Freight Technologies, Inc 20-F for FY2021
Freight Technologies, Inc. (FRGT)
About this 20-F
Freight Technologies, Inc filed this 20-F on April 29, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $2.15M
- compared with a net loss of $9.08M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
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| Emerging
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INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
| ● | “we,” “us,” “our Company,” “our,” or “HUSN” refers to Hudson Capital Inc. (formerly known as China Internet Nationwide Financial Services, Inc.), its subsidiaries, and, in the context of describing our operations and consolidated financial information, our consolidated affiliated entities in China, including but not limited to, prior to the Merger, Hongkong Internet Financial Services Limited, Hongkong Shengqi Technology Limited, Beijing Yingxin Yijia Network Technology Co., Ltd, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd, Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd., Fu Hui (Shenzhen) Commercial Factoring Co., Ltd., Ltd., CIFS (Xiamen) Financial Leasing Co., Ltd., Fuhui (Xiamen) Commercial Factoring Co., Ltd., Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd., Hangzhou Yuchuang Investment Partnership and our U.S. subsidiaries, Hudson Capital USA Inc., Hudson Capital Merger Sub I Inc. and Hudson Capital Merger Sub II Inc and after the Merger, Freight App, Inc. and Freight App de México S.A De C.V. | |
| ● | “China” or “PRC” refers to the People’s Republic of China, and solely for the purpose of this annual report, excluding Taiwan, Hong Kong and Macau; | |
| ● | “Fr8App” refers to Freight App, Inc. | |
| ● | “Merger” refers to the consummation of that certain merger agreement, dated December 13, 2021, and as amended on December 29, 2021 (the “Merger Agreement”) by and among Hudson Capital, Inc,. Hudson Capital Merger Sub I, Inc., a Delaware corporation and wholly-owned subsidiary of Hudson Capital (“Merger Sub”), Freight App, Inc., a Delaware corporation (“Fr8App”) and ATW Master Fund II, L.P., as the representative of the stockholders of Fr8App (the “Stockholders’ Representative”) whereby Merger Sub I merged with and into Fr8App, with Fr8App surviving the Merger and continuing as a direct wholly-owned subsidiary of the Company. The Merger closed on February 14, 2022 and the separate corporate existence of Merger Sub I and its Certificate of Incorporation and by-laws then in effect ceased, and the organizational documents of Fr8App after the Merger is in the form as agreed by the Company and Fr8App. | |
| ● | “shares” or “ordinary shares” refers to our ordinary shares, par value $0.011 per share and prior to the Merger, par value $0.005. | |
| ● | “U.S.” means the United States of America; | |
| ● | “U.S. GAAP” refers to generally accepted accounting principles in the United States; | |
| ● | “RMB” or “Renminbi” refers to the legal currency of China; | |
| ● | “$,” “dollars,” “US$” or “U.S. dollars” refers to the legal currency of the United States; and | |
| ● | all discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding. |
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FORWARD-LOOKING INFORMATION
This annual report on Form 20-F and the documents incorporated by reference into this annual report on Form 20-F contain forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as neither Hudson Capital Inc. nor Fr8App can assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “anticipates,” “believes,” “continue,” “could,” “design,” “estimates,” “expects,” “intends,” “may,” “plans,” “potentially,” “predict,” “pro forma” “seeks,” “should,” “will” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology.
All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. Forward-looking statements may also include any statements of the plans, strategies and objectives of management with respect to the approval and the closing of the Merger and other matters related to the Merger.
For a discussion of the factors that may cause Hudson Capital, Inc. and Fr8App’s (after the Merger) actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, and the effect of the Merger on the business of the Company and Fr8App, see the section titled “Item 3. Key Information — D. Risk Factors.” Those risks are not exhaustive. We operate in a rapidly evolving environment. New risk factors emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.
These forward-looking statements include, but are not limited to, statements concerning the following:
| ● | growth strategies: | |
| ● | future business development, results of operations and financial condition; | |
| ● | any statement concerning the attraction and retention of highly qualified personnel; | |
| ● | our ability to attract and retain users and customers and generate revenue and profit from our customers; | |
| ● | any statements concerning Fr8App’s financial performance; | |
| ● | any statements regarding expectations concerning Fr8App’s relationships and actions with third parties; and | |
| ● | future regulatory, judicial and legislative changes in Fr8App’s industry. |
You should not rely upon forward-looking statements as predictions of future events. Neither Hudson Capital Inc. nor Fr8App can assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur.
All forward-looking statements in this annual report on Form 20-F prospectus are current only as of the date on which the statements were made, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, neither Hudson Capital Inc. nor Fr8App undertakes any obligation to update publicly any forward-looking statements for any reason after the date of this annual report on Form 20-F or to conform these statements to actual results or to changes in expectations.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
| A. | Select Financial Data |
The following table presents the selected consolidated financial information for our Company. The selected consolidated statements of comprehensive income data for the three years ended December 31, 2019, 2020 and 2021 and the consolidated balance sheets data as of December 31, 2019, 2020 and 2021 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1.
Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP.
| All $ Numbers (US$’000’s) | Year Ended December 31, 2021 |
Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
|||||||||
| Revenue | ||||||||||||
| - Third parties | $ | - | $ | 0.6 | $ | 1,366.4 | ||||||
| - Related parties | - | - | - | |||||||||
| Total revenue | - | 0.6 | 1,366.4 | |||||||||
| Cost of revenues | - | - | 0.1 | |||||||||
| Gross profit | - | 0.6 | 1,366.3 | |||||||||
| Operating expenses | ||||||||||||
| Selling and marketing expenses | - | 10.7 | 100.5 | |||||||||
| General and administrative expenses | 2,495.3 | 4,123.1 | 1,893.5 | |||||||||
| Research & Development Expense | - | - | - | |||||||||
| Donation expenses | - | - | - | |||||||||
| Total Operating expenses | 2,495.3 | 4,133.9 | 1,994.0 | |||||||||
| (Loss) income from operations | (2,495.3 | ) | (4,133.2 | ) | (627.7 | ) | ||||||
| Other income (expenses) | ||||||||||||
| Interest income on bank deposit | 0.0 | 0.0 | 0.7 | |||||||||
| Loss on disposal of a subsidiary | ||||||||||||
| Other income (expenses) | 349.0 | 38.9 | (5,611.5 | ) | ||||||||
| Interest income from loans to third parties | 0.8 | 365.0 | 2,191.6 | |||||||||
| Impairment loss on loans to third parties and property and equipment | - | (5,346.0 | ) | (57,941.7 | ) | |||||||
| Total other (expenses) income, net | (2,145.5 | ) | (4,942.1 | ) | (61,360.9 | ) | ||||||
| (Loss) Income before income tax expenses | (2,145.5 | ) | (9,075.4 | ) | (61,988.5 | ) | ||||||
| Income tax (benefit) expenses | - | - | 7.2 | |||||||||
| Net (loss) income | $ | (2,145.5 | ) | $ | (9,075.4 | ) | $ | (61,995.8 | ) | |||
| Other comprehensive (loss) income | ||||||||||||
| Foreign currency translation (loss) gain | 558.0 | 2,686.4 | (365.3 | ) | ||||||||
| Comprehensive (loss) Income | $ | (1,587.5 | ) | $ | (6,389.0 | ) | $ | (62,361.0 | ) | |||
| Weighted average number of shares, basic and diluted | 6,574,226 | 6,406,146 | 4,422,837 | * | ||||||||
| (Loss) earnings per share, basic and diluted | $ | (0.33 | ) | $ | (1.42 | ) | $ | (0.85 | )* | |||
* - The number of shares outstanding was adjusted retroactively for all period presented to reflect the 5 to 1 reverse stock split change which was effective on October 29, 2020.
Warrants to purchase common stock are not included in the diluted loss per share calculations when their effect is antidilutive.
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| B. | Capitalization and indebtedness |
Not applicable.
| C. | Reasons for the offer and use of proceeds |
Not applicable.
| D. | Risk Factors |
COVID-19 Pandemic
A global pandemic or spread of disease, real or perceived, as well as natural disasters in any country in which Fr8App operates could materially and adversely affect the demand for its services, its operations and financial conditions.
The novel coronavirus (COVID-19) pandemic and the concurrent economic slowdown may have an unexpected effect on Fr8App’s business, financial condition, and results of operations. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, supply chains, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn across many global economies. COVID-19 has also caused widespread unemployment and border closings.
Due to COVID-19, Fr8App has experienced great volatility in global and domestic supply chains. The extent to which COVID-19 ultimately impacts the third-party logistics (“3PL”) industry, Fr8App’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity and duration of the COVID-19 outbreak and any additional virus strains and the effectiveness of actions taken to contain the COVID-19 outbreak, among others. Additionally, the extent to which COVID-19 ultimately impacts Fr8App’s operations will depend on a number of factors, many of which will be outside of its control. The COVID-19 outbreak is evolving, and new information emerges daily; accordingly, the ultimate consequences of the COVID-19 outbreak cannot be predicted with certainty.
Severe weather conditions and other natural or manmade disasters, including storms, floods, fires, earthquakes, epidemics, pandemics, conflicts, unrest, or terrorist attacks, may disrupt Fr8App’s business and result in decreased revenues. Customers may reduce shipments, or Fr8App’s costs to operate its business may increase, either of which could have a material adverse effect on Fr8App. Any such event affecting one of the countries in which Fr8App operates could result in a significant interruption in its business. Natural disasters such as major fires in Australia, Brazil and the Western United States and other major weather or geological events around the globe could adversely affect the demand for its services, its operations and financial condition.
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Risks Related to Fr8App’s Business
Fr8App’s limited operating history may make it difficult for you to evaluate the success of its business to date and to assess its future viability.
Fr8App was founded in 2015 with a view to developing and bringing solutions to the cross-border commercial freight market on the U.S.-Mexico border, and by extension, the U.S.-Canada border. The first commercial version of Fr8App’s products was launched in 2017. Fr8App continued its product development efforts throughout 2018, added initial business intelligence and analytics to supplement its basic products in 2019 and offered its revised products package with active freight brokerage support towards the end of 2019 and into early 2020. The latest generation of Fr8App products was brought to market during the second quarter of 2020 and a new management team was hired during the second and third quarters of 2020 to bring a renewed focus to promoting freight services to Shippers and Carriers (each as defined below). Accordingly, you should consider Fr8App’s prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development. Any predictions you make about its future success or viability may not be as accurate as they would be if Fr8App had a longer operating history or a history of successfully developing and marketing its product offerings. Fr8App’s relatively limited operating history may make it difficult for you to evaluate the success of its business and assess its future viability.
Fr8App may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving its business objectives. Fr8App’s transition from a company with a development focus to a company successfully marketing and monetizing its product offerings may take longer than anticipated, or may not be successful at all.
Fr8App’s early stage operations could expose it to a high concentration of revenues in individual clients and increase the volatility of its revenues.
Fr8App works with a number of large corporate entities in addressing their logistics needs. Many of these clients use Fr8App for a very small amount of their overall logistics needs. Shippers tend to be repeat customers and can grow in size relative to Fr8App’s book of business in an accelerated manner. Fr8App’s largest single client during 2021 represented approximately 37% of total 2021 revenues. Large increases and decreases in Fr8App’s client base may add volatility to results while the Company remains in its early growth stages.
A significant data breach or IT system disruption could materially adversely affect Fr8App, including requiring Fr8App to increase spending on data and system security.
Fr8App relies heavily on information technology networks and systems, including the Internet and a number of internally-developed systems and applications, to manage or support a wide variety of important business processes and activities throughout its operations. For example, Fr8App relies on information technology to analyze its customer loads and input their information into its databases, identify different routes and their costs, track ongoing shipments, confirm receipts, transfer documents, and a number of other functions that are integral to the ongoing operation of Fr8App’s business.
In addition, the provision of service to Fr8App’s customers and the operation of its networks and systems involve the collection, storage and transmission of significant amounts of information and potentially sensitive or confidential data. Fr8App is subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to us is often uncertain and may be conflicting, particularly with respect to foreign laws.
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Fr8App’s information technology systems are susceptible to damage, disruptions or shutdowns due to programming errors, defects or other vulnerabilities, power outages, hardware failures, computer viruses, cyber-attacks, ransomware attacks, malware attacks, theft, misconduct by employees or other insiders, telecommunications failures, misuse, human errors or other catastrophic events. Hackers acting individually or in coordinated groups, may launch distributed denial of service attacks or other coordinated attacks that may cause service outages, gain inappropriate or block legitimate access to systems or information, or result in other interruptions in Fr8App’s business. In addition, the foregoing breaches in security could expose Fr8App and its customers to a risk of loss, disclosure or misuse of proprietary information and sensitive or confidential data.
Fr8App protects its software, web portal and platform solutions from third-party attacks and implement what it believes to be state-of-the art prophylactic controls around and throughout its software environment. However, there is no assurance that Fr8App’s web portal and platform solution will not sometimes malfunction or be subject to malicious attacks. Any unexpected malfunction of Fr8App’s system could cause major interruptions to its daily operations, including its ability to deliver its third-party logistics (“3PL”) services to customers, to collect payments from its customers or pay its key suppliers. Although to date Fr8App is unaware of a data breach or system disruption that has had a material adverse effect on it, Fr8App cannot provide any assurances that such events and impacts will not be material in the future, and its efforts to deter, identify, mitigate and/or eliminate future breaches may require significant additional effort and expense and may not be successful.
Trade wars or adverse political changes in any country in which Fr 8App operates could materially and adversely affect the demand for its services, its operations and financial conditions.
Fr8App has business operations in the U.S., Mexico and Canada. These three countries currently have a free trade agreement which directly impacts the amount of international trade across the US-Mexico and the US-Canada borders. The first such trade agreement went into effect in 1994 and was followed by tremendous increase in trade amongst all three countries. Unanticipated changes in the trade agreements or sudden political changes in any of these three countries in which Fr8App operates could have a material adverse effect on customers’ demand for its services. Fr8App’s business can be greatly impacted by the laws, regulations and policies that affect trade among these three countries, including tariff and trade policies, export requirements and other restrictions. The factors that result in general economic changes are also beyond Fr8App’s control, and it may be difficult for Fr8App to adjust its business model to mitigate the impact of these factors. In particular, Fr8App’s business is affected by levels of industrial production, consumer spending and retail activity and Fr8App could be materially and adversely affected by adverse developments in these and other aspects of the economies in which Fr8App operates. If Fr8App is unable to implement its business strategies successfully or properly react to changes in market conditions as a result of trade wars or political changes in these countries, its financial condition, results of operations and cash flows could be materially and adversely affected.
Fr8App’s industry is rapidly evolving. It expects to continue to face significant competition, which could adversely affect Fr8App.
The 3PL industry is rapidly evolving, including demand for greater efficiency and increased visibility into the shipment lifecycle. Fr8App expects continued significant competition on a national and international level. Fr8App’s competitors include the postal services of the U.S. and other nations, various motor carriers, express companies, freight forwarders, air couriers, large transportation and e-commerce companies that are making significant investments in their capabilities, and start-ups and other companies that combine technologies with crowdsourcing to focus on local market needs, some of whom may currently be its customers.
Competition may also come from other sources in the future as new technologies are developed and new methods of transportations are made widely available. Innovations in transportation technology, including driverless trucks, artificial intelligence and logistics could adversely affect the demand for Fr8App’s 3PL services. If Fr8App is unable to adapt to these changes, its business could be adversely affected.
Fr8App is directly affected by the cyclicality of the trucking industry and general economic conditions.
The trucking industry has historically been highly cyclical and especially susceptible to trends in economic activity. The trucking industry has historically fluctuated in response to factors that are beyond Fr8App’s control, such as general economic conditions, interest rates, federal and state regulations, consumer spending and fuel costs. The industry is particularly sensitive to the consumer, industrial and manufacturing sectors of the economy, which generate a significant portion of the freight tonnage hauled by heavy-duty trucks. Since truck fleet owners and professional truck drivers are some of the key carriers Fr8App serves, Fr8App’s business activities are directly tied to the purchase and production of goods and other key macro-economic measurements. When individuals and companies purchase and produce fewer goods, Fr8App’s customers transport fewer goods. Downturns in consumer business cycles, such as the home construction, automobile, and manufactured goods sectors, can create excess capacity in the trucking industry and may have a material adverse effect on Fr8App’s business and operating results.
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Fr8App could be affected by strikes or labor unrest at any border crossing that is relied upon by its customer base.
The cross-border trucking industry relies on many government-provided services and agencies such as the U.S. Customs and Border Protection that may be unionized and is subject to strikes or labor unrest that could be disruptive to cross-border freight on a short-term basis. Lower or inefficient cross-border crossings due to labor unrest or strikes could adversely affect Fr8App’s customers and Fr8App’s operating results and financial condition.
Fr8App is exposed to the effects of changing fuel and energy prices, including gasoline, jet fuel and diesel, and what interruptions in supplies of these commodities can bring to the demand for the shipping and commercial freight industry.
Changing fuel and energy costs have a significant impact on the expenses incurred by the shipping and commercial freight industry. On April 20, 2020, the price for oil traded at negative prices for the first time in modern history. In the event that this short-term distortion in fuel prices were to last, air freight costs would continue to drop, making it an attractive alternative to trucking. If air freight or some other form of freight became increasingly attractive to shippers in general, there could be a switch from truck freight to air freight, or some other, more economic means of freight. During March 2022, gasoline prices in the United States were reaching historic highs with significant day to day volatility. Higher fuel charges may affect Carriers results and performance when they are unable to pass on their higher costs to Shipper clients. Changes in fuel prices, disruption in energy supplies as a result of war, actions by producers or other factors beyond Fr8App’s control, could in turn have a material adverse effect on Fr8App’s business.
Truck Driver or other supply shortages within the transportation value chain could have material adverse effect on Fr8App’s business and operating results.
Fr8App’s freight brokerage support and customer services relies on Fr8App being able to assist with securing carrier services for shippers at commercially feasible rates. Truck driver or other supply shortages within the transportation value chain could adversely affect Fr8App’s ability to secure carrier services at commercially favorable rates, which could, in turn, have a material adverse effect on Fr8App’s business and operating results.
Fr8App currently does not hold any patents or own any registered trademarks.
Fr8App currently does not hold any patents or own any registered trademarks. Although Fr8App believes that the success of its business depends on the quality of its proprietary software solutions, technology, processes, and domain expertise, and has taken appropriate steps to protect its intellectual property, the measures taken may not be inadequate.
