the date of this Report, 100 automobiles of the contract signed in February 2021 have been purchased in cash and delivered to us. As we are in process of getting approval from the dealer’s designated financial institutions in financing the 100 automobiles’ purchase, there is no clear timing schedule for completing the remaining purchase commitment with this automobile dealer. However, we expect the purchase to be completed by December 31, 2022.
● Contingent Liabilities
Hunan Ruixi is exposed to credit risk as we are required by certain financial institutions to provide guarantee on the lease/loan payments (including principal and interests) of the automobile purchasers referred by us. As of March 31, 2022, the maximum contingent liabilities Hunan Ruixi would be exposed to was approximately $0.8 million, assuming all the automobile purchasers were in default, which may cause an increase in guarantee expense and cash outflow in financing activities. Besides, the maximum contingent liabilities our former VIE, Jinkailong, would be exposed to was approximately $6.3 million, assuming all the automobile purchasers were in default, which may cause an increase in guarantee expense and cash outflow in its own financing activities. As Hunan Ruixi holds 35% of equity interest of Jinkailong and has not made any consideration towards to the investment, Hunan Ruixi will subject to the maximum amount of RMB3.5 million (approximately $570,000) of which is equivalent to 35% of liabilities in case Jinkailong is liquidated in accordance with PRC’s company registry compliance.
Inflation
We do not believe our business and operations have been materially affected by inflation.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S GAAP. These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets and liabilities at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our past experience, knowledge and assessments of current business and other conditions, our expectations regarding the future based on available information and assumptions.
The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our
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financial statements. We believe the following accounting policies involve the most significant assumptions and estimates used in the preparation of our consolidated financial statements.
(a)
Use of estimates
In presenting the consolidated financial statements in accordance with U.S. GAAP, management make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgement and available information. Accordingly, actual results could differ from those estimates. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause us to revise our estimates. we base our estimates on past experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, lease classification and liabilities, finance lease receivables, inventory obsolescence, right-of-use assets, determinations of the useful lives and valuation of long-lived assets, estimates of allowances for doubtful accounts and prepayments, estimates of impairment of long-lived assets and goodwill, valuation of deferred tax assets, estimated fair value used in business acquisitions, valuation of derivative liabilities, allocation of fair value of derivative liabilities, issuance of common stock and warrants exercised and other provisions and contingencies.
(b)
Fair values of financial instruments
Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of us. The three levels of valuation hierarchy are defined as follows:
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value.
(c)
Property and equipment
Property and equipment primarily consist of automobiles, leasehold improvements, computers and other equipment, which is stated at cost less accumulated depreciation less any provision required for impairment in value. Depreciation is computed using the straight-line method with no residual value based on the estimated useful life.
(d)
Mezzanine Equity (redeemable)
We evaluate our convertible preferred stock in accordance with ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to determine if its convertible preferred stock should be treated as a liability or an equity. As a result, the convertible preferred stock should be treated as an equity as it did not meet the definition of liability instrument. In accordance with ASC 480-10-s99, the convertible preferred stock should be classified as a mezzanine equity, since it contained a change of control redemption right feature which is not solely within our control.
(e)
Derivative liabilities
A contract is designated as an asset or a liability and is carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. We then determine which options, warrants and embedded features require liability accounting and records the fair value as a derivative liability. The changes in the values of these instruments are shown in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss as “change in fair value of derivative liabilities”.
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(f)
Revenue recognition
We recognize our revenue under ASC 606. 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. It also requires us to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.
To achieve that core principle, we apply the five steps defined under ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
We account for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration to collect is substantially probable.
We have assessed the impact of the guidance by reviewing our 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, we concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of ASC 606 and therefore there was no material changes to our unaudited condensed consolidated financial statements upon adoption of ASC 606.
Automobile Transaction and Related Services
Operating lease revenues from automobile rentals – We generate revenue from sub-leasing automobiles from some online ride-hailing drivers or leasing our own automobiles. We recognize revenue wherein an automobile is transferred to the lessee and the lessee has the ability to control the asset, is accounted for under ASC Topic 842. Rental transactions are satisfied over the rental period. Rental periods are short term in nature, generally are twelve months or less.
Financing revenues – Interest income from the lease arising from our sales-type leases and bundled lease arrangements is recognized in financing revenues over the lease term based on the effective rate of interest in the lease.
Service fees from management and guarantee services – Over 95% of our customers are online ride-hailing drivers. The drivers sign affiliation agreements with us, pursuant to which we provide them with management and guarantee services during the affiliation period. Service fees for management and guarantee services are paid by such automobile purchasers on a monthly basis for the management and guarantee services provided during the affiliation period. We recognize revenue over the affiliation period when performance obligations are completed.
Sales of automobiles – We generate revenue from sales of automobiles to the customers of Jinkailong and Hunan Ruixi. The control over the automobile is transferred to the purchaser along with the delivery of automobiles. The amount of the revenue is based on the sale price agreed by Hunan Ruixi or Jinkailong and their customers. We recognize revenues when an automobile is delivered and control is transferred to the purchaser. Accounts receivable related to the revenue are being collected over 36 to 48 months. The interest component is included in the non-current portion of the accounts receivable.