On September 6, 2018, Hub Group, Inc. (“Hub Group”) filed a Notice of Opposition with the Trademark Trial and Appeal Board (“TTAB”) against Fr8App’s U.S. Trademark Application Serial No. 87102800 (the “Trademark Application”) for its “Fr8HUB” unitary design mark (the “Mark”). On August 27, 2021 Fr8App and Hub Group entered into a binding Settlement Agreement and Release (the “Settlement”) fully resolving the TTAB proceeding. Under the terms of the Settlement, Fr8App agreed to irrevocably abandon the Trademark Application and permanently cease further commercial use of the terms “FreightHub,” “Fr8Hub” and “Hub,” as well as any confusingly similar marks (together the “Source Identifiers”), including abandoning any and all commercial and intellectual property rights to the Source Identifiers, refraining from filing additional trademark applications involving the Source Identifiers, and refraining from otherwise seeking to secure or enforce its rights to the Source Identifiers. There are no damages, penalties or payments arising under the Settlement. However, consumer or market confusion could result from Fr8App’s adoption of the identifiers “Freight App” and “Fr8App” and its abandonment of the terms “FreightHub” and “Fr8Hub” going forward. The duration or impact of such confusion, if any, is difficult to estimate. Hub Group has fully released any further legal claims concerning Fr8App’s use of the Source Identifiers through the date of the Settlement.
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The impact of environmental laws and regulations and their enforcement could materially and adversely affect Fr8App’s business.
Motor carrier deregulation in the U.S. began in 1970-71 with initiatives in the Nixon Administration and continued into the 1980s through the Carter administration. They were part of a sweeping reduction in price controls, entry controls, and collective vendor price setting in U.S. transportation. While these deregulations by and large had a positive impact on the transportation volumes over the years, changes of regulations in the trucking industry could adversely affect Fr8App’s business. Routes and pricing for commercial freight could be regulated. Controlled margins or prices for certain goods could be put into effect. Fr8App cannot predict the impact of any new regulations on the 3PL and transportation industries. The effect these potential regulations could have on the commercial freight business, and in turn, its business and operating results may be long-lasting.
Risks Related to Fr8App’s Financial Position and Need for Additional Capital
Fr8App has a history of significant operating losses and expect to incur losses for the foreseeable future, and Fr8App may never achieve or maintain profitability.
Fr8App has a history of significant operating losses, and Fr8App has not been profitable since inception in 2015. Fr8App plans to continue to invest in improving Fr8App’s platform and services. Recurring losses from Fr8App’s operations could raise substantial doubt regarding its ability to continue as a going concern. If Fr8App fails to transition from a company with a development focus and in early growth strategies to fully commercializing its product offerings, it may not be able to fund its operations without raising additional capital, if at all. While Fr8App has been successful in raising capital in the past, there is no assurance that it can access additional capital in the future when needed, on favorable terms, or at all. If Fr8App fails to execute its business plan and strategies, it may incur losses for the foreseeable future, and be unable to fund its operations at some time in the future.
Raising additional capital may cause dilution to Fr8App’s existing shareholders, restrict its operations or cause it to relinquish valuable rights.
While Fr8App has been successful in raising capital in the past, there is no assurance that Fr8App can access additional capital in the future when needed, on favorable terms, or at all. To the extent that Fr8App raises additional capital through the sale of equity, convertible debt securities or other equity-based derivative securities, your ownership interest may be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Any indebtedness Fr8App incurs would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on its ability to incur additional debt, limitations on its ability to acquire or license intellectual property rights, limitations on the payment of dividends, and other operating restrictions that could adversely impact its ability to conduct its business. Furthermore, the issuance of additional securities, whether equity or debt, by Fr8App, or the possibility of such issuance, may cause the market price of its common stock to decline and existing shareholders may not agree with its financing plans or the terms of such financings. If Fr8App raises additional funds through strategic partnerships and alliances, licensing arrangements or monetization transactions with third parties, it may have to relinquish valuable rights to its technologies, or product candidates, or grant licenses on terms unfavorable to Fr8App. Adequate additional financing may not be available to Fr 8App on acceptable terms, or at all. If Fr8App is unable to raise additional funds when needed, it may be required to delay, limit, reduce or terminate its product development or future commercialization efforts or grant rights to develop and market product candidates that it would otherwise prefer to develop and market itself.
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Risks Related to Fr8App’s Operations
A number of Fr8App’s personnel are based outside of the United States and regularly conduct business outside of the United States. Fr8App is subject to economic, political, regulatory and other risks associated with international operations.
As a number of personnel that support Fr8App’s operations are based in Mexico, Fr8App’s business is subject to risks associated with conducting business outside of the United States. Accordingly, Fr8App’s future results could be harmed by a variety of factors, including:
| ● | economic weakness, including inflation, or political instability, particularly on the U.S./Mexico and U.S./Canada international borders; | |
| ● | differing and changing regulatory requirements for product approvals; | |
| ● | differing jurisdictions could present different issues for securing, maintaining or obtaining freedom to operate in such jurisdictions; | |
| ● | potentially reduced protection for intellectual property rights; | |
| ● | difficulties in compliance with different, complex and changing laws, regulations and court systems of multiple jurisdictions and compliance with a wide variety of foreign laws, tax requirements, treaties and regulations; | |
| ● | changes in U.S. and non-U.S. regulations and customs, tariffs and trade barriers; | |
| ● | changes in non-U.S. currency exchange rates of the Mexican Peso or the Canadian dollar and the potential imposition of currency controls; | |
| ● | trade protection measures, import or export licensing requirements or other restrictive actions by governments; | |
| ● | differing reimbursement regimes and price controls in certain non-U.S. markets; | |
| ● | difficulties with compliance with transfer pricing regulations; | |
| ● | changing restrictions or conditions for the repatriation of profits; | |
| ● | negative consequences from changes in tax laws; | |
| ● | compliance with tax, employment, immigration and labor laws for employees living or traveling abroad, including, for example, the variable tax treatment in different jurisdictions of options granted under its share option schemes or equity incentive plans; | |
| ● | workforce uncertainty or labor unrest; | |
| ● | litigation or administrative actions resulting from claims against us by current or former employees or consultants individually or as part of class actions, including claims of wrongful terminations, discrimination, misclassification or other violations of labor law or other alleged conduct; | |
| ● | difficulties associated with staffing and managing international operations, including differing labor relations; and | |
| ● | business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires. |
Exchange rate fluctuations may materially affect Fr8App’s results of operations and financial condition.
Though most of Fr8App’s revenues are denominated in U.S. dollars, Fr8App does effect contracts in Mexico whereby Fr8App invoices for its services in Mexican pesos. Fr8App may execute contracts in Canadian dollars or other currencies at some point in the future. Fr8App also has a number of its personnel operating in Mexico and it pays an ongoing payroll and key suppliers in Mexico. Unexpected exchange rate fluctuations between the U.S. dollar and the Mexican peso could adversely affect Fr8App’s results from operations.
Fr8App monitors and manages its exposures to changes in currency exchange rates and interest rates. It may use derivative instruments to mitigate the impact of changes in these rates on Fr8App’s financial position and results of operations; however, changes in exchange rates and interest rates cannot always be predicted or hedged and may have a material adverse effect on Fr8App.
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Fr8App may be subject to claims by third parties asserting that its employees or Fr8App has misappropriated their intellectual property, or claiming ownership of what Fr8App regards as its own intellectual property.
Many of Fr8App’s employees have spent many years in the high technology, transportation and logistics industries. Some of these employees may be subject to proprietary rights, non-disclosure and non-competition agreements, or similar agreements, in connection with such previous employment. Although Fr8App tries to ensure that its employees do not use the proprietary information or know-how of others in their work for Fr8App, Fr8App may be subject to claims that it or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such third party. Litigation may be necessary to defend against such claims. If Fr8App fails in defending any such claims, in addition to paying monetary damages, it may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and Fr8App could be required to obtain a license from such third party to commercialize its technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if Fr8App is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Risks Related to Employee Matters and Managing Growth
Fr8App’s management team is relatively new and its future success will depend on its ability to retain key employees, consultants and advisors and to attract, retain and motivate qualified personnel.
Fr8App’s President, Chief Executive Officer and Chief Financial Officer all joined Fr8App in September 2020 and their Chief Operating Officer in August 2021 and have not worked together prior to joining Fr8App. Fr8App’s ability to execute its business strategies and manage its growth will largely depend on its executive team and key employees, the loss of whose services may adversely impact the achievement of its objectives. While Fr8App has entered into employment agreements with certain of its executive officers and key employees, any of them could leave Fr8App’s employment at any time. Fr8App does not maintain “key person” insurance policies on the lives of these individuals or the lives of any of its other employees. The loss of the services of one or more of its current employees might impede its objectives. Furthermore, replacing executive officers or other key employees may be difficult and may take an extended period of time because of the limited number of individuals in Fr8App’s industry with the breadth of skills and experience required to develop, gain marketing approval of and commercialize products successfully.
Recruiting and retaining other qualified employees, consultants and advisors for Fr8App’s business, including scientific, technical and experienced industry personnel, will also be critical to its success. There is currently a shortage of skilled executives in Fr8App’s industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Fr8App may have to incur additional recruiting and training expenses to adequately staff its company. Fr8App may not be able to attract and retain personnel on acceptable terms.
The trucking industry is highly fragmented and regulated.
The trucking industry, one of Fr8App’s target customers, is a disparate group comprised of truck fleet owners and independent truck drivers. Some truck fleet owners are small companies, and like independent truck drivers, may not be familiar with the industry trends or have exposure to new technologies or new methods of doing business. As a result, Fr8App may not be able to establish a consistently effective method for marketing its digital Marketplace and mobile application platform to such industry participants.
The trucking industry is also highly regulated. The jurisdiction of the Department of Transportation (“DOT”), the Environmental Protection Agency (“EPA”) and similar state agencies, extends to Fr8App’s customers in the trucking industry. DOT and EPA regulations are subject to varying interpretations which may evolve over time. If compliance with the current regulations is not actively enforced by these agencies, or enforcement continues to vary from region to region, that may affect some of Fr8App’s carriers’ businesses and in turn, its business could be materially and adversely affected. Fr8App cannot assure you that government agencies will not adopt new policies or regulations that could adversely affect its business, results of operations and financial condition.
Increased security requirements impose substantial costs on Fr8App and it could be the target of an attack or have a security breach, which could materially adversely affect Fr8App.
Fr8App operates in a particularly complex legal and regulatory environment. The legal environment of a cloud-based software business is evolving in the U.S. and other jurisdictions and Fr8App is subject to a variety of laws and regulations in the United States and abroad that involve matters central to its business.
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Fr8App’s business is subject to a variety of U.S. and Mexican laws, rules and regulations, including those affecting “Motor Carriers, Owner-Operators and Transportation Brokers” issued by the US Federal Motor Carrier Safety Administration (“FMCSA”) of the DOT. Fr8App is subject to many U.S., Canadian and Mexican federal, state and local laws and regulations including those related to internet activities, privacy, rights of publicity, data protection, intellectual property, health and safety, competition, consumer protection, payments, transportation services, insurance coverage and taxation. These laws and regulations are constantly evolving and may be interpreted, applied, created or amended in a manner that could harm Fr8App’s business.
Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm Fr8App’s business. These may involve privacy, data protection and personal information, content, intellectual property, data security, retention and deletion. In particular, Fr8App is subject to federal, state and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy, content and other laws and regulations can impose different obligations or be more restrictive than those in the U.S. U.S. federal, state and foreign laws and regulations which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation and enforcement of these laws and regulations are often uncertain, particularly in the new and evolving industry in which Fr8App operates and may be interpreted and applied inconsistently from country to country and inconsistently with its current policies and practices. Fr8App’s customers upload and store customer data in its cloud-based platform. This presents legal challenges to Fr8App’s business and operations, such as consumer privacy rights or intellectual property rights. Both in the U.S. and abroad, Fr8App must monitor and comply with a wide variety of laws and regulations regarding the data stored and processed on its cloud-based platform as well as in the operation of its business. Fr8App cannot determine the effect that any new requirements will have on its cost structure or its operating results, and new rules or other future security requirements may increase its costs of operations and reduce operating efficiencies. Regardless of its compliance with security requirements or the steps Fr8App takes to secure the data on its platform, it could also be the target of an attack or security breaches could occur, which could materially adversely affect Fr8App’s business.
Fr8App’s growth plan may not succeed as quickly as anticipated, if at all.
Fr8App’s commercial freight Marketplace and mobile application platform matching the needs of carriers offering transportation services and shippers requiring commercial freight services is relatively new to the market. Success of its digital commercial freight matching brokerage service will depend on the adoption rate of this relatively new technology by Fr8App’s customers. Since many carriers are small companies slow to adapt to new technologies, Fr8App may not be able to establish a consistently effective method for marketing its platform and mobile application to such industry participants. Fr8App’s plan to commercialize and grow the usage of its platform and service offerings may not succeed as quickly as anticipated, if at all.
Fr8App expects to expand its organization, and as a result, it may encounter difficulties in managing its growth, which could disrupt its operations.
Fr8App expects to aggressively grow its sales and carrier personnel, specifically targeting at its key accounts and leveraging known customer preferences, to increase adoption of Fr8App’s solution platform for both its shippers and carriers with live 24/7 tracking on shipment. Fr8App is establishing creative marketing campaigns in Mexico’s domestic market and cross-border market. As it expands its cross-cultural workforce both in the U.S. and Mexico, Fr8App may encounter difficulties in managing its growth. Fr8App also plans to invest in its technology team so it can continue to build out internal tools on its platform. Failure to manage its growth could disrupt its operations and materially and adversely affect its results of operations and financial condition.
Fr8App is likely to have material weaknesses in its internal control systems and will need to hire additional personnel and develop and maintain proper and effective internal control over financial reporting, or the accuracy and timeliness of its financial reporting will be adversely affected.
Post Merger, Fr8App’s financial statements has become those of the Company’s and Fr8App’s management team members are now the executive officers of the Company. They will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of the Company’s internal control over financial reporting. In particular, Fr8App will be required to perform system and process evaluation and testing of its internal control over financial reporting to allow management to report on the effectiveness of its internal control over financial reporting. Fr8App has not yet been required to do such an analysis. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
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To address these potential control weaknesses, Fr8App will likely need to add personnel as well as implement new financial processes. Fr8App intends to take steps to remediate the control weaknesses described above through hiring additional qualified accounting and financial reporting personnel, and further evolving its accounting processes and policies. Fr8App may not be able to fully remediate these weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time.
The Company’s independent registered public accounting firm will not be required to attest to the effectiveness of the Company’s internal control over financial reporting for so long as the Company remains a “smaller reporting company” as defined in applicable SEC regulations. The management team of the Company will be required to disclose changes made in its internal controls and procedures on a quarterly basis. To comply with the requirements of its financial statements becoming those of the Company following the Merger, Fr8App will need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. The Company’s new audit committee must also be advised and regularly updated on management’s review of internal controls. Fr8App is only now beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation of its internal control over financial reporting needed to comply with Section 404, and Fr8App may not be able to complete its evaluation, testing and any required remediation in a timely fashion. Moreover, if Fr8App is not able to comply with the requirements of Section 404 in a timely manner or if it identifies or its independent registered public accounting firm identifies deficiencies in Fr8App’s internal control over financial reporting that are deemed to be material weaknesses, the market price of the Company’s ordinary shares could decline and the Company could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources.
Risks Related to our Ordinary Shares
The trading price of our ordinary shares and is likely to be volatile, which could result in substantial losses to our shareholders.
The trading price of our ordinary shares is likely to continue to be volatile and could fluctuate widely in response to a variety of factors, many of which are beyond our control. In addition to market and industry factors, the price and trading volume for our ordinary shares may be highly volatile for specific business reasons, including:
| ● | variations in our results of operations; | |
| ● | the high number of non-voting ordinary shares outstanding in comparison to total ordinary shares; | |
| ● | announcements about our earnings that are not in line with analyst expectations; | |
| ● | publication of operating or industry metrics by third parties, including government statistical agencies, that differ from expectations of industry or financial analysts; | |
| ● | changes in financial estimates by securities research analysts; | |
| ● | announcements made by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments; | |
| ● | press reports, whether or not true, about our business; | |
| ● | regulatory allegations or actions or negative reports or publicity against us, regardless of their veracity or materiality to our company; | |
| ● | changes in pricing made by us or our competitors; | |
| ● | conditions in the financial advisory market; | |
| ● | additions to or departures of our management; |
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| ● | fluctuations of exchange rates of the Mexican Peso and the U.S. dollar; | |
| ● | release or expiry of transfer restrictions on our outstanding ordinary shares; | |
| ● | sales or perceived potential sales or other disposition of existing or additional ordinary shares or other equity or equity-linked securities, including by our principal shareholders, directors officers and other affiliates; | |
| ● | actual or perceived general economic and business conditions and trends globally and in the freight industry in particular; and | |
| ● | the potential or actual effect of program trading on our stock price; and | |
| ● | changes or developments in the global regulatory environment. |
Any of these factors may result in large and sudden changes in the volume and trading price of our ordinary shares. In addition, the stock market has at times experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies and industries. These fluctuations may include a so-called “bubble market” in which investors temporarily raise the price of the stocks of companies in certain industries, such as the e-commerce industry, to unsustainable levels. These market fluctuations may significantly affect the trading price of our ordinary shares. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class named as a defendant in shareholder class action lawsuits. The litigation process may utilize a material portion of our cash resources and divert management’s attention from the day-to-day operations of our Company, all of which could harm our business. If adversely determined, the class action suits may have a material adverse effect on our financial condition and results of operations.
We are vulnerable to predatory short selling practices.
We are vulnerable to predatory short sellers who publish false or negative reports on us alleging, among other things, market manipulation, false or misleading statements and misleading or deceptive conduct. While we will expend every reasonable effort to refute such negative reports, there is no guarantee that our efforts will be successful and in the event that our efforts are unsuccessful, this could result in a suspension on the trading of our shares, a decline in the trading price of our shares, investigations or inquiries by governmental and regulatory agencies, increased costs and expenses in responding to such investigations or inquiries and/or even a delisting of our shares from the national exchange. Any and all of the foregoing would have a negative impact on us and to our shareholders.
You must rely on the judgment of our management as to the use of its resources, the different market segments it may develop or its ability to develop certain relationships.
Our management has considerable discretion in the market segments it chooses to pursue. You will not have the opportunity, as part of your investment decision, to assess whether the company’s business development efforts are appropriately focused, which may be used for purposes that do not improve our efforts to achieve or maintain profitability or increase our ordinary shares price in the short term. The Company may focus its resources on developing market segments that do not produce income, that produce negative margins or that lose value.
Substantial future sales or registrations or perceived potential sales or registrations of our ordinary shares, ordinary shares or other equity or equity-linked securities in the public market could cause the price of our ordinary shares to decline significantly.
Sales of our ordinary shares or other equity or equity-linked securities in the public market, or the perception that these sales could occur, could cause the market price of our ordinary shares to decline significantly. As of December 31, 2021, we had 7,551,467 ordinary shares outstanding (equivalent to 3,432,485 following the 2.2:1 reverse split on February 15, 2022). All of our ordinary shares were freely transferable by persons other than our affiliates without restriction or additional registration under the Securities Act. However sale of ordinary shares or their perceived potential sale by any other substantial shareholder in the public market could cause the price of our ordinary shares to decline significantly.
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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ordinary shares and trading volume could decline.
The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ordinary shares or publishes inaccurate or unfavorable research about our business, the market price for our ordinary shares would likely decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ordinary shares to decline significantly.
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ordinary shares.
We are exempted from certain corporate governance requirements of the NASDAQ by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on the NASDAQ. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:
| ● | have a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act and the majority of our board is independent); | |
| ● | have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors (although our compensation committee is made up entirely of independent directors0; | |
| ● | have regularly scheduled executive sessions for non-management directors; or |
We have relied on and intend to continue to rely on some of these exemptions. As a result, our shareholders may not be provided with the benefits of certain corporate governance requirements of the NASDAQ.
As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would enjoy if we were a domestic U.S. company.
As a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act and the rules relating to selective disclosure of material nonpublic information under Regulation FD. In addition, our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act. As a result, our shareholders may be afforded less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.
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Our shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited because we are incorporated under British Virgin Islands law, we conduct most of our operations in Mexico and some of our directors and our executive officers reside outside the United States.
We are incorporated in the British Virgin Islands and conduct the majority of our operations in Mexico. One of our directors and some of our executive officers reside outside the United States and a substantial portion of their assets may be located outside of the United States. As a result, it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the British Virgin Islands or in Mexico in the event that they believe that their rights have been infringed under the securities laws of the United States or otherwise. Even if shareholders are successful in bringing an action of this kind, the laws of the British Virgin Islands and Mexico may render them unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States or Mexico, although the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs will be governed by our Memorandum and Articles of Association, the BVI Act and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company and whose management, directors and/or major shareholders were also incorporated, resident, or otherwise established in a United States jurisdiction.
As a result of the foregoing, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
The laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders may have limited or no recourse if they are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, there is limited statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies (as summarized under “Item 10. Additional Information – B. Memorandum and articles of association — Material Differences in BVI Law and our Amended and Restated Memorandum and Articles of Association and Delaware Law”). The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the company and are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of the company. As such, if those who control the company have disregarded the requirements of the BVI Act or the provisions of the company’s memorandum and articles of association, or oppose to do so, then the courts will likely grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (ii) acts that constitute fraud on the minority where the wrongdoers control the company; (iii) acts that infringe on the personal rights of the shareholders, such as the right to vote or breach of a duty owed to the shareholder by the Company; and (iv) acts where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.
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British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue to protect their interests.
British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such an action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce judgments of courts in the United States based on certain liability provisions of United States securities law or to impose liabilities, in original actions brought in the British Virgin Islands, based on certain liability provisions of the United States securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
The requirements of being a public company may strain our resources and distract our management.
We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us, either or both of which could have a negative effect on our business, financial condition and results of operations.
As a public company, we will be subject to the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial performance. The Sarbanes-Oxley Act requires that we maintain disclosure controls and procedures and internal control over financial reporting. To improve the effectiveness of our disclosure controls and procedures and our internal control over financing reporting, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. These activities may divert management’s attention from other business concerns and we will incur significant legal, accounting and other expenses that we did not have as a private company prior to going public, which could have a material adverse effect on our business, financial condition and results of operations.
There could be adverse United States federal income tax consequences to United States investors if we were or were to become a passive foreign investment company.
While we do not believe we are or will become a passive foreign investment company, or PFIC, there can be no assurance that we were not a PFIC in the past and will not become a PFIC in the future. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (1) 75% or more of our gross income in a taxable year is passive income, or (2) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our ordinary shares, which is subject to change. See “Item 10. Additional Information— E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company.”
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Although we do not believe we were or will become a PFIC, it is not entirely clear how the contractual arrangements between us and our variable interest entities will be treated for purposes of the PFIC rules. If it were determined that we do not own the stock of our variable interest entities for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC. See “Item 10. Additional Information— E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company.”
If we were or were to become a PFIC, such characterization could result in adverse United States federal income tax consequences to our shareholders that are United States investors. For example, if we are a PFIC, our United States investors will become subject to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure you that we were not or will not become a PFIC for any taxable year. Further, if we are a PFIC for any year during which a U.S. investor holds our ordinary shares, we generally will continue to be treated as a PFIC with respect to that investor for all succeeding years during which he is a shareholder. You are urged to consult your own tax advisors concerning United States federal income tax consequence on the application of the PFIC rules. See “Item 10. Additional Information— E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company.”
We have recently received several written notifications from The Nasdaq Stock Market LLC informing us that we no longer meet certain continued listing requirements of the Nasdaq Global Market.
On January 28, 2020, we received written notification from The Nasdaq Stock Market LLC (“Nasdaq”) that it no longer meets Listing Rule 5450(v)(1)(A) which requires it to maintain a minimum $10,000,000 in stockholders’ equity for continued listing. The Company reported in its last Form 6-K for the period ended June 30, 2019 that its stockholders’ equity was $9,490,313. Under the Nasdaq Rules, the Company has 45 calendar days (no later than March 13, 2020) to submit a plan to regain compliance. We had already submitted our plan and are awaiting the Nasdaq’s determination as to whether to grant us an extension of up to 180 calendar days from the date of the letter to evidence compliance.
On March 12, 2020, we received a letter from the Nasdaq indicating that, the closing bid price of the Company’s ordinary shares for the last 30 consecutive business days did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(a)(1). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days, or until August 31,2020, in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A). The letter further provided that if, at any time during the 180-day period, the closing bid price of the Company’s ordinary shares is at least $1.00 for a minimum of ten consecutive business days, Nasdaq will provide the Company with written confirmation that it has achieved compliance with the minimum bid price requirement. If the Company does not regain compliance by August 31, 2020, an additional 180 days may be granted to regain compliance if the Company (i) meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Global Market (except for the bid price requirement) and (ii) provides written notice of its intention to cure the deficiency during the second 180-day compliance period.
On April 16, 2020 we received a letter from the Nasdaq indicating the Company’s Market Value of Publicly Held Shares (MVPHS) did not meet the minimum value of $5,000,000 for the last 30 consecutive business days in contravention of the Nasdaq’s Listing Rules (“Rules”). However, the Rules also provide the Company a compliance period of 180 calendar days in which to regain compliance. We were informed that if at any time during this compliance period the Company’s MVPHS closes at $5,000,000 or more for a minimum of ten consecutive business days, the Nasdaq would provide the Company written confirmation of compliance and this matter would be closed. In the event the Company does not regain compliance with the Rules prior to the expiration of the compliance period, it will receive written notification that its securities are subject to delisting. Alternatively, the Company may consider applying to transfer the Company’s securities to The Nasdaq Capital Market (the “Capital Market”). In order to transfer, the Company must submit an on-line Transfer Application, pay the $5,000 application fee, and meet the Capital Market’s continued listing requirements.
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Although we transitioned to the Nasdaq Capital Market and had regained compliance with the continued listing requirements of the Nasdaq, we recently received another written notification from the Nasdaq on May 13, 2021 informing us that we no longer meet Nasdaq Listing Rule 5550(b)(1), which requires us to maintain a minimum $2,500,000 in stockholders’ equity for continued listing. We had reported in our last annual report on Form 20-F for the period ended December 31, 2020 that our stockholders’ equity was $631,145. Under the Nasdaq Rules, we have 45 calendar days (no later than June 28, 2021) to submit a plan to regain compliance. If our plan is accepted, we should be granted an extension of up to 180 calendar days from the date of written notification letter to evidence compliance. We submitted our plan and the Nasdaq has granted us until November 9, 2021 to regain compliance. On September 28, 2021, we announced in a Form 6-K filed with the Securities and Exchange Commission that we had consummated a sale of an aggregate of 630,000 ordinary shares, par value $0.005 and a pre-funded warrant to purchase 650,000 ordinary Shares to ATW Opportunities Master Fund, L.P. for an aggregate purchase price of $2,700,000 pursuant to a securities purchase agreement dated September 16, 2021 (the “Securities Purchase”). Because of the Securities Purchase, we believe that we have regained compliance with the stockholders’ equity requirement. The Nasdaq shall continue to monitor our ongoing compliance with the stockholders’ equity requirement and, if at the time of its next periodic report we do not evidence compliance, we may be subject to delisting.
As part of the issuance of shares in the Merger, we announced in a Form 6-K filed with the Securities and Exchange Commission that we had pro forma projections showing capital for the Company in excess of $5,000,000 following the Merger.
We intend to take all reasonable actions to ensure compliance, including without limitation, effecting the Merger. However, there can be no assurance that we will be able to regain compliance with the Nasdaq Rules or will otherwise be in compliance with other Nasdaq listing criteria post Merger. In the event we are unsuccessful, our ordinary shares will be delisted and you will likely experience a devaluation in the market price of your shares as well as face challenges in trading them forthwith.
Our shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors for three consecutive years beginning in 2021. If the bill passed by the U.S. Senate on June 22, 2021 is passed by the U.S. House of Representatives and signed into law, this would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the Holding Foreign Companies Accountable from three years to two. The delisting of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.
Our ordinary shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors for three consecutive years beginning in 2021. If the bill passed by the U.S. Senate on June 22, 2021 is passed by the U.S. House of Representatives and signed into law, this would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the Holding Foreign Companies Accountable Act from three years to two. The delisting of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act (“HFCA Act”) was enacted on December 18, 2020. The HFCA Act states if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit the company’s shares from being traded on a national securities exchange or in the over the counter trading market in the U.S.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. A company will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two years.
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On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (“Commission-Identified Issuers”). The final amendments require Commission-Identified Issuers to submit documentation to the SEC establishing that, if true, it is not owned or controlled by a governmental entity in the public accounting firm’s foreign jurisdiction. The amendments also require that a Commission-Identified Issuer that is a “foreign issuer,” as defined in Exchange Act Rule 3b-4, provide certain additional disclosures in its annual report for itself and any of its consolidated foreign operating entities. Further, the release provides notice regarding the procedures the SEC has established to identify issuers and to impose trading prohibitions on the securities of certain Commission-Identified Issuers, as required by the HFCAA.
The SEC will identify Commission-Identified Issuers for fiscal years beginning after December 18, 2020. A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.
On December 16, 2021, PCAOB announced the PCAOB HFCA Act determinations (the “PCAOB determinations”) relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China of the PRC or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in the PRC or Hong Kong.
Our auditor, Centurion ZD CPA & Co., the independent registered public accounting firm that issues the audit report included in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with applicable professional standards. Centurion ZD CPA & Co. is headquartered in Hong Kong and accordingly, falls within the PCAOB determinations.
Given the recent developments, we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements.
The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company’s auditor was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
The SEC had announced that the SEC staff was preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. The implications of possible additional regulation in addition to the requirements of the HFCA Act and what was recently adopted on December 2, 2021 are uncertain. Such uncertainty could cause the market price of our ordinary shares to be materially and adversely affected, and our securities could be delisted or prohibited from being traded on the national securities exchange earlier than would be required by the HFCA Act. If our ordinary shares are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ordinary shares when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on
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NASDAQ may apply additional and more stringent criteria for our continued listing.
NASDAQ Listing Rule 5101 provides NASDAQ with broad discretionary authority over the initial and continued listing of securities in NASDAQ and NASDAQ may use such discretion to deny initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing of the securities on NASDAQ inadvisable or unwarranted in the opinion of NASDAQ, even though the securities meet all enumerated criteria for initial or continued listing on NASDAQ. In addition, NASDAQ has used its discretion to deny initial or continued listing or to apply additional and more stringent criteria in the instances, including but not limited to where the company engaged an auditor that has not been subject to an inspection by PCAOB, an auditor that PCAOB cannot inspect, or an auditor that has not demonstrated sufficient resources, geographic reach, or experience to adequately perform the company’s audit; (ii) where a company planned a small public offering, which would result in insiders holding a large portion of the company’s listed securities. NASDAQ was concerned that an offering size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public market for the company; and (iii) where the company did not demonstrate sufficient nexus to the U.S. capital market, including having no U.S. shareholders, operations, or members of the board of directors or management. For the any aforementioned concerns, we may be subject to the additional and more stringent criteria of NASDAQ for our continued listing.
Item 4. Information on the Company
A. History and development of the company.
Our History and Corporate Structure
We were established as “China Internet Nationwide Financial Services Inc.”, a holding company incorporated under the laws of British Virgin Islands on September 28, 2015. On October 7, 2015, we incorporated Hongkong Internet Financial Services Limited (“HKIFS”) in Hong Kong SAR. HKIFS, in turn, incorporated Beijing Yingxin Yijia Network Technology Co., Ltd (“BYYNT”) in the People’s Republic of China with a registered capital of RMB1,000,000 (approximately $150,375.94) on December 31, 2015. BYYNT entered into a series of contractual agreements (the “PRC VIE Agreements”) with Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“Sheng Ying Xin” or “SYX”), a company incorporated in the People’s Republic of China on September 16, 2014.
On September 2, 2019, Hongkong Shengqi Technology Limited (“HKSQ” or “HKSQ VIE”) became a shareholder of BYYNT. HKSQ was incorporated in Hong Kong on August 29, 2019. On September 26, 2019, a series of agreements were entered into among HKIFS, HKSQ and its shareholder (the “HKSQ VIE Agreements”). As a result of the HKSQ VIE Agreements, HKIFS become the primary beneficiary of HKSQ.
Similar to the HKSQ VIE Agreements, the PRC VIE Agreements essentially conferred control and management as well as the economic benefits of Sheng Ying Xin onto BYYNT. In spite of the shareholder change in BYYNT, we were able to retain full control and management over Sheng Ying Xin and were still entitled to substantially all of the economic benefits of BYYNT through the HKSQ VIE Agreements.
Accordingly, the results of operations, assets and liabilities of BYYNT and Sheng Ying Xin have been included in the accompanying consolidated financial statements. Because we are a holding company that managed Sheng Ying Xin though a series of contractual arrangements, our consolidated financial statements are essentially those of BYYNT’s and Sheng Ying Xin’s as we are conferred their economic benefits.
Through Sheng Ying Xin and its subsidiaries, we provided almost all our financial advisory services in the People’s Republic of China.
On July 28, 2017, we announced the pricing and closing of our initial public offering (“IPO”) of 2,023,146 of our ordinary shares at a price to the public of $10.00 per share for a total of $20,231,460 before underwriting discounts and commissions and offering expenses. Our shares began trading on NASDAQ Global Market on August 8, 2017 under the symbol “CIFS.”
After several years of decline in our financial advisory business in the People’s Republic of China, the board of directors of the Company (the “Board”), together with management began to consider various long- and short-term strategic options to strengthen our business and enhance stockholder value. Strategic options that have been considered included strategic alliances, mergers and acquisitions, divestitures, other business combinations, and delisting from Nasdaq, as well as continuing operations as an independent company. As a result of the continued deterioration of the Company’s share price and erosion of stockholder value, the Board determined that it was critical to pursue a strategic option in the near-term.
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In keeping with our plan to diversity our operations, rebrand ourselves and seek new strategic options, not only were our Board members and management completely changed but our corporate name was changed to “Hudson Capital Inc.” on April 23, 2020 and we began to trade under our new symbol, “HUSN” on May 8, 2020. Our securities were also transferred to the Nasdaq Capital Market at the opening of business on July 16, 2020.
The Board considered multiple potential merger candidates before identifying Fr8App as the most able to complete a merger and best potential value for its stockholders. Pursuant to such determination, we entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”) on October 10, 2020 with Hudson Capital Merger Sub I, Inc., our Delaware wholly-owned subsidiary (“Merger Sub I”), Hudson Capital Merger Sub II, Inc., a Delaware subsidiary of Merger Sub I (“Merger Sub II”), Fr8App and ATW Master Fund II, L.P., as the representative of the stockholders of Fr8App (the “Stockholders’ Representative”).
This Merger Agreement was terminated on December 13, 2021 after the Board determined it was in our best interest to change strategies. In its stead, a new merger agreement was entered into between, us, Merger Sub I, Fr8App and the Stockholders’ Representative on December 13, 2021 (the “New Merger Agreement”). On February 14, 2022, a Certificate of Merger was filed with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law, whereby in accordance with the New Merger Agreement, Merger Sub I merged with and into Fr8App, with Fr 8App surviving the Merger and continuing as a direct wholly-owned subsidiary of the Company (the “Merger”). The Merger closed on February 14, 2022 and the separate corporate existence of Merger Sub I and its Certificate of Incorporation and by-laws then in effect ceased, and the organizational documents of Fr8App after the Merger is in the form as agreed by the Company and Fr 8App.
In connection with the Merger, the following unregistered, restricted securities were issued to shareholders of Fr8App, subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions (the “Merger Consideration”):
| Securities Issued in Merger | Issued at Merger | Underlying Ordinary Shares | ||||||
| Ordinary Shares | 5,670,842 | 5,670,842 | ||||||
| A2 Preferred Shares | 2,781,592 | 2,781,592 | ||||||
| A1A Preferred Shares | 9,841,804 | 9,841,804 | ||||||
| Series Seed Preferred Shares | 15,445 | 15,445 | ||||||
| Series B Preferred Shares | 16,257,671 | 16,257,671 | ||||||
| Series A4 Preferred Shares | 1,251,647 | 1,251,647 | ||||||
| Ordinary Shares Warrant | 11,480 | 11,480 | ||||||
| Series Seed Warrant | 9,164 | 9,164 | ||||||
| Equity Awards for Ordinary Shares | 4,308,231 | * | 4,308,231 | * | ||||
| Total Issued in Merger | 40,147,876 | 40,147,876 | ||||||
* Includes 400,558 shares to be granted under the Hudson Capital, Inc. Equity Incentive Plan.
Also, in connection with the Merger, the Company’s Board accepted the resignations from the Board of Warren Wang, Hon Man Yun, Ming Yi (Martin), Hong Chen and Xiaoyue Zhang, and from the position of the Chief Executive Officer and Chief Financial Officer of Warren Wang and Hon Man Yun, respectively, effective upon closing of the Merger. Messrs. Javier Selgas, Nicholas H. Adler, William Samuels, and Marc Urbach were appointed new directors of the Board. Each of the following executives was appointed to the respective office set opposite to his/her name:
Javier Selgas – Chief Executive Officer
Mike Flinker - President
Luisa Irene Lopez Reyes – Chief Operating Officer
Paul Freudenthaler – Secretary and Chief Financial Officer
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On October 26, 2020, we filed Amended and Restated Memorandum and Articles of Association with the Registrar of Corporate Affairs of the British Virgins Islands (the “BVI”) to effect a 5-for-1 reverse stock split of the Company’s ordinary shares. On February 14, 2022, we effected another 2.2:1 reverse split of our ordinary shares and our ordinary shares began trading on a split adjusted basis on February 15, 2022.