Service fees from NEVs leasing and automobile purchase services – Services fees from NEVs leasing and automobile purchase services are paid by lessees who rent new energy electric vehicles from us or automobile purchasers for a series of the services provided to them throughout the purchase process such as credit assessment, preparation of financing application materials, assistance with closing of financing transactions, license and plate registration, payment of taxes and fees, purchase of insurance, installment of GPS devices, ride-hailing driver qualification and other administrative procedures. The amount of services fees for NEVs leasing is based on the product solutions while these fees for purchase is based on the sales price of the automobiles and relevant services provided. We recognize revenue when all the services are completed and an automobile is delivered to the purchaser at a point in time. Accounts receivable related to the revenue from NEVs leasing is collected upon the NEVs are delivered to lessees while accounts receivables from purchase services are being collected over 36 to 48 months. The interest component is included in the non-current portion of the accounts receivable.
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Online ride-hailing platform service revenue
We generate revenue from providing services to online ride-hailing drivers (“Drivers”) to assist them in providing transportation services to riders (“Riders”) looking for taxi/ride-hailing services. We earn commissions for each completed order in an amount equal to the difference between an upfront quoted fare and the amount earned by a Driver based on actual time and distance for the ride charged to the Rider. As a result, we bear a single performance obligation in the transaction of connecting Drivers with Riders to facilitate the completion of a successful transportation service for Riders. We recognize revenue upon completion of a ride as the single performance obligation is satisfied and we have the right to receive payment for the services rendered upon the completion of the ride. We evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the Rider and are the principal (i.e., “gross”), or we arrange for other parties to provide the service to the Rider and are an agent (i.e., “net”). Since we are not primarily responsible for ride-hailing services provided to Riders, nor do we have inventory risk related to the services, we recognize revenue at net basis.
Leases
We account for leases in accordance with ASC 842. The two primary accounting provisions we use to classify transactions as sales-type or operating leases are: (i) a review of the lease term to determine if it is for the major part of the economic life of the underlying equipment (defined as greater than 75%); and (ii) a review of the present value of the lease payments to determine if they are equal to or greater than substantially all of the fair market value of the equipment at the inception of the lease (defined as greater than 90%). Automobiles included in arrangements meeting these conditions are accounted for as sales-type leases. Interest income from the lease is recognized in financing revenues over the lease term. Automobiles included in arrangements that do not meet these conditions are accounted for as operating leases and revenue is recognized over the term of the lease.
We exclude from the measurement of our lease revenues any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer.
We consider the economic life of most of automobile to be three to four years, since this represents the most frequent contractual lease term for its automobile and the automobile will be used for Didi driving services. We believe three to four years is representative of the period during which the automobile is expected to be economically usable, with normal service, for the purpose for which it is intended.
A portion of our direct sales of automobile to end customers are made through bundled lease arrangements which typically include automobile, services (automobile purchase services, facilitation fees, and management and guarantee services) and financing components where the customer pays a single negotiated fixed minimum monthly payment for all elements over the contractual lease term. Revenues under these bundled lease arrangements are allocated considering the relative standalone selling prices of the lease and non-lease deliverables included in the bundled arrangement and the financing components. Lease deliverables include the automobile and financing, while the non-lease deliverables generally consist of the services and repayment of advanced fees made on behalf of its customers. We consider the fixed payments for purposes of allocation to the lease elements of the contract. The fixed minimum monthly payments are multiplied by the number of months in the contract term to arrive at the total fixed lease payments that the customer is obligated to make over the lease term. Amounts allocated to the automobile and financing elements are then subjected to the accounting estimates under ASC 842 to ensure the values reflect standalone selling prices. The remainder of any fixed payments are allocated to non-lease elements (automobile purchase services, facilitation fees, and management and guarantee services), for which these revenues are recognized in a manner consistent with the guidance for service fees from automobile purchase services, facilitation fees from automobile transactions, and service fees from management and guarantee services as discussed above.
Our lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are developed based upon the local prevailing rates in the marketplace where its customer will be able to obtain an automobile loan under similar terms from the bank. We reassess our pricing interest rates quarterly based on changes in the local prevailing rates in the marketplace. As of March 31, 2022, our pricing interest rate was 6.0% per annum.
(g)
Share-based awards
Share-based awards granted to our employees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of
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estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying shares.
At each date of measurement, we review internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by us, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. We are required to consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.
(h)
Leases
We account for leases in accordance with ASC 842. Beginning in the year ended March 31, 2020, we entered into certain agreements as a lessor under which we lease automobiles to short-term (usually under twelve months) car service drivers. We also enter into certain agreements as a lessee to lease automobiles and to conduct our automobiles rental operations. If any of the following criteria are met, we classify the lease as a finance lease (as a lessee) or as a direct financing or sales-type lease (both as a lessor):
● The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
● The lease grants the lessee an option to purchase the underlying asset that the Company is reasonably certain to exercise;
● The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date falls within the last 25% of the economic life of the underlying asset;
● The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or
● The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
Leases that do not meet any of the above criteria are accounted for as operating leases.
We combine lease and non-lease components in its contracts under Topic 842, when permissible.
Finance and operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the implicit rate for our leases is not readily determinable, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that we would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as we do not have reasonable certainty at lease inception that these options will be exercised. We generally consider the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. We have elected the short-term lease exception; therefore, operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. The leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
We review the impairment of our ROU assets consistent with the approach applied for our other long-lived assets. We review the recoverability of its long-lived assets when events or changes in circumstances occur, indicating that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. We have elected to include the carrying amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash flows.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
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