On March 25, 2022, we dissolved Merger Sub II and Hudson Capital Holding Co., Ltd. On March 30, 2022, we sold HKIFS in its entirety to a private investor. The divestment of HKIFS was effected through the sale of the entirety of the equity interest in HKIFS. As of the divestment date, there are no remaining or contingent obligations or benefits from HKIFS.
With the divestment of HKIFS, we are no longer involved in the financial advisory business in the People’s Republic of China nor do we maintain any operations, personnel, assets, or corporate presence of any type in Asia. We are now, through Fr8App, operating a North American transportation logistics technology platform, focusing on truckload freight for domestic and cross-border markets in Mexico, the US and Canada. Fr8App uses its proprietary technology platform to connect carriers and shippers and significantly improve matching and operation efficiency via innovative technologies such as live pricing and real-time tracking, digital freight marketplace, broker, transportation management, fleet management, and committed capacity solutions. Below is a diagrammatic representation of our present corporate structure:
B. Business overview.
Freight App, Inc. (formerly known as “Freight Hub, Inc.” and hereinafter referred to as “Fr8App”) was incorporated in 2015 as a Delaware corporation. It was founded with a view to developing and bringing solutions to the relatively unorganized cross-border commercial freight market on the U.S.-Mexico border, and by extension, the U.S.-Canada border. In January 2019, Freight Hub México, S.A De C.V., a wholly-owned subsidiary of Fr8App was formed. In December 2021, Freight Hub Mexico, S.A De C.V. changed its name to Freight App de México, S.A De C.V. (“Freight App Mexico”). As a result of the Merger, on February 14, 2022, Fr8App became our wholly-owned subsidiary.
The first commercial version of Fr8App’s products was launched in 2017. Fr8App continued its product development efforts throughout 2018, added initial business intelligence and analytics to supplement its basic products in 2019 and offered its revised products package with active freight brokerage support and customer service, ramping up at the end of 2019 and fully launched during the second quarter of 2020. The latest generation of Fr8App products were brought to market during the second quarter of 2020 and a new management team was hired during the third quarter of 2020 to bring a renewed focus to promoting freight services to Shippers (defined below) and Carriers (defined below). Fr8Data and Fr8Radar are product features that are further described below and that play an integral role in Fr8App’s product offerings. During 2021, Fr8App launched the broker portal, an electronic feature to address reporting obligations to Mexican authorities called “Carta Porte”, an internal pricing tool, automated onboarding and a number of EDI Integrations with Shippers and API integrations with third-parties. Towards the end of 2021, Fr8App introduced its private fleet product, Fr8Fleet.
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Fr8App’s technology product offerings includes (i) a computerized platform (the “Platform”) that holds an online portal (the “Portal”) and a mobile App solution (the “App”) to provide third-party logistics (“3PL”) services to companies actively involved in the freight transportation market, (ii) a Transport Management Solution (“TMS “) for customers to manage their own fleet, and (iii) freight brokerage support and customer service based on the Platform. Fr8App believes it is the first digital commercial freight-matching broker to offer 3PL while targeting the domestic Mexican and the cross-border Mexico-U.S.-Canada markets (“Target Markets”). Fr8App serves cross-border traffic across the Mexico-U.S. border, the U.S.-Canada border, and domestic shipments within each of these three countries, with a primary focus on full truck-load freight. Its cutting-edge cloud-based Platform was designed to connect in real-time parties with commercial transportation needs.
The freight transportation supply chain begins with parties having transportation needs (“Shippers”) and addressed by those offering freight transportation services (“Carriers”). Shippers seeking suitable means of transportation for their supplies represent demand and Carriers with freight transportation capability represent supply. The digital freight matching technology on Fr8App’s Platform streamlines and simplifies cross-border shipping logistics by facilitating the matching of demand with supply. Shippers that use Fr8App’s Platform can connect with a wide network of reliable Carriers who can fulfill their logistics needs across North America. Use of Fr8App’s Platform brings the additional benefit of providing transparency on all shipment characteristics to allow for the identification of available and qualified freight capacity.
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Fr8App’s Portal is the system’s front-end, a tool that Fr8App’s customers and providers use to summarize data on the Fr8App Platform such that it is in a usable form from a business perspective. This data is accessed online on a computer via a browser, or through a mobile App located on a smart telephone. Once customers and providers (“Shippers” and “Carriers”) gain access to the Platform they can enter into transactions such as booking a load and administering the manner in which that load will be managed, and reviewing summary information on display within the Platform. Below are two screen-shots from the Portal for illustrative purposes:
Fr8App’s Platform
Fr8App’s Platform contains the primary operating system. It is a digital marketplace that facilitates booking of freight transactions at the Shipper and Carrier level. The matching of Shipper requirements and Carrier capacities can occur on the Platform automatically, without the need for human intervention. A Fr8App Platform user can be very involved in the process and actively control its shipment activities by inputting Shipper requirements and matching those with Carrier offerings and tracking shipments as they leave their point of origin and arrive at their ultimate destination, i.e., managing his or her company’s logistics. Among other things, Fr8App’s Platform can provide a system user with a summary of all its freight activities through a combination of reports or visual displays on its screen. A system user can track the status of a given delivery on a visual display of the map with status updates on the load location and status from the moment the shipment leaves its origin through to its final destination. A system user can also set up routes that are physically different from one that the Platform might recommend if that system user has a preference for a given route over another, perhaps because of altitude or temperature differences on competing routes.
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Shippers can use Fr8App’s Platform to post their freight needs, find available Carriers, enter into a freight contract with them, and monitor the transported goods while their shipment is in transit. Carriers can use Fr8App’s Platform (through the Portal or mobile App), to accept shipment requests, assign transportation jobs to available truck drivers instantaneously, or make themselves available on routes or route segments to avoid driving “dead” or empty trucks from one location to another. Carriers can receive notifications every time a load or job request is entered by a Shipper that matches the criteria they are looking for on a given shipment type and shipment lane. Every time there is a match and a Carrier hauls a load, the Platform’s algorithm takes this into account and creates a history that can be referred to when attempting to fulfill future Shipper requests. Fr8App’s mobile App gives Carriers full visibility on all of their shipping options and helps them eliminate empty miles on the road, leading to a reduction in operating costs. Its specialized technology is designed to enhance supply chain visibility and operations, helping reduce Carrier’s carbon footprint and improving profitability and environmental sustainability.
Fr8App’s API
Fr8App’s Platform has a public application programming interface (“API”), that is accessible free of charge and has the ability to automate the matching of Shippers requirements (commercial freight demand) with Carrier capacities (commercial freight supply). An API is an interphase consisting of a series of computer instructions that allow one type of system to interact with another separate system by taking information from one system and making it legible and usable by another. It can be compared to something like a translator that takes instructions in English and translates them into Spanish so that users on both sides of the translation can work with the underlying instructions. In Fr8App’s service offering context, an API allows one of our customer’s freight tracking systems to provide information to Fr8App’s Platform and for our Platform to provide information to our customer’s system using a data structure or language that is legible by that customer’s computer system. An API is a tool allowing Fr8App to have a number of different customers and providers, each with different operating systems, to interact with and use Fr8App’s Platform.
Fr8App’s Mobile App, FMS, TMS
Users can access the Platform through an internet browser on a computer or through the mobile App in a smartphone, using the same credentials.
Fr8App also offers a cloud-based TMS solution to maximize the efficiency of a company’s transportation operations. TMS can be used by either a Shipper or a Carrier as its key logistics tool, independent of using Fr8App’s Platform or Portal solutions. TMS can help Shippers and/or Carriers manage their fleet as well as post requests for freight services on its Platform. The cloud-based TMS solution is available to Shippers wanting to actively manage their supporting Carriers or their own fleet of trucks. Fr8App also gives a TMS solution user the option to source additional freight capacity or offer its over-capacity on the Fr8App Platform. Fr8FMS (Fr8App´s “FMS”) allows transportation companies and owner operators to handle their own fleet reducing their operational costs, and enables them to haul loads from Shippers in the platform´s marketplace.
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Fr8Radar
Fr8Radar is a product feature that provides Shippers and Carriers track and trace visibility, via Fr8App´s mobile solution, or through the integrations with other third-party GPS providers or other technology companies providing track and trace solutions for the industry. Track and trace visibility through Fr8Radar allows Shippers to follow their freight operations in real time, using just one system, and not one for each GPS provider. Fr8Radar also enables low tech Carriers to provide real time position of each load to their customers.
Fr8Data
Fr8Data is the group of tools and reports developed to show Shippers and Carriers real time dashboards with all the detailed information of their shipments in real time, to increase control and make better business decisions. Fr8Data enables the analysis of historical data to find better matching between Shippers and Carriers and better pricing calculations, based on real data saved in Fr8App´s platform. Fr8Data consists of set of tools and analysis methodologies intended to be used for improvement a system user – be they a Shipper, a Carrier or Fr8App itself.
Fr8App’s Brokerage Support and Customer Service
Finally, Fr8App offers customers freight brokerage support and customer service based on using the Platform for fulfillment. The brokerage and customer services offered are based on using the Platform to book freight to meet a Shipper’s needs and fulfills those needs with Carriers that have already been onboarded on the Platform. It facilitates full usage of the Platform’s utility and it is aided by experienced users of the system and Fr8App’s in-house of experts. In late 2021, we also introduced Fr8Fleet, a private fleet management product whereby large corporate shippers are allowed to purchase fleet capacity over a period of time, say a month, in exchange for a fixed fee. Fr8App’s customer service group works with such clients to secure carrier capacity to fulfill their freight needs over a given period of time.
Industry Overview and Market Trend
According to the Statista, the U.S. domestic truck freight transportation market, in 2021, was approximately $732 billion in size. Over the same period, the Mexican domestic freight market was estimated at approximately $45 billion. In 2021, the cross-border U.S.-Mexico freight transportation market grew to $461 billion while Mexico’s trade with the U.S. grew at an annual compound growth rate of approximately 7.5% between 2011 and 2021. Fr8App expects the market to continue growing at rates at least equal to historic rates.
A primary contributor to the growth in the North American cross-border freight transportation markets has been the increased level of trade between the U.S., Mexico and Canada. Effective July 1, 2020, the three countries signed a new free trade deal the United States, Mexico, Canada Agreement (“USMCA”), replacing the North American Free Trade Agreement (“NAFTA”) enacted on January 1, 1994. As of 2019, Mexico became the U.S.’s largest single trading partner. According to the United Nations, Mexico exported an extra $3.5 billion of goods into the U.S., in the first half of 2019, since the summer of 2018 when the trade war between the U.S. and China began. Fr8App believes the replacement of NAFTA with the USMCA creates a stable environment attractive to multi-national companies considering Mexico as a market from which to export to both the United States and Canada.
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In early 2020, U.S. President Donald Trump used trade policy in a manner that displaced global supply chains across industries and around the world. With global supply chains in disarray and no foreseeable end to the COVID-19 pandemic, Fr8App believes Mexico is a logical location for U.S. companies considering options to diversify away from the geopolitical risks associated with the ongoing U.S.-China trade tension. The approval of the USMCA in combination with new perspectives as related to national security implications of foreign-based supply chains may bring about changes in Mexico’s freight market, in terms of globalization or regionalization and logistics integration, as well as, the role of 3PL operators. Fr8App believes this supply chain volatility is driving an increase in demand for large and small freight brokers to secure more abundant freight capacity, in real-time, which is readily available on Fr8App’s digital marketplace and facilitated by its Portal and Platform solutions. Fr8App believes this supply chain volatility is aggravated by a shortage of drivers thereby creating further pressure on the need for a more comprehensive approach to logistics management, with the view to meeting supply chain requirements while attempting to minimize increases in the related freight costs. Fr8App acts as an intermediary between the total system’s freight requirements and the related freight demand in a more efficient manner than if various of the parties requiring freight contracted these services on their own or managed their own proprietary fleets. Fr8App believes that its ability to secure available freight capacity, using the Portal and Platform solutions, amongst available truck drivers offers customers an organized, efficient solution to transporting goods domestically and internationally in favorable or unfavorable market environments. Additionally, Fr8App believes it is well positioned to benefit from the increasing trade across both the U.S.-Mexico and the U.S.-Canada borders caused by supply chain volatility and magnified by the COVID-19 pandemic.
Fr8App believes that traditional 3PLs rely on a network of offices staffed with individuals tasked with communicating with colleagues, customers and transportation companies to identify and secure freight services that meet their customers’ specific needs. The process is manual, inefficient, and lacks transparency. Cross-border transportation challenges can include tracking, visibility, multiple hand-offs (where applicable), and international customs and regulatory inefficiencies. The ability to access real-time freight capacity and locate the right truck at the right time becomes critical to securing a reliable shipment service. Fr8App believes market conditions have created an increased demand for digital freight brokers who can help ease capacity constraints, open up new shipping lanes, and provide a benchmarking tool for both Shippers and Carriers.
Important Factors of the Trucking Industry
According to an October 2020 article titled, “Trends Transforming the Trucking Industry Outlook in 2021” published by Linchpin, below are the factors affecting the outlook for the U.S. trucking industry:
| ● | Highest GDP contribution– The U.S. currently stands at the number one spot when it comes to GDP contribution from the trucking industry. | |
| ● | Job percentage – more than 5.8% of jobs in the U.S. are related to the trucking industry. | |
| ● | Total freight carried – Trucks carried approximately 10.8 billion tons of goods across the country each year. | |
| ● | Top commodities traded between the U.S. and Mexico – computers and parts ($151 billion), electrical machinery ($124 billion), motor vehicles and parts ($120 billion). | |
| ● | Preferred form of transportation – almost 70% of the goods transported in the U.S. are carried around by trucks from state to state. | |
| ● | Grocery store dependence – grocery stores are highly dependent on truck drivers to carry supplies to multiple locations. Most grocery stores would run out of transportation options within three days if truck drivers halted grocery deliveries. | |
| ● | Truck driver shortage – experts believe that the trucking industry needs to hire at least 900,000 more drivers to meet the growing demand. | |
| ● | Miles per year – on average, a truck driver logged in more than 100,000 miles over the past year. |
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Market Opportunity
According to Modor Intelligence, the Mexican 3PL market is expected to register a compound annual growth rate of over 7.0% between 2021 and 2025. According to the same source, the US and Canadian 3PL markets are expected to grow at a 3.5% and 3.0% compound annual growth rate, respectively, over the same time period. Fr8App believes this commercial freight market growth is driven by growing domestic economies and increasing trade flows, which are not only from one region to another, but are more decentralized and fragmented. Fr8App believes these factors are expected to intensify the complexity of logistics activities in the coming years in what has been a relatively fragmented Mexican transportation market on a historical basis. Fr8App believes the U.S. and Canadian markets remain relatively fragmented as well though they have each seen major logistics companies enter the industry over the past decade. Fr8App believes the evolution of supply chains is also susceptible to changes in consumer habits, driven further by e-commerce and international health issues, such as the COVID 19 pandemic. Rising consumer expectations have had an observable effect throughout the supply chain, driving the need for greater efficiency and speed. Technology in warehouses, onboard trucks, and on smartphones has led to automating critical processes, improving visibility into the shipment lifecycle, and enabling faster decisions. In addition to profitability, sustainability and reliability has likely become a consideration of every Shipper’s bottom line. Fr8App believes that an ability to respond to increasing market volatility in real-time, can become an asset contributing to a Shipper’s business success. Fr8App believes this consideration is further exacerbated by qualified driver shortages in the U.S. and Canada. Fr8App believes the TMS market to be in a development stage similar to the consumer transportation industry, or “taxicabs”, prior to the introduction of wider reaching platforms like Uber and Cabify. Fr8App continues to invest in improving its TMS technology and expects these investments to help improve its Platform as well as the range of services Fr8App may offer to its Shippers and Carriers over time.
Fr8App believes the Mexican commercial freight market is also ripe for technological disruption as adoption of technology in this industry segment has lagged several others in the commercial transportation space. Fr8App believes there are significant complexities within the Mexican freight transportation market that give Fr8App a competitive advantage. As an example, there are standard ways in which a new carrier is evaluated as a potential business counterparty in the U.S. There are several industry, data and government databases and electronic tools for investigating a potential business supplier and no such vetting processes overseeing the commercial freight transportation market in Mexico. Fr8App intends to gain a deep understanding of these unique processes, within the Mexican transportation industry, to gain a competitive advantage over future market entrants. Fr8App intends to leverage this competitive advantage into opportunistically selected routes carrying traffic into the U.S. and Canada.
Fr8App’s operations center in Mexico is located in Monterrey, Mexico, a city which accounts for the second highest GDP in Mexico (behind only Mexico City) and, historically, a transportation hub within the domestic and cross border Mexican freight transportation market. Fr8App plans to leverage its presence in Monterrey to become a leader in international freight to and from Mexico, and into and across the U.S., and into Canada.
The Fr8App Solution
Fr8App’s Platform provides visibility on freight transportation options not readily apparent with traditional 3PL solutions. The Platform allows Shippers and Carriers to book loads at the palm of their hands and assign jobs to drivers, in real-time, with the click of a button. Shippers and Carriers register on the Platform and are approved to transact after undergoing a rigorous vetting process.
The vetting process for Shippers includes the following:
| ● | Mexico Beneficial Cargo Owner (BCO) or Broker (3PL): Articles Incorporation charter, tax registration number, legal representative power of attorney, legal representative ID, banking information, address receipt, fiscal situation document, fiscal obligations opinion document (updated), Fr8App credit form | |
| ● | For US or Canada Client (BCO): W-9 form for US, TD1 form for Canada, Fr8App credit form | |
| ● | For US or Canada Broker (3PL): W-9 form for US, TD1 form for Canada, Fr8App credit form, insurance and bond certificates, license and authority number of broker |
Fr8App collections group performs a credit report analysis which includes a due diligence of the customer credit record, revenues of the customer for the latest 5 years, industry in which client operates, review of current insurance coverage, and payment terms negotiated. Fr8App has had immaterial bad debt expense in the past several years.
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The vetting process for Carriers includes the following:
| ● | A due diligence review is performed to ensure that carriers are following regulatory compliance, whether they are a line or base haul carrier, which routes they operate, truck types, cargo they are eligible to transport, reliability and availability. Depending on location, the document set-up requirements are as follows: |
| ■ | Mexico: Articles Incorporation charter, tax registration number, Servicio de Administración Tributaria (“SAT” is the Mexican equivalent to the IRS in US) legal opinion, legal representative power of attorney, legal representative ID, Standard Carrier Alpha Code (“SCAC”), banking information, insurance policy, ACH format, security questionnaire, verified mobile phone, | |
| ■ | US and Canada: W-9 form for US, TD1 for Canada, MC Certification (Insurance certificate), ACH Form | |
| ■ | Once approved, Shippers can request bids for a certain service or Carriers can provide bids on Shipper requests. Fr8App’s Platform matches up Shippers and Carriers and assigns a driver and truck to the job. The driver picks up the supplies while the Platform tracks the progress of the trip, in real time. The driver delivers the shipment, uploads documentary evidence of the delivery (“POD”) and is paid. |
Fr8App’s Platform automatically matches Shippers with Carriers within the Fr8App network, instantaneously. Carriers are sent push notifications through the Platform every time a load or job request is entered by a Shipper that matches the criteria Carriers are looking for on a given shipment and lane.
By leveraging its technology, the increasing usage, and amount of traffic booked on its Platform, Fr8App can work with customers to optimize their supply chain, eliminate empty miles on the road, and reduce their carbon footprint. A transformation in the logistics transportation industry is taking place. With its proprietary software, Fr8App offers smart solutions that create sustainable alternatives and offer benefits to both Shippers and Carriers, including:
| ● | a single point of contact as a control center | |
| ● | full visibility to freight transportation, in real-time | |
| ● | ability to book shipment loads in minutes | |
| ● | matching with only pre-approved Carrier compliance | |
| ● | live 24/7 tracking on shipment while in-transit | |
| ● | real-time messaging capabilities with Carriers | |
| ● | advanced data analytics | |
| ● | ability to secure quality loads faster on preferred routes | |
| ● | ability to reduce “deadhead” empty loads | |
| ● | convenient and faster payment | |
| ● | scalable technology for Carriers who plan to grow their fleet |
Fr8App’s Customers
Fr8App’s customers consist of Shippers and Carriers across North America. A Shipper will use Fr8App’s Platform to request bids on a shipment or a series of shipments of certain characteristics and a Carrier will agree to the terms set forth on its Platform. Carriers have the option to carry out deliveries prior to receiving payment from Fr8App, and Shippers may start shipments before submitting their payment to Fr8App. Fr8App mitigates payment risks by pre-screening and approving all Shippers and Carriers prior to approving either party. Fr8App believes that Shippers value the features and benefits from its Platform by working with trusted Carriers that help alleviate driver shortages. Shippers also benefit from the cost transparency available on Fr8App’s Platform as there are no hidden fees. Shippers can count on the safety and reliability of the Platform as Fr8App tracks cross border shipments. Lastly, Shippers can benefit by managing their logistics needs in one control center, all on Fr8App’s Platform.
For the year ended December 31, 2021, each of two customers accounted for 35% and 15% of Fr8App’s accounts receivable, and for the year ended December 31, 2020, each of three customers accounted for 11%, 12% and 13% of its accounts receivable. For the year ended December 31, 2021, one customer accounted for 37% of Fr8App’s revenues. For the year ended December 31, 2020, one customer accounted for 13% of the Company’s revenues.
Fr8App believes Carriers value its ability to assist in minimizing empty (deadhead) miles and making every mile, a mile paid for. Carriers also benefit from the Platform’s transparency and know how much they are scheduled to make from fulfilling each job. Carriers receive faster payment for their services by using Fr8App’s Platform and avoid potentially expensive factoring companies. Lastly, Carriers can benefit from Fr8App’s Platform by using it as a tool to streamline workflows and increase overall efficiency.
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Fr8App’s Growth Strategy
Fr8App intends to establish itself as the top digital freight matching broker in the Mexican domestic market as well as U.S-Mexico and Mexico-U.S. cross-border markets. Fr8App intends to leverage its position within the U.S-Mexico and Mexico-U.S. cross-border markets, into opportunistically expanding its footprint across select routes in the U.S. and into Canada. Fr8App’s growth strategy consists of the following:
Fr8App plans to expand its Shipper base and increase its Carrier ecosystem throughout all three countries, with an initial focus on the Mexico-U.S. cross-border market, a select portion of the U.S. domestic market and a select segment of the Mexican domestic market. With recent investments in its Platform and internal tools for sales representatives, Fr8App plans to hire additional employees in its Shipper and Carrier Sales areas and its operations teams, and establish formal training programs for its labor force and access the highly trained labor market in Mexico to manage its ongoing daily operations throughout North America. Using creative marketing campaigns, Fr8App intends to reinforce the benefits of using its Platform and increase adoption amongst existing Shipper and Carrier customers. With the use of business intelligence tools and management solutions, Fr8App will actively manage margins and maintain lean operating units. By leveraging customer references and building off existing Shipper relationships, Fr8App believes it will be able to add new accounts to its portfolio across the domestic trucking industry in Mexico, at the U.S.-Mexico cross-border and opportunistically select routes within the U.S. and the U.S.-Canada border commercial freight transportation market.
Fr8App plans to continue to build trust among its Carriers by managing its Shipper base to provide a high level of fulfilment, and effective management of loads. Fr8App will monitor service levels across its Platform with on-time pick up and delivery metrics. To deliver high performance attention while maximizing value to its Carrier customers, Fr8App plans to grow its Carrier sales force to quickly respond to high volume primary loads and spot loads, as necessary.
Fr8App intends to establish a very well-trained bilingual sales force and operations team and has implemented a successful “Fr8App University” Program. Fr8App intends to help grow its sales and operations teams by developing a college recruiting program and hiring qualified individuals to train them within the industry and continue working with them on a side by side basis.
Fr8App will continue to invest in its technology to improve and differentiate its Platform, as well as, expand its TMS offerings for Shippers. Fr8App plans on integrating more of its business customers through customized API’s and launching a fleet management system for Carriers.
Focusing On Automation
| ● | Go Digital: Fr8App believes that by providing more sophisticated automation to the relatively untapped digital commercial freight market in Mexico, and expanding upon initial efforts in the U.S. and Canada, it will strengthen its position within the domestic transportation segments in Mexico and the U.S. and grow its revenue stream. By leveraging existing relationships with Shippers, Fr8App will train Carriers utilizing the Platform to improve operations and gain more transportation loads. Fr8App plans to introduce “native onboarding” through API integration with relationship management integration software coupled with building out of internal tools and capabilities. Fr8App would like Shippers and Carriers to work toward making its Platform totally “self-serve” where Carriers and Shippers gain access to the Platform without human intervention. Its goal is to automate sales and operations functionality throughout the process while providing real-time visibility for all parties; – Shippers, Carriers and Fr8App. | |
| ● | Be digital: Fr8App intends to continue refining and automating its operational flow and maximize efficiencies while thoughtfully growing its brokerage division. Fr8App is investing in adding development efforts to expand its technology team and to work towards building out more internal tools to maximize efficiency in its brokerage division such as real-time pricing tools by coupling historical lane data analytics with API integration as well as other unique internal data sets. |
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Balancing Contractual and Spot Business
Primary markets are markets with established regular routes that are contracted for over a period of time. and spot markets are negotiated at a specific point in time and, usually in response to some form of short-term overage that was not originally planned by a Carrier. Fr8App understands the importance of balancing its efforts and business between primary and spot markets. As Fr8App moves forward advances in serving the domestic with Mexico domestic and U.S.-Mexico cross-border markets opportunities, Fr8App will try to leverage spot opportunities presented by different global situations, such as high market volatility as a result of COVID-19, the trade wars, and other macroeconomic factors creating a shortage of supply and surplus in demand. As the market stabilizes, Fr8App will increasingly try to target higher volume, long-term contractual business directly from Shippers.
Research and Development
The first commercial version of Fr8App’s products was launched in 2017. Fr8App continued its product development efforts throughout 2018, added initial business intelligence and analytics to supplement its basic products in 2019 and offered its revised products package with active freight brokerage support and customer service towards the end of 2019 and into early 2020.
The latest generation of Fr8App products were brought to market during the second quarter of 2020 and consist of (1) the online Portal and Mobile App by itself, (2) the TMS, and (3) Fr8App’s Platform supplemented with freight brokerage support and customer service.
All products work under the same business model whereby revenues are generated as a percentage of commission per transaction. Each one of the shipments that are made through the Platform (Portal or App) are considered a transaction. The difference between the products resides in the degree of active assistance provided by Fr8App in the operation of the Platform itself. If the system user operates with the Platform without assistance, the interaction between Shipper and Carrier offerings is automatically carried out on the system with a fixed commission representing Fr8App’s revenues. If the Platform is supplemented with freight brokerage support and customer service, then the Fr8App team’s active intervention is required through the Platform’s BackOffice, thus allowing more flexibility to the parties involved to negotiate and agree on rates. Currently, Fr8App’s offering of using its Platform supplemented with freight brokerage support and customer service accounts for 100% of Fr8App’s revenue. Fr8App believes the industry is still anchored in communication through traditional channels (phone or email), and human attention is valued in the management of shipments.
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Fr8App’s BackOffice
However, for traditional brokers, the Fr8App Platform is a solution to try to get capacity to their clients, quickly, when they have not achieved it through their traditional channels and methods. We anticipate that brokers will use the Portal to help augment their present offerings in the freight market over time and thereby providing Fr8App with an additional source of revenue.
Fr8App’s systems development team works in a development environment that is based on Scrum methodology. This methodology allows it to deliver new functionalities as frequently as it designs, which is presently every two weeks. By applying concepts such as Continuous Integration and Continuous Delivery (“CI/CD”), Fr8App believes its development process is highly robust. Following is a visual depiction of the Scrum Methodology:
Its technology has been designed with the goals of building a highly efficient, adaptable, scalable and secure platform with the potential
to vastly improve operating margins of freight transactions. Following are some of the features of Fr8App’s technology infrastructure
and development methodologies:
| 1. | Efficiency & Adaptability: | |
| a. | Highly automated agile development process supported by CI and CD tools. | |
| b. | Event based, microservice architecture. | |
| c. | Applications packaged in Docker images. | |
| d. | Container orchestration via Kubernetes leveraging automated rollouts and rollbacks, service discovery and load balancing. | |
| e. | Modern, extendable, API suited for integration with industry data providers (TMS, telematics, ELD, Compliance, Big Data providers and other systems). |
| 2. | Scalability & High-availability: | |
| a. | Project hosted in GoogleCloudPlatform. | |
| b. | Underlying platform invented in telco industry, designed for scale with minimal downtime. | |
| c. | Erlang’s (via Elixir) let-it-crash philosophy, reducing codebase and allowing smaller teams to produce more. |
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| d. | CQRS design pattern used throughout the system, separation between read & write storage. | |
| e. | Easy horizontal scaling via Kubernetes. | |
| f. | EventStore as a framework for CQRS, EventsFr8App’scing, and messaging. | |
| g. | Postgresql hosted in Aiven. |
| 3. | Security & Auditability: | |
| a. | No information is lost, all transactions are stored in immutable storage. Fr8App can go back in time and reinterpret the data from the beginning of time with the new knowledge it is acquiring. | |
| b. | System is being monitored by automated monitoring tools (Stackdriver, Prometheus) and is alerting the engineering team via Slack integration. Grafana is used to visualize system parameters in real-time. All API traffic is stored in BigQuery for deep analysis of system’s usage. | |
| c. | Using highest industry available encryption standards. | |
| d. | All information is encrypted on the go, https & wss. | |
| e. | Personally identifiable information is encrypted in rest as well. | |
| f. | Strict data and code access policies applied to product, and to development process. | |
| g. | Full snapshot, i.e. base backup of Postgresql. | |
| h. | Postgresql streaming backup, i.e. WAL records. | |
| i. | Entire instances backed up. | |
| j. | Access to multiple data centers in different geographic zones |
Fr8App is developing and plans to develop reporting, online analytical processing, analytics, data mining, process mining, complex event processing, business performance management, benchmarking, text mining, predictive analytics, and prescriptive analytics. All these enhanced functionalities will increase the utility and add value to any user of its Platform and in turn, help drive traffic to the Platform itself.
Sales and Marketing
Fr8App targets its product offerings to high volume contractual lanes from direct small and mid-market Shippers with $1 to $200 million in annual revenue. Fr8App builds Carrier density with high volume consistent business from Shippers and builds buying power as it continues to attract more Carriers to use the Platform. Fr8App is establishing creative marketing campaigns in the Mexico domestic market to reinforce the benefits of using its Platform and Portal, and to increase adoption of its technology and solution.
Fr8App has recruited a proven industry executive, Mike Flinker as its President. Mike brings with him over 40 years of industry experience to lead Fr8App’s sales and business development efforts. Fr8App’s Chief Executive Officer, Javier Selgas, initially joined Fr8App as Chief Technology Officer and has over a dozen years of experience in developing technology and digital marketing. Fr8App’s Chief Financial Officer and Secretary, Paul Freudenthaler, has over 30 years of financial experience and has been Chief Financial Officer for several leading companies in both the U.S. and Mexico. Fr8App’s Chief Operating Officer has over 25 years of experience within the logistics and supply chain industry across North America. As of March 30, 2022, Fr8App has a total of 82 benefits-eligible employees and 10 contract-based employees. Fr8App believes that by positioning and growing its cross-cultural human capabilities, interacting at a local level with Shippers and Carriers and by providing international knowledge and expertise, Fr8App will execute best practices in a smart and accelerated fashion and help build the trust among its customers and employees and strengthen its operations ecosystem.
Regulations
The Carriers with which Fr8App transacts its business, are usually legal corporate entities, LLC’s, or their equivalents, in Mexico and Canada. Fr8App enters into contracts for the provision of services with Shippers and Carriers while the Shippers and Carriers are typically subject to rules and regulations for operating within their given industry and, as applicable, the freight industry within their respective countries of operation. Carriers are responsible for being duly certified and operating under good standing as required by their corporate residence and the locations over which they carry freight. For US carriers, the main regulator is the US Department of Transportation (“DOT”) and various state level equivalents. For Mexico Carriers, the relevant counterparty is the “Secretaria de Transporte” and in Canada it is “Canadian Transportation Agency”. Of note is that nearly the entirety of regulatory compliance burden with Fr8App’s business footprint falls on the Carriers themselves. For example, Fr8App’s regulatory compliance in the U.S. is for the most part limited to remaining in good standing with the DOT. Meanwhile the US based Carriers Fr8App works with are also required to comply with the DOT but may also have additional requirements for maintaining a number of operating licenses, insurance requirements and special certifications (i.e., border-crossing).
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Consequently, the cost to comply with government regulation for Fr8App is relatively low. Government regulations affecting the manner in which the truck freight industry operates, and more specifically on Fr8App, would likely impose a number of obligations on parties that secure Carrier freight services within the freight industry. Depending on the nature of the regulatory changes, Fr8App’s business model could be adversely affected. However, it is nearly impossible to attempt to identify all cases that would affect the Company’s business model. For example, a change in trade regulations could increase or decrease freight volumes across a given border but the Company’s business model may not be adversely affected. A disease in products such as lettuce could affect the segment of our business that works with lettuce producers shipping from Mexico into the US and Canada. A US policy to impose tariffs on foreign steel could decrease cross-border traffic but increase domestic freight traffic in the steel industry. In comparison, if regulations were decreased and border restriction removed or lessened, as it occurred in the European Union as border restrictions eased, the added-value that Fr8App provides to our customers by assisting them with the nuances of border-crossing freight could be eliminated and our business from that segment could be negatively affected.
While Fr8App does not anticipate any wide or far-reaching changes in regulations affecting our industry, they are not out of the question and they could affect Fr8App’s business model in a material way.
Fr8App’s business is subject to a variety of U.S. and Mexican laws, rules and regulations, including those affecting “Motor Carriers, Owner-Operators and Transportation Brokers” issued by FMCSA of the DOT. Fr8App is subject to many U.S., Canadian and Mexican federal, state and local laws and regulations including those related to internet activities, privacy, rights of publicity, data protection, intellectual property, health and safety, competition, consumer protection, payments, transportation services, insurance coverage and taxation. These laws and regulations are constantly evolving and may be interpreted, applied, created or amended in a manner that could harm Fr8App’s business.
Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm Fr8App. These may involve privacy, data protection and personal information, content, intellectual property, data security, retention and deletion. In particular it is subject to federal, state and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy, content and other laws and regulations can impose different obligations or be more restrictive than those in the U.S. U.S. federal, state and foreign laws and regulations which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation and enforcement of these laws and regulations are often uncertain, particularly in the new and evolving industry in which it operates and may be interpreted and applied inconsistently from country to country and inconsistently with its current policies and practices. Fr8App’s customers upload and store data in its Platform. This presents legal challenges to its business and operations, such as consumer privacy rights or intellectual property rights. Both in the U.S. and abroad, Fr8App must monitor and comply with a wide variety of laws and regulations regarding the data stored and processed on its cloud-based platform as well as in the operation of its business.
Competition
The 3PL industry is rapidly evolving, including demand for greater efficiency and increased visibility into the shipment lifecycle. Fr8App expects continued significant competition on a national and international level. Fr8App’s competitors include the postal services of the U.S. and other nations, various motor carriers, express companies, freight forwarders, air couriers, large transportation and e-commerce companies that are making significant investments in their capabilities, and startups and other companies that combine technologies with crowdsourcing to focus on local market needs, some of whom may currently be its customers.
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In Mexico, Fr8App competes with many logistics companies and freight brokers. Fr8App also buy from and sell transportation services to companies that compete with us. There are very few direct technology-based competitors that are focused on the domestic transportation market in Mexico.
In contrast, the domestic U.S. 3PL industry is crowded with globally recognized competitors, some of whom, offer transportation services as well as traditional 3PL services. Fr8App technology was developed in part to improve traditional 3PL solutions offered by established corporations such as XPS Logistics, Inc., C.H. Robinson Worldwide, Inc. and J.B. Hunt Transport Services, Inc. Traditional 3PL providers leverage their vast network of offices and employees to coordinate freight transportation domestically and internationally. Additionally, a wave of new entrants have entered the 3PL space with novel, real-time 3PL solutions; similar to Fr8App’s Portal and Platform. Companies such as Uber Freight LLC, Convoy, Inc. and NEXT Trucking, LLC have each accessed the 3PL market with the support of private financing to disrupt established 3PL corporations.
Furthermore, both established and emerging competitors have direct access to U.S.-Canadian cross border trade routes, where Fr8App intends to serve on an opportunistic basis as well. According to the U.S. Bureau of Transportation Statistics, a total of $343.0 billion worth of freight moved across the U.S.-Canada border in 2019.
In the future, competition may also come from other sources in the future as new technologies are developed and new methods of transportations are made widely available. Innovations in transportation technology, including driverless trucks, artificial intelligence and logistics could adversely affect the demand for Fr8App’s 3PL services.
Intellectual Property
On January 7, 2021, Fr8App filed a trademark application with the U.S. Patent and Trademark Office for the Fr8Technologies design mark. Fr8App currently does not hold any patents or own any registered trademarks. Fr8App believes that the success of its business depends on the quality of its proprietary software solutions, technology, processes, and domain expertise. While it considers its intellectual property rights to be valuable, Fr8App believes that its competitive position depends primarily on its ability to increase and eventually to maintain a leadership position by developing innovative proprietary solutions, technology, information, processes, insights and business intelligence to satisfy both Shippers and Carriers’ needs through its Platform.
Fr8App’s principal asset consists of its software, which it invests in on a monthly basis through development work by employees and externally contracted parties. Fr8App invested approximately $0.5 million and $0.2 million in software during the years ended December 31, 2021 and December 31, 2020, respectively. Fr8App expects to continue investing in its software in line with the expansion of its product offerings. Financing for investment in software has historically been provided for by the company’s operations.
Employees
As of March 30, 2022, we have a total of 82 employees, 69 of them are based in Mexico with the remaining in the U.S. and other virtual locations and 10 contract-based employees. None of its employees are represented by a labor union or covered by a collective bargaining agreement. Fr8App considers its relationship with its employees to be good. Fr8App has four principal executives including its CEO, COO, CEO and President. Fr8App has the following number of people including its executives in each of its departments: Finance and Administration – 17, Carrier Sales – 21, Shipper Sales 11, IT – 11, Operations – 24 and Support – 13. Relationships with employees are stable and favorable.
Facilities
Fr8App’s U.S. headquarters office is located at 2001 Timberloch Place, Suite 500, The Woodlands, Texas 77380, and its Mexican headquarters office is in Monterrey, Mexico . The headquarters location consists of a rental office in a shared office facility. The facilities in Monterrey consists of 62 workstations and two private offices in a work suite facility in Monterrey. Fr8App evaluates its needs for facilities on an ongoing basis. There are no environmental issue affecting access and utilization of any of the company’s assets.
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| C. | Organization structure. |
The following is a list of our principal subsidiaries and consolidated affiliated entities as of the date of this annual report on Form 20-F:
| Name | Place of Formation | Relationship | ||
| Freight App, Inc. | Delaware | Wholly-owned subsidiary | ||
| Freight App de México S.A. de C.V. | Mexico | Wholly-owned subsidiary |
| D. | Property, plants and equipment. |
Facilities
We currently maintain two physical offices in The Woodlands, Texas and Monterrey, Mexico and a variety of our personnel work from their home office in a number of cities across the US, Mexico and Canada. In January 2020, we entered into a lease agreement for 7 workstations in Mexico for a term of 12 months and expired on December 31, 2020. In November 2020, the Company entered into a lease agreement for 14 workstations in Mexico for a term of 12 months and expired on October 31, 2021. In November 2021, the Company entered into a lease agreement for 62 workstations and two private offices in Mexico for a term of 12 months, which will expire on October 31, 2022. The rental cost for the years ended December 31, 2021 and 2020, was approximately $110,000 and $67,000, respectively . In October 2020, the Company entered into a worksuites arrangement for a workspace in an office located in The Woodlands, Texas, on a month to month basis for $94 per month. The contract continues in effect.
Equipment
Fr8App’s principal asset consists of its software, which it invests in on a monthly basis through development work by employees and externally contracted parties. Fr8App invested approximately $0.5 million and $0.2 million in software during the years ended December 31, 2021 and December 31, 2020, respectively. Fr8App expects to continue investing in its software in line with the expansion of its product offerings. Financing for investment in software has historically been provided for by the company’s operations.
Item 4A. Unresolved Staff Comments
Not applicable.
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Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See “Forward-Looking Information.” In evaluating our business, you should carefully consider the information provided under the caption “Item 3 Key Information — D. Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks, changes and uncertainties.
| A. | Operating Results |
Overview
Prior to February 14, 2022, we were mainly in the business of providing financial services in the People’s Republic of China to meet the financial and capital needs of our clients, which comprise largely of small-to-medium sized enterprises (“SMEs”). Through our wholly-owned subsidiaries, Hongkong Internet Financial Services Limited and CIFS (Xiamen) Financial Leasing Co., Ltd, our contractually controlled and managed company, Hongkong Shengqi Technology Limited, its wholly-owned subsidiary, Beijing Yingxin Yijia Network Technology Co., Ltd and its contractually controlled and managed company, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“SYX” or “Sheng Ying Xin”), and SYX’s wholly-owned subsidiaries, Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”), Fu Hui (Shenzhen) Commercial Factoring Co., Ltd (“FuhuiSZ”), Yingda Xincheng (Beijing) Insurance Broker Co., Ltd (“ Yin Da Xin Cheng”), Fuhui (Xiamen) Commercial Factoring Co., Ltd (“FuhuiXM”), Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd. and Hangzhou Yuchuang Investment Partnership. We primarily offered commercial payment advisory services, international corporate financing advisory services, intermediary bank loan advisory services and supply chain financing services.
We historically generated revenue from service fees in connection with our (i) commercial payment advisory services, (i) international corporate financing advisory services,(iii) intermediary bank loan advisory services, and (iv) supply chain financing services (factoring services). Additionally we historically earned interest income from our direct or entrusted lending activities. Our total net revenue from service fees was $1.4 million in 2019, declined to $0.6 million in 2020 and decreased to $0.0 in 2021. We had a net loss of $62.0 million, $9.1 million and $2.1 million in fiscal years 2019, 2020 and 2021, respectively.
Our service fee business has materially slowed down in recent years. Although the number of clients we served and the amount of services we provided grew rapidly through 2017, due to the economic downturn in China since 2018, our clients’ financial needs significantly decreased. We served 47 customers, 47 customers and only one customer and arranged approximately $2.4 million, $996 million and $0.42 million in financings in 2017, 2018 and 2019, respectively. In 2020, because of the COVID-19 pandemic, which resulted in a nation-wide lockdown, all economic activities came to a virtual standstill for over a year. We started to recover gradually in the last quarter of 2020, but the PRC economy had not yet recovered and this downward pressure on our business carried forward to 2021 through today. We used to provide technical services through our subsidiary, Beijing Anytrust Science & Technology Co., Ltd (“Anytrust”). In 2018, we generated $0.5 million from the provision of technical services. However, in order to reduce our operating losses, we disposed of Anytrust in December 30, 2018 and therefore we no longer provide such technical services. Our other service fee businesses have been severely hampered by the COVID-19 effect and shifts in value added and distribution chains in North America away from China and towards a more regional focus.
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Key Factors Affecting Our Results of Operations
Major factors that have affected our results of operations include the following:
Economic Conditions in China
The demand for financial services from borrowers is dependent upon overall economic conditions in China and of Chinese company activities outside of China. General economic factors, including the interest rate environment and unemployment rates, may affect borrowers’ willingness to seek loans and investors’ ability and desire to invest in loans. For example, significant increases in interest rates could cause potential borrowers to defer obtaining loans as they wait for interest rates to become stable or decrease. Additionally, a slowdown in the economy, such as from a rise in the unemployment rate and a decrease in real income, may affect individuals’ level of disposable income. Sectoral shifts away from expanding Chinese companies could affect demand for our services. All of this and others may negatively affect borrowers’ repayment capability, which in turn may decrease their willingness to seek loans and potentially cause an increase in default rates. If actual or expected default rates increase generally in China or the finance market, investors may delay or reduce their investments in loan products in general, including those provided by us.
Ability to Acquire Borrowers Effectively
Our ability to increase the loan volume facilitated through us largely depends on our ability to attract potential borrowers through sales and marketing efforts. Presently, we are largely dependent on key members of our management team, including our largest shareholder and former Chairman and Chief Executive Officer, Mr. Jianxin Lin and Mr. Jinchi Xu, who have extensive experience in the financial service industry and important relationships with borrowers, banks and lending institutions for our business.
Our future sales and marketing efforts will include those related to borrower acquisition and retention, and general marketing. We intend to continue to dedicate significant resources to our sales and marketing efforts and constantly seek to improve the effectiveness of these efforts, in particular with regard to borrower and investor acquisition.
Effectiveness of Risk Management
Our ability to effectively segment borrowers into appropriate risk profiles affects our ability to match them with attractive products and services offered by the relevant bank or lending institution in terms of offering attractive pricing to borrowers as well as our ability to offer them attractive returns on financial products, both of which directly relate to the level of user confidence in our services.
Ability to Innovate
Our growth to date had depended on, and were we to continue our service fee strategy, our future success will depend in part on, successfully meeting borrower demand with new and innovative loan and investment products customized for their needs. We have made efforts to source loan and investment products to meet the individualized needs of our borrowers. We evaluated the popularity of existing product offerings and services that cater to the ever evolving needs of our borrowers. We also sought to negotiate better terms for our customers based on our relationships with banks and lending institutions.
From the borrower perspective, we could continue to attempt to tailor credit products to meet their specific needs.
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Ability to Compete Effectively
Our fee service business and results of operations depend on our ability to compete effectively in the markets in which we operate. The financial services industry in China is intensely competitive, and we expect that competition to persist and intensify in the future. In addition to competing with other finance companies, we also compete with other types of financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions, such as finance business units in commercial banks and other finance companies. If we are unable to compete effectively, the demand for our services could stagnate or substantially decline, we could experience reduced revenues or our services could fail to maintain or achieve more widespread market acceptance, any of which could harm our business and results of operations.
Regulatory Environment in China
The regulatory environment for the financial services industry in China is developing and evolving, creating both challenges and opportunities that could affect our financial performance. Due to the relatively short history of the financial services industry in China, the PRC government has not adopted a clear regulatory framework governing our industry. We will continue to make efforts to ensure that we are compliant with the existing laws, regulations and governmental policies relating to our industry and to comply with new laws and regulations or changes under existing laws and regulations that may arise in the future. While new laws and regulations or changes to existing laws and regulations could make loans more difficult to be accepted by borrowers on terms favorable to us, or at all, these events could also provide new product and market opportunities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report.
Principle of consolidation and combination
The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of these consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. Management makes its estimates based on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements mainly include the allowance for doubtful accounts, the valuation allowance of deferred tax assets, the estimated useful lives of long-lived assets, the impairment assessment of goodwill, intangibles and other long-lived assets, the fair value of identifiable assets and liabilities acquired through business combination.
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Revenue Recognition
Revenue principally consists of consulting service and factoring service revenue. Revenue comprises the fair value of the consideration received or receivable for the provision of services in the ordinary course of the Company’s activities and is recorded net of value added tax (“VAT”). Consistent with the criteria of ASC 605 “Revenue Recognition” (“ASC 605”), the Company recognizes revenue when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
The Company’s services included commercial payment advisory services, intermediary bank loan advisory services, international corporate financing advisory services and supply chain financing services (factoring business). We used to provide technical services through Anytrust. However, we disposed of Anytrust on December 30, 2018 to reduce our operating losses. As a result, we no longer provide technical services.
For commercial payment advisory services, after signing contracts with the client, the Company would start to identify and select banks and financial products, coordinate with banks to structure financing solutions for the client. Then the client prepares application materials and sends them to the bank. When approved by the bank, the client deposits cash with the bank or purchase wealth management products sold by the bank. After this step, the bank issues a letter of guarantee, which the client will pledge as security for the acceptance bills. The letter of guarantee is a document that the bank provides certifying itself as guarantor. The Company’s service fee is a percentage of the amount of cash deposited with or wealth management products purchased from the bank by the client. The Company recognizes revenue after the client receives a bank credit contract from the bank and when the Company receives a contract completion confirmation from the client.
For intermediary bank loan advisory services, the Company would match small-to-medium sized enterprises (“SMEs”) with financing sources. The Company would then charge borrowers an introduction fee which is calculated at a percentage of the loan. The Company recognizes revenue after the client receives a bank credit contract from the bank and when the Company receives a contract completion confirmation from the client. The Company typically receives the contract completion confirmation when the client receives the bank financing and signs off on the contract completion confirmation.
For international corporate financing advisory services, the Company works with overseas banks to structure and provide clients with financing solutions to obtain facilities from overseas banks for the clients’ offshore affiliates. After signing contracts with the client, the Company starts to identify potential overseas banks and domestic banks to provide the client’s financing needs, structure financing solutions and facilitate the application process. After the client provides security to the domestic bank, the domestic bank will issue a letter of guarantee to the overseas bank. The overseas bank will provide credit to the affiliate designated by client. The Company’s service fee is a percentage of credit granted by the overseas bank to the offshore affiliate. The Company recognizes revenue after the offshore affiliate receives a credit approval notice from the offshore bank and when the Company receives a contract completion confirmation from the client. The Company typically receives the contract completion confirmation when the affiliate receives the bank financing and the client signs off on the contract completion confirmation.
For technical services, after signing the contract, and we have provided the clients with the technical services and charged our clients the relevant fees, we recognize revenue when the services are rendered.
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Our factoring services provide owners of SMEs with holistic supply chain financing solutions and value-added services in order to reduce financing costs and improve efficiency during a business transaction.
There are no claw back provisions or other guarantees. Full service fee are due upon the contract completion confirmation from the client.
Interest income from loans to a third party
The Company accepts clients’ application for short-term loans and conducts a review of their credit status and application materials. The Company lends its own funds in the form of direct and entrusted loans to the eligible clients and receives interest income, which is calculated at a percentage of the amount of fund the Company lent. The Company recognized interest income monthly on accrued basis as interest income.
Fair Value of Financial Instruments
The Company has adopted ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
Its establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
| Level 1 | - | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2 | - | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| Level 3 | - | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The carrying value of cash and cash equivalents, accounts receivable, other current assets and prepaid expenses, short term loans, other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments.
The Company does not have any level 2 or level 3 assets and liabilities as of December 31, 2021 and 2020.
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Goodwill
Goodwill is the excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business combination. The Company tests goodwill for impairment at the reporting unit level on an annual basis as of December 31, 2021 and between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. The Company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report.
Results of Operations
Results for the Year ended December 31, 2021 compared to the Year ended December 31, 2020
Operating Metrics for the year ended December 31, 2021 and December 31, 2020
We regularly monitor a number of metrics in order to measure our current and projected future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
| For the Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| RMB | US$ | RMB | US$ | |||||||||||||
| (in Million) | ||||||||||||||||
| Amount of financing advised: | - | - | - | - | ||||||||||||
| Commercial Payment | - | - | - | - | ||||||||||||
| International Corporate Financing | - | - | - | - | ||||||||||||
| Intermediary Loan | - | - | - | - | ||||||||||||
| Amount of financing factored: | - | - | - | - | ||||||||||||
| Factoring Business | - | - | - | - | ||||||||||||
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| For the Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Number of clients advised(1) | - | - | ||||||
| Commercial Payment | - | - | ||||||
| International Corporate Financing | - | - | ||||||
| Intermediary Loan | - | - | ||||||
| (1) | The number of clients for a specified period represents the number of clients whose financing were funded during such period. |
| For the Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in US$ thousands) | ||||||||
| Fees billed to clients(2) | - | - | ||||||
| (2) | Represent amounts net of VAT. |
The amount of financing advised is calculated by summing up the financing amount indicated on the financing contracts. The revenue is calculated by multiplying the service fee ratio indicated on the contract and the financing amount advised.
The following tables set forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of variance. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| All Numbers (US$’000’s) | Years ended December 31, | Variance | ||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenue | $ | - | $ | 0.6 | $ | (0.6 | ) | (100.0 | )% | |||||||
| Cost of revenue | - | - | - | - | ||||||||||||
| Gross profit | - | 0.6 | (0.6 | ) | (100.0 | )% | ||||||||||
| General and administrative expense | 2,495.3 | 4,123.1 | (1,627.8 | ) | (39.5 | )% | ||||||||||
| Selling and distribution expense | - | 10.7 | (10.7 | ) | (100.0 | )% | ||||||||||
| (Loss) income from operations | (2,495.3 | ) | (4,133.2 | ) | (1,638.5 | ) | (39.6 | % | ||||||||
| Interest income on bank deposit | 0.0 | 0.0 | (0.0 | ) | (64.3 | )% | ||||||||||
| Other income (expenses) | 349.0 | 38.9 | 310.2 | 797.9 | % | |||||||||||
| Interest income from loans to third parties | 0.8 | 365.0 | (364.3 | ) | (99.8 | )% | ||||||||||
| Impairment loss on loans to third parties and property and equipment | - | (5,346.0 | ) | (5,3460 | ) | (100.0 | )% | |||||||||
| (Loss) income before income taxes | (2,145.5 | ) | (9,075.4 | ) | (6,929.8 | ) | (76.4 | )% | ||||||||
| Income tax (benefit) expenses | - | - | - | - | ||||||||||||
| Net (loss) income | $ | (2,145.5 | ) | $ | (9,075.4 | ) | $ | (6,929.8 | ) | (76.4 | )% | |||||
| Comprehensive loss (income) | $ | (1,587.5 | ) | $ | (6,389.0 | ) | $ | (4,801.4 | ) | (75.2 | )% | |||||
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Revenue
A breakdown of our revenue for the year ended December 31, 2021 versus the year ended December 31, 2020 is set forth below:
| All Numbers (US$’000’s) | For the Year Ended December 31, | Variance | ||||||||||||||||||||||
| 2021 | % | 2020 | % | Amount | % | |||||||||||||||||||
| Intermediary Bank Loan Services | $ | - | - | % | $ | - | - | % | $ | - | % | |||||||||||||
| Factoring Service | - | - | % | 0.6 | 100 | % | (0.6 | ) | (100.0 | )% | ||||||||||||||
| Total Amount | $ | - | - | % | $ | 0.6 | 100 | % | $ | (0.6 | ) | (100.0 | )% | |||||||||||
Net revenue for the year ended December 31, 2021 decreased by 100% year-over-year to $0 from $0.6 in the same period in 2020.
Overall, our revenue decreased for the year ended December 31, 2021 compared to the same period in 2020, mainly due to a reduction in business opportunities as a result of the overall economic environment and COVID-19 pandemic in the PRC and strategic adjustment of our business to diversify and explore new business opportunities.
Cost of Revenue
Total cost of revenue, comprises mainly revenue-generating staffing costs. The main reasons for the decrease in cost of revenue was because we did not have any business in 2021 and very minimal business volume in 2020.
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2021 decreased by 100% to $0.0 from $0.6 for the year ended December 31, 2020. The decrease is in line with the revenue decrease of 100% over the same periods.
Gross margin, or gross profit as a percentage of total revenue, was zero for the year ended December 31, 2021 and 100% for the year ended December 31, 2020. There is no significant cost of revenue for either year.
Operating Expenses
The following table sets forth the breakdown of our operating expenses for the year ended December 31, 2021 and 2020, respectively:
| For the Year Ended December 31, | Variance | |||||||||||||||||||||||
| All Numbers (US$’000’s) | 2021 | % | 2020 | % | Amount | % | ||||||||||||||||||
| General and administrative expenses | $ | 2,495.3 | 100.0 | % | $ | 4,123.1 | 99.7 | % | $ | (1,627.8 | ) | (39.5 | )% | |||||||||||
| Selling and marketing expenses | - | - | % | 10.7 | 0.3 | % | (10.7 | ) | (100.0 | )% | ||||||||||||||
| Total Amount | $ | 2,495.3 | 100.0 | % | $ | 4,133.9 | 100 | % | $ | (1,638.5 | ) | (39.6 | % | |||||||||||
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Total operating expenses for the year ended December 31, 2021 decreased 39.6% to $2,495.3 from $4,133.9 in the year ended December 31, 2020.
General and administrative expenses consist primarily of staff costs, rental expenses and office related expenses. General and administrative expenses were $2,495.3 for the year ended December 31, 2021 compared to $4,123.1 for the year ended December 31, 2020, a decrease of $1,627.8. The decrease in general and administrative expenses is mainly due to the downsizing in our operations.
Selling and marketing expenses for the year ended December 31, 2021 decreased by 100% to $0 from $10.7 in the year ended December 31, 2020. The year-over-year decrease primarily resulted from the downsizing in our operations.
(Loss) Income from Operations and Operating Margin
Loss from operations in the year ended December 31, 2021 was $2,495.3, compared with loss from operations of $4,133.2 in the year ended December 31, 2020.
Operating margin, or income from operations as a percentage of total revenue was nil as there in no revenue for the year ended December 31, 2021, compared with a large negative margin for the year ended December 31, 2020, due to the previously discussed changes.
Other income/(expenses)
The following table sets forth the breakdown of our other income for the year ended December 31, 2021 and the year ended December 31, 2020:
| All Numbers (US$’000’s) | For the Year Ended December 31, | Variance | ||||||||||||||||||||||
| 2021 | % | 2020 | % | Amount | % | |||||||||||||||||||
| Interest income on loans to third parties | $ | 0.8 | 0.2 | % | $ | 365.0 | (7.4 | )% | $ | (364.2 | ) | (99.8 | )% | |||||||||||
| Interest income on bank deposits | 0.0 | (0.0 | )% | 0.0 | (0.0 | )% | 0.0 | ) | (64.3 | )% | ||||||||||||||
| Other income (expenses) | 349.0 | 99.8 | % | 38.9 | 10.3 | % | 310.2 | 797.9 | % | |||||||||||||||
| Impairment loss on loans to third parties and property and equipment | - | - | % | (5,346.0 | ) | 97.1 | % | (5,346.0 | ) | (100 | )% | |||||||||||||
| Total Amount | $ | 349.8 | 100.0 | % | $ | (4,942.1 | ) | 100.0 | % | $ | 5,291.9 | 107.1 | % | |||||||||||
Other income, which principally consists of interest income on loans to third parties, was $0.8 and $365.0 for the years ended December 31, 2021 and 2020, respectively, a decrease of 99.8% year over year. This decrease is in line with the decrease in average loan balances to third parties.
Other income/(expenses) (which include interest expenses) for the year ended December 31, 2021 increased by $310.2 to $349.8 of other income from $38.9 of other income in the year ended December 31, 2020, due to writing off of certain long outstanding payables and liabilities in 2021.
Impairment loss on loans to third parties and property and equipment amounted decreased by $5.3 million to $0.0 in 2021 from $5.3 million in 2020. Management assessed the collectability of its assets by the end of the year and determined that a provision of $0.0 and $4,800.0 be made against entrusted loans, direct loans and office equipment in 2021 and 2020, respectively. The assessment was based on the customer’s ability to pay and its financial strength. After we exhausted all efforts to pursue repayment, we determined that an impairment had to be made.
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Income tax (benefit) expense
Income tax expense was $0.0 and $0.0 for the year ended December 31, 2021 and 2020, respectively.
Foreign Currency Translation Gain/(Loss)
Foreign currency translation gain was $558.0 in the year ended December 31, 2021, compared with a gain of $2,686.4 in the year ended December 31, 2020 as a result of the fluctuations in the exchange rates of the Renminbi against the US dollar.
Net (Loss) Income
Net loss for the year ended December 31, 2021 was $2,145.5, as compared to net loss of $9,075.4 for the year ended December 31, 2020. The net loss is mainly due to the COVID-19 pandemic, which resulted in a significant downturn in our business and an increase in impairment losses against uncollectible assets.
Liquidity and Capital Resources
As of December 31, 2021 and December 31, 2020, we held cash of $276.3 and $3,274.3, respectively.
The following table summarizes our cash flows for the year ended December 31, 2021 and for the same period in 2020.
| All Numbers (US$’000’s) | Year ended December 31, 2021 | Year ended December 31, 2020 | ||||||
| Net cash used in operating activities | $ | (4,854.5 | ) | $ | (3,818.7 | ) | ||
| Net cash used in investing activities | (2,355.4 | ) | (108.1 | ) | ||||
| Net cash provided by financing activities | 3,599.5 | 4,278.0 | ||||||
| Effect of exchange rate change on cash and cash equivalents | 557.4 | 2,909.5 | ||||||
| Net (decrease) increase in cash and cash equivalents | (3,053.0 | ) | 3,260.7 | |||||
| Cash and cash equivalents, beginning balance | 3,274.3 | 13.6 | ||||||
| Cash and cash equivalents, ending balance | $ | 221.3 | $ | 3,274.3 | ||||
Operating activities
Net cash used in operations was $4,854.5 for the year ended December 31, 2021, representing an increase of $1,035.8 from cash used in operating activities of $3,818.7 for the year ended December 31, 2020. Cash used in operations was primarily from the net loss of $2,145.5, and the settlement of tax liabilities, current liabilities and estimated liabilities offset by collections on currents assets in a net amount of $2,658.1 during 2021.
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Investing activities
Net cash used in investing activities for year ended December 31, 2021 was $2,355.4, an increase of $2,247.3 from net cash used in investing activities of $108.1 for the year ended December 31, 2020. This is mainly attributed by the increase of our loans to third parties by $2,450.0 compared to 2020.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2021 was $3,599.5, a decrease of approximately $678.4 from cash used in financing activities of $4,278.0 for the year ended December 31, 2020. The amount was represented the net proceeds from private placements during 2021 and 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
The Company has no operating lease commitment as of December 31, 2021.
For the years ended December 31, 2021, 2020 and 2019, rental expenses under operating leases were approximately $112.1, $82.7 and $258.5, respectively.
For the year ended December 31, 2020, the Company had written back an accrued payroll for the Company’s VIEs amounting to $475.9 (RMB3,105,476). There has been no claim from the relevant employees for which this accrual was originally recorded for over 2 years. Clause 27 of the Labor Dispute Mediation and Arbitration Law of the People’s Republic of China provides that a claimant has the right to claim any outstanding wages within one year after termination of the employment. Notwithstanding the foregoing, the Company could not assure that the claimants have not lodged their claims or that the claims have not been delivered to our VIE. Accordingly, there may be a potential but unlikely claim of $475.9 (RMB3,105,476) against the Company.
In the ordinary course of business, the Company may be subject to legal proceedings regarding contractual and employment relationships and a variety of other matters. The Company records contingent liabilities resulting from such claims, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. The Company is not currently involved in any such claims.
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Results for the Year ended December 31, 2020 compared to the Year ended December 31, 2019
Operating Metrics for the year ended December 31, 2020 vs. December 31, 2019
We regularly monitor a number of metrics in order to measure our current and projected future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
| For the Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| RMB | US$ | RMB | US$ | |||||||||||||
| (in Million) | ||||||||||||||||
| Amount of financing advised: | - | - | 153 | 22 | ||||||||||||
| Commercial Payment | - | - | - | - | ||||||||||||
| International Corporate Financing | - | - | - | - | ||||||||||||
| Intermediary Loan | - | - | 153 | 22 | ||||||||||||
| Amount of financing factored: | - | - | - | - | ||||||||||||
| Factoring Business | - | - | 15 | 2 | ||||||||||||
| For the Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Number of clients advised(1) | - | 1 | ||||||
| Commercial Payment | - | - | ||||||
| International Corporate Financing | - | - | ||||||
| Intermediary Loan | - | 1 | ||||||
| (1) | The number of clients for a specified period represents the number of clients whose financing were funded during such period. |
| For the Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| (in US$ thousands) | ||||||||
| fees billed to clients(2) | - | 417 | ||||||
| (2) | Represent amounts net of VAT. |
The amount of financing advised is calculated by summing up the financing amount indicated on the financing advisory contracts. The revenue is calculated by multiplying the service fee ratio indicated on the contract and the financing amount advised.
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The following tables set forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of variance. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| Years ended December 31, | Variance | |||||||||||||||
| All Numbers (US$’000’s) | 2020 | 2019 | Amount | % | ||||||||||||
| Revenue | $ | 0.6 | $ | 1,366.4 | $ | (1,365.8 | ) | (100.0 | )% | |||||||
| Cost of revenue | - | 0.1 | (0.1 | ) | (100.0 | )% | ||||||||||
| Gross profit | 0.6 | 1,366.3 | (1,365.7 | ) | (100.0 | )% | ||||||||||
| General and administrative expense | 4,123.1 | 1,893.5 | 2,229.6 | 117.8 | % | |||||||||||
| Selling and distribution expense | 10.7 | 100.5 | (89.7 | ) | (89.3 | )% | ||||||||||
| (Loss) income from operations | (4,133.2 | ) | (627.7 | ) | 3,505.6 | 558.5 | % | |||||||||
| Interest income on bank deposit | 0.0 | 0.7 | (0.7 | ) | (97.9 | )% | ||||||||||
| Other income (expenses) | 38.9 | (5,611.5 | ) | (5,103.7 | ) | (91.0 | )% | |||||||||
| Interest income from loans to third parties | 365.0 | 2,191.6 | (1,826.6 | ) | (83.3 | )% | ||||||||||
| Impairment loss on loans to third parties and property and equipment | (5,346.0 | ) | (57,941.7 | ) | (53,142.4 | ) | (91.7 | )% | ||||||||
| (Loss) income before income taxes | (9,075.4 | ) | (61,988.5 | ) | (52,913.2 | ) | (85.4 | )% | ||||||||
| Income tax (benefit) expenses | - | 7.2 | (7.2 | ) | (100.4 | )% | ||||||||||
| Net (loss) income | $ | (9,075.4 | ) | $ | (61,995.8 | ) | $ | (52,920.4 | ) | (85.4 | )% | |||||
| Comprehensive loss (income) | $ | (6,389.0 | ) | $ | (62,361.0 | ) | $ | (55,972.1 | ) | (89.8 | )% | |||||
Revenue
A breakdown of our revenue for the year ended December 31, 2020 versus the year ended December 31, 2019 is set forth below:
| For the Year Ended December 31, | Variance | |||||||||||||||||||||||
| 2020 | % | 2019 | % | Amount | % | |||||||||||||||||||
| Intermediary Bank Loan Services | $ | - | - | % | $ | 417.3 | 30.5 | % | $ | (417.3 | ) | (100.0 | )% | |||||||||||
| Factoring Service | 0.6 | 100 | % | 949.1 | 69.5 | % | (948. 5 | ) | (100.0 | )% | ||||||||||||||
| Total Amount | $ | 0.6 | 100 | % | $ | 1,366.4 | 100 | % | $ | (1,365.8 | ) | (100.0 | )% | |||||||||||
Net revenue for the year ended December 31, 2020 decreased by 100% year-over-year to $0.6 from $1,365.8 in the same period in 2019.
Approximately 30.5% of our revenue or $417.3 was derived from providing intermediary bank loan advisory services to just one customer in 2019.
Overall, our revenue decreased substantially for the year ended December 31, 2020 compared to the same period in 2019, mainly due to a reduction in business opportunities as a result of the overall economic environment and COVID-19 pandemic in the PRC and strategic adjustment of our business to diversify and explore new business opportunities.
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Cost of Revenue
Total cost of revenue, which comprises mainly revenue-generating staffing costs, was $0.0 for the year ended December 31, 2020 compared to $0.1 for the year ended December 31, 2019. The main reasons for the decrease in cost of revenue was the very minimal business volume in 2020.
Our cost of revenue is broken down as follows:
| For the Year Ended December 31, | Variance | |||||||||||||||||||||||
| All Numbers (US$’000’s) | 2020 | % | 2019 | % | Amount | % | ||||||||||||||||||
| Sales tax and surcharges | $ | - | - | % | $ | 0.1 | 100.0 | % | $ | (0.1 | ) | (100.0 | )% | |||||||||||
| Total Amount | $ | - | - | % | $ | 0.1 | 100 | % | $ | (0.1 | ) | (100 | )% | |||||||||||
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2020 decreased by 100% to $0.6 from $1,366.3 for the year ended December 31, 2019. The decrease is in line with the revenue decrease of 100% over the same periods.
Gross margin, or gross profit as a percentage of total revenue, was 100% for both years ended December 31, 2020 and 2019, both of which had no significant cost of revenue during their respective years.
Operating Expenses
The following table sets forth the breakdown of our operating expenses for the year ended December 31, 2020 and 2019, respectively:
| For the Year Ended December 31, | Variance | |||||||||||||||||||||||
| All Numbers (US$’000’s) | 2020 | % | 2019 | % | Amount | % | ||||||||||||||||||
| General and administrative expenses | $ | 4,123.1 | 99.7 | % | $ | 1,893.5 | 95.0 | % | $ | 2,229.6 | 117.8 | % | ||||||||||||
| Selling and marketing expenses | 10.7 | 0.3 | % | 100.5 | 5.0 | % | (89.7 | ) | (89.3 | )% | ||||||||||||||
| Total Amount | $ | 4,133.9 | 100 | % | $ | 1,994.0 | 100 | % | $ | 2,139.9 | ) | 107.3 | )% | |||||||||||
Total operating expenses for the year ended December 31, 2020 increased 107% to $4,133.9 from $1,994.0 in the year ended December 31, 2019.
General and administrative expenses consist primarily of staff costs, rental expenses and office related expenses. General and administrative expenses were $4,123.1, or as compared to $1,893.5, or 139% of total revenue for the year ended December 31, 2019, an increase of $2,229.6. The increase in general and administrative expenses is mainly due to an increase in legal and professional expenses to maintain our Nasdaq listing status.
Selling and marketing expenses for the year ended December 31, 2020 decreased by 89% to $10.7 from $100.5 in the year ended December 31, 2019. The year-over-year decrease primarily resulted from downsize in our business.
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Income from Operations and Operating Margin
Loss from operations in the year ended December 31, 2020 was $4,133.3, compared with loss from operations of $627.7 in the year ended December 31, 2019.
Operating margin, or income from operations as a percentage of total revenue was significantly negative for the year ended December 31, 2020, compared with negative 46% for the year ended December 31, 2019 due to the previously discussed changes.
Other income/(expenses)
The following table sets forth the breakdown of our other income for the year ended December 31, 2020 and the year ended December 31, 2019:
| For the Year Ended December 31, | Variance | |||||||||||||||||||||||
| All Numbers (US$’000’s) | 2020 | % | 2019 | % | Amount | % | ||||||||||||||||||
| Interest income on loans to third parties | $ | 365.0 | (7.4 | )% | $ | 2,191.6 | (3.5 | )% | $ | (1,826.6 | ) | (83.3 | )% | |||||||||||
| Interest income on bank deposits | 0.0 | (0.0 | )% | 0.7 | (0.0 | )% | (0.7 | ) | (97.9 | )% | ||||||||||||||
| Other income (expenses) | 38.9 | 10.3 | % | (5,611.5 | ) | 9.1 | % | 5,103.7 | 91.0 | % | ||||||||||||||
| Impairment loss on loans to third parties and property and equipment | (5,346.0 | ) | 97.1 | % | (57,941.7 | ) | 94.4 | % | 53,142.4 | 91.7 | % | |||||||||||||
| Total Amount | $ | (4,942.1 | ) | 100.0 | % | $ | (61,360.9 | ) | 100.0 | % | $ | 56,418.7 | 91.9 | % | ||||||||||
Other income principally consists of interest income on loans to third parties was $365.0 and $2,191.6 for the years ended December 31, 2020 and 2019, respectively, a decrease of 83.3% year over year. This decrease is in line with the decrease of average loan balances to third parties, which were $0.0 and $4,800.0 for the years ended December 31, 2020 and 2019, respectively.
Other income/expenses (which include interest expenses) for the year ended December 31, 2020 decreased by $5,103.7 to $38.9 of other income from $5,611.5 of other expenses in the year ended December 31, 2019 due to $4,857.2 of previously accrued payroll over 2 years in 2020 .
Impairment loss on loans to third parties and property and equipment amounted decreased by $53.142.4 to $5,346.0 million in 2020 from $57,941.7 in 2019. Management assessed the collectability of its assets by the end of the year and determined that a provision of $5,346.0 and $57,941.6 million be made against entrusted loans, direct loans and office equipment in 2020 and 2019, respectively. The assessment was based on the customer’s ability to pay and its financial strength. After we exhausted all efforts to pursue repayment, we determined that an impairment had to be made.
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Income tax (benefit) expense
Income tax expense was $0.0 for the year ended December 31, 2020, compared with income tax benefit of $7.2 for the year ended December 31, 2019.
Foreign Currency Translation Gain/(Loss)
Foreign currency translation gain was $2,686.4 in the year ended December 31, 2020, compared with a loss of $365.3 in the year ended December 31, 2019 as a result of the fluctuations in the exchange rates of the Renminbi against the US dollar.
Net (Loss) Income
Net loss for the year ended December 31, 2020 was $9,075.4, as compared to net loss of $61,995.8 for the year ended December 31, 2019. The net loss is mainly due to COVID-19 pandemic, a significant downturn in our business and an increase in impairment losses against uncollectible assets.
Liquidity and Capital Resources
As of December 31, 2020 and December 31, 2019, we held cash of $3,274.3 and $ 13.6, respectively.
The following table summarizes our cash flows for the year ended December 31, 2020 and for the same period in 2019.
| All Numbers (US$’000’s) | Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||
| Net cash (used in) provided by operating activities | $ | (3,818.7 | ) | $ | (1,071.4 | ) | ||
| Net cash used in investing activities | (108.1 | ) | (200.0 | ) | ||||
| Net cash (used in) provided by financing activities | 4,278.0 | (31.2 | ) | |||||
| Effect of exchange rate change on cash and cash equivalents | 2,909.5 | (262.7 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | 3,260.7 | (1,565.3 | ) | |||||
| Cash and cash equivalents, beginning balance | 13.6 | 1,578.8 | ||||||
| Cash and cash equivalents, ending balance | $ | 3,274.3 | $ | 13.6 | ||||
Operating activities
Net cash used in operations was $3,818.7 for the year ended December 31, 2020, representing a decrease of $2,747 million from cash used in operating activities of $1,071.4 million for the year ended December 31, 2019, though our losses of $9,075.4 in 2020 mainly because our impairment losses were $5,346.0 in 2020.
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Investing activities
Net cash used in investing activities for year ended December 31, 2020 was $108.1, a decrease of $91.9 from net cash used in investing activities of $200.0 for the year ended December 31, 2019. This is mainly attributed by purchase of fixed assets in US office in 2020.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2020 was $4,278.0, an increase of approximately $4,309.2 from cash used in financing activities of $31.2 for the year ended December 31, 2019. The increase was mainly attributable to the $4,278.0 net proceeds from private placements during 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements during either year ended December 31, 2020 or 2019.
COMMITMENTS AND CONTINGENCIES
The following table sets forth the Company’s operating lease commitment as of December 31, 2020:
| All Numbers (US$’000’s) | Office Rental | |||
| Year ending December 31, | ||||
| 2021 | 34.0 | |||
| Total | $ | 34.0 | ||
For the years ended December 31, 2020 and 2019, rental expenses under operating leases were approximately $82.7 and $258.5, respectively.
At December 31, 2020, the Company has an accrued payroll for the Company’s VIEs amounting to $475. 9 (RMB3,105,476). There has been no claim from the relevant employees for over 2 years. Clause 27 of the Labor Dispute Mediation and Arbitration Law of the People’s Republic of China provides that a claimant has the right to claim any outstanding wages within one year after termination of the employment. Notwithstanding the foregoing, the Company could not assure that the claimants have not lodged their claims or that the claims have not been delivered to our VIE. Accordingly, there may be a potential claim of $475. (RMB3,105,476) against the Company.
In the ordinary course of business, the Company may be subject to legal proceedings regarding contractual and employment relationships and a variety of other matters. The Company records contingent liabilities resulting from such claims, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. The company is not currently involved in any such claims.
C. Research and development, patents and licenses, etc.
After HKIFS was sold in its entirety on March 30, 2022, there are no intangible assets remaining from the Company’s financial services businesses as of that date.
The first commercial version of Fr8App’s products were launched in 2017. Fr8App continued its product development efforts throughout 2018, added initial business intelligence and analytics to supplement its basic products in 2019 and offered its revised products package with active freight brokerage support and customer service towards the end of 2019 and into early 2020.
Fr8App’s principal asset consists of its software, which it invests in on a monthly basis through development work by employees and externally contracted parties. Fr8App invested approximately $0.5 million and $0.2 million in software during the years ended December 31, 2021 and December 31, 2020, respectively. Fr8App expects to continue investing in its software in line with the expansion of its product offerings. Financing for investment in software has historically been provided for by the company’s operations.
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The latest generation of Fr8App products were brought to market during the second quarter of 2020 and consist of (1) the online Portal and Mobile App by itself, (2) the TMS, and (3) Fr8App’s Platform supplemented with freight brokerage support and customer service.
On January 7, 2021, Fr8App filed a trademark application with the U.S. Patent and Trademark Office for the Fr8Technologies design mark. Fr8App currently does not hold any patents or own any registered trademarks. Fr8App believes that the success of its business depends on the quality of its proprietary software solutions, technology, processes, and domain expertise. While it considers its intellectual property rights to be valuable, Fr8App believes that its competitive position depends primarily on its ability to increase and eventually to maintain a leadership position by developing innovative proprietary solutions, technology, information, processes, insights and business intelligence to satisfy both Shippers and Carriers’ needs through its Platform.
D. Trend information.
After HKIFS was sold in its entirety on March 30, 2022, the trend information of the Company on a going-forward basis in this Item 5D. pertains only and is limited to the industry in which its subsidiary, Fr8App operates.
Fr8App believes the growing interest in digital freight matching platforms shows that traditional 3PL providers recognize the sweeping technological shifts in the industry and is ready to offer solutions to market participants. During the last eight quarterly calendars ending in December 2021, the industry has seen severe swings due to the volatility of global and domestic supply chains in light of significant market distortions resulting from the global pandemic caused by the virus known as COVID-19. This supply chain volatility has led large and small freight brokers to, among other tactics, pivot toward more abundant and secure sources of freight capacity which is available in a digital marketplace and facilitated by software portals and platforms. Fr8App believes the supply chain will continue to evolve into a more digital platform. As it does so, Fr8App believes digital brokers, like Fr8App can play an integral role in easing capacity constraints, opening up new lanes, and providing a benchmarking tool for shippers.
In the short-term, Fr8App believes the COVID-19 pandemic has also changed the nature of global commerce and shipping. Cross-border travel and trade restrictions have been put into effect and many remain in place, even as economies and trade continue to re-open around the globe. Trucking capacity is no longer readily available across borders. Contract carriers can still only go to certain pre-specified locations and companies continue to need to determine where specific available freight capacity is and how much it costs. Fr8App believes that these conditions are creating part of the market void where digital brokers come into play for cross-border and consequently, intra-country commerce.
According to the U.S. Bureau of Transportation Statistics, the U.S. domestic truck freight transportation market, in 2021, was approximately $735 billion in size. Over the same period, the Mexican domestic freight market was estimated at approximately $34 billion. In 2019, the cross-border U.S.-Mexico freight transportation market grew to $385 billion while Mexico’s trade with the U.S. grew at an annual compound growth rate of approximately 7.5% between 2011 and 2021. Fr8App expects the market to continue growing at rates similar to growth rates observed thus far.
A primary contributor to the growth in the North American cross-border freight transportation markets has been the increased level of trade between the U.S., Mexico and Canada. Effective July 1, 2020, the three countries signed a new free trade deal the United States, Mexico, Canada Agreement (“USMCA”), replacing the North American Free Trade Agreement (“NAFTA”) enacted on January 1, 1994. As of 2019, Mexico became the U.S.’s largest single trading partner. According to the United Nations, Mexico exported an extra $3.5 billion of goods into the U.S., in the first half of 2019, since the summer of 2018 when the trade war between the U.S. and China began. Fr8App believes the replacement of NAFTA with the USMCA creates a stable environment attractive to multi-national companies considering Mexico as a market from which to export to both the United States and Canada.
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In early 2020, U.S. President Donald Trump used trade policy in a manner that displaced global supply chains across industries and around the world. With global supply chains in disarray and no foreseeable end to the COVID-19 pandemic, Fr8App believes Mexico is a logical location for U.S. companies considering options to diversify away from the geopolitical risks associated with the ongoing U.S.-China trade tension. The approval of the USMCA in combination with new perspectives as related to national security implications of foreign-based supply chains may bring about changes in Mexico’s freight market, in terms of globalization or regionalization and logistics integration, as well as, the role of 3PL operators. Fr8App believes this supply chain volatility is driving an increase in demand for large and small freight brokers to secure more abundant freight capacity, in real-time, which is readily available on Fr8App’s digital marketplace and facilitated by its Portal and Platform solutions. Fr8App believes this supply chain volatility is aggravated by a shortage of drivers thereby creating further pressure on the need for a more comprehensive approach to logistics management, with the view to meeting supply chain requirements without needing to increase the related freight costs. We act as an intermediary between the total system’s freight requirements and the related freight demand in a more efficient manner than if various of the parties requiring freight contracted these services on their own or managed their own proprietary fleets. Fr8App believes that its ability to secure available freight capacity, using the Portal and Platform solutions, amongst available truck drivers offers customers an organized, efficient solution to transporting goods domestically and internationally in favorable or unfavorable market environments. Additionally, Fr8App believes it is well positioned to benefit from the increasing trade across both the U.S.-Mexico and the U.S.-Canada borders caused by supply chain volatility and magnified by the COVID-19 pandemic.
Fr8App believes that traditional 3PLs rely on a network of offices staffed with individuals tasked with communicating with colleagues, customers and transportation companies to identify and secure freight services that meet their customers’ specific needs. The process is manual, inefficient, and lacks transparency. Cross-border transportation challenges can include tracking, visibility, multiple hand-offs (where applicable), and international customs and regulatory inefficiencies. The ability to access real-time freight capacity and locate the right truck at the right time becomes critical to securing a reliable shipment service. Fr8App believes market conditions have created an increased demand for digital freight brokers who can help ease capacity constraints, open up new shipping lanes, and provide a benchmarking tool for both Shippers and Carriers.
Important factors of the trucking industry:
According to an October 2020 article titled, “Trends Transforming the Trucking Industry Outlook in 2021” published by Linchpin, below are the factors affecting the outlook for the U.S. trucking industry:
| ❖ | Highest GDP contribution– The U.S. currently stands at the number one spot when it comes to GDP contribution from the trucking industry. | |
| ❖ | Job percentage – more than 5.8% of jobs in the U.S. are related to the trucking industry. | |
| ❖ | Total freight carried – Trucks carried approximately 10.8 billion tons of goods across the country each year. | |
| ❖ | Top commodities traded between the U.S. and Mexico – computers and parts ($151 billion), electrical machinery ($124 billion), motor vehicles and parts ($120 billion). | |
| ❖ | Preferred form of transportation – almost 70% of the goods transported in the U.S. are carried around by trucks from state to state. | |
| ❖ | Grocery store dependence – grocery stores are highly dependent on truck drivers to carry supplies to multiple locations. Most grocery stores would run out of transportation options within three days if truck drivers halted grocery deliveries. | |
| ❖ | Truck driver shortage – experts believe that the trucking industry needs to hire at least 900,000 more drivers to meet the growing demand. | |
| ❖ | Miles per year – on average, a truck driver logged in more than 100,000 miles over the past year. |
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Market Opportunity
According to Modor Intelligence, the Mexican 3PL market is expected to register a compound annual growth rate of over 7.0% between 2021 and 2025. According to the same source, the US and Canadian 3PL markets are expected to grow at a 3.5% and 3.0% compound annual growth rate, respectively, over the same time period. Fr8App believes this commercial freight market growth is driven by growing domestic economies and increasing trade flows, which are not only from one region to another, but are more decentralized and fragmented. Fr8App believes these factors are expected to intensify the complexity of logistics activities in the coming years in what has been a relatively fragmented Mexican transportation market on a historical basis. Fr8App believes the U.S. and Canadian markets remain relatively fragmented as well though they have each seen major logistics companies enter the industry over the past decade. Fr8App believes the evolution of supply chains is also susceptible to changes in consumer habits, driven further by e-commerce and international health issues, such as the COVID 19 pandemic. Rising consumer expectations have had an observable effect throughout the supply chain, driving the need for greater efficiency and speed. Technology in warehouses, onboard trucks, and on smartphones has led to automating critical processes, improving visibility into the shipment lifecycle, and enabling faster decisions. In addition to profitability, sustainability and reliability has likely become a consideration of every Shipper’s bottom line. Fr8App believes that an ability to respond to increasing market volatility in real-time, can become an asset contributing to a Shipper’s business success. Fr8App believes this consideration is further exacerbated by qualified driver shortages in the U.S. and Canada. Fr8App believes the TMS market to be in a development stage similar to the consumer transportation industry, or “taxicabs”, prior to the introduction of wider reaching platforms like Uber and Cabify. Fr8App continues to invest in improving its TMS technology and expects these investments to help improve its Platform as well as the range of services Fr8App may offer to its Shippers and Carriers over time.
Fr8App believes the Mexican commercial freight market is also ripe for technological disruption as adoption of technology in this industry segment has lagged several others in the commercial transportation space. Fr8App believes there are significant complexities within the Mexican freight transportation market that give Fr8App a competitive advantage. As an example, there are standard ways in which a new carrier is evaluated as a potential business counterparty in the U.S. There are several industry, data and government databases and electronic tools for investigating a potential business supplier and no such vetting processes overseeing the commercial freight transportation market in Mexico. Fr8App intends to gain a deep understanding of these unique processes, within the Mexican transportation industry, to gain a competitive advantage over future market entrants. Fr8App intends to leverage this competitive advantage into opportunistically selected routes carrying traffic into the U.S. and Canada.
Fr8App’s operations center in Mexico is located in Monterrey, Mexico, a city which accounts for the second highest GDP in Mexico (behind only Mexico City) and, historically, a transportation hub within the domestic and cross border Mexican freight transportation market. Fr8App plans to leverage its presence in Monterrey to become a leader in international freight to and from Mexico, and into and across the U.S., and into Canada.
The Fr8App Solution
Fr8App’s Platform provides visibility on freight transportation options not readily apparent with traditional 3PL solutions. The Platform allows Shippers and Carriers to book loads at the palm of their hands and assign jobs to drivers, in real-time, with the click of a button. Shippers and Carriers register on the Platform and are approved to transact after undergoing a rigorous vetting process.
The vetting process for Shippers includes the following:
| ● | Mexico Beneficial Cargo Owner (BCO) or Broker (3PL): Articles Incorporation charter, tax registration number, legal representative power of attorney, legal representative ID, banking information, address receipt, fiscal situation document, fiscal obligations opinion document (updated), Fr8App credit form | |
| ● | For US or Canada Client (BCO): W-9 form for US, TD1 form for Canada, Fr8App credit form | |
| ● | For US or Canada Broker (3PL): W-9 form for US, TD1 form for Canada, Fr8App credit form, insurance and bond certificates, license and authority number of broker |
Fr8App collections group performs a credit report analysis which includes a due diligence of the customer credit record, revenues of the customer for the latest 5 years, industry in which client operates, review of current insurance coverage, and payment terms negotiated. Fr8App has had immaterial bad debt expense in the past several years.
The vetting process for Carriers includes the following:
A due diligence review is performed to ensure that carriers are following regulatory compliance, whether they are a line or base haul carrier, which routes they operate, truck types, cargo they are eligible to transport, reliability and availability. Depending on location, the document set-up requirements are as follows:
| ● | Mexico: Articles Incorporation charter, tax registration number, Servicio de Administración Tributaria (“SAT” is the Mexican equivalent to the IRS in US) legal opinion, legal representative power of attorney, legal representative ID, Standard Carrier Alpha Code (“SCAC”), banking information, insurance policy, ACH format, security questionnaire, verified mobile phone, | |
| ● | US and Canada: W-9 form for US, TD1 for Canada, MC Certification (Insurance certificate), ACH Form |
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Once approved, Shippers can request bids for a certain service or Carriers can provide bids on Shipper requests. Fr8App’s Platform matches up Shippers and Carriers and assigns a driver and truck to the job. The driver picks up the supplies while the Platform tracks the progress of the trip, in real time. The driver delivers the shipment, uploads documentary evidence of the delivery (“POD”) and is paid.
Fr8App’s Platform automatically matches Shippers with Carriers within the Fr8App network, instantaneously. Carriers are sent push notifications through the Platform every time a load or job request is entered by a Shipper that matches the criteria Carriers are looking for on a given shipment and lane.
By leveraging its technology, the increasing usage, and amount of traffic booked on its Platform, Fr8App can work with customers to optimize their supply chain, eliminate empty miles on the road, and reduce their carbon footprint. A transformation in the logistics transportation industry is taking place. With its proprietary software, Fr8App offers smart solutions that create sustainable alternatives and offer benefits to both Shippers and Carriers, including:
| ● | a single point of contact as a control center | |
| ● | full visibility to freight transportation, in real-time | |
| ● | ability to book shipment loads in minutes | |
| ● | matching with only pre-approved Carrier compliance | |
| ● | live 24/7 tracking on shipment while in-transit | |
| ● | real-time messaging capabilities with Carriers | |
| ● | advanced data analytics | |
| ● | ability to secure quality loads faster on preferred routes | |
| ● | ability to reduce “deadhead” empty loads | |
| ● | convenient and faster payment | |
| ● | scalable technology for Carriers who plan to grow their fleet |
Fr8App’s Customers
Fr8App’s customers consist of Shippers and Carriers across North America. A Shipper will use Fr8App’s Platform to request bids on a shipment or a series of shipments of certain characteristics and a Carrier will agree to the terms set forth on its Platform. Carriers have the option to carry out deliveries prior to receiving payment from Fr8App, and Shippers may start shipments before submitting their payment to Fr8App. Fr8App mitigates payment risks by pre-screening and approving all Shippers and Carriers prior to approving either party. Fr8App believes that Shippers value the features and benefits from its Platform by working with trusted Carriers that help alleviate driver shortages. Shippers also benefit from the cost transparency available on Fr8App’s Platform as there are no hidden fees. Shippers can count on the safety and reliability of the Platform as Fr8App tracks cross border shipments. Lastly, Shippers can benefit by managing their logistics needs in one control center, all on Fr8App’s Platform.
Fr8App believes Carriers value its ability to assist in minimizing empty (deadhead) miles and making every mile, a mile paid for. Carriers also benefit from the Platform’s transparency and know how much they are scheduled to make from fulfilling each job. Carriers receive faster payment for their services by using Fr8App’s Platform and avoid potentially expensive factoring companies. Lastly, Carriers can benefit from Fr8App’s Platform by using it as a tool to streamline workflows and increase overall efficiency.
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Fr8App’s Growth Strategy
Fr8App intends to establish itself as the top digital freight matching broker in the Mexican domestic market as well as U.S-Mexico and Mexico-U.S. cross-border markets. Fr8App intends to leverage its position within the U.S-Mexico and Mexico-U.S. cross-border markets, into opportunistically expanding its footprint across select routes in the U.S. and into Canada. Fr8App’s growth strategy consists of the following:
Fr8App plans to expand its Shipper base and increase its Carrier ecosystem throughout all three countries, with an initial focus on the Mexico-U.S. cross-border market. With recent investments in its Platform and internal tools for sales representatives, Fr8App plans to hire additional employees in its Shipper and Carrier Sales areas and its operations teams, and establish formal training programs for its labor force and access the highly trained labor market in Mexico to manage its ongoing daily operations throughout North America. Using creative marketing campaigns, Fr8App intends to reinforce the benefits of using its Platform and increase adoption amongst existing Shipper and Carrier customers. With the use of business intelligence tools and management solutions, Fr8App will actively manage margins and maintain lean operating units. By leveraging customer references and building off existing Shipper relationships, Fr8App believes it will be able to add new accounts to its portfolio across the domestic trucking industry in Mexico, at the U.S.-Mexico cross-border and opportunistically select routes within the U.S. and the U.S.-Canada border commercial freight transportation market.
Fr8App plans to continue to build trust among its Carriers by managing its Shipper base to provide a high level of fulfilment, and effective management of loads. Fr8App will monitor service levels across its Platform with on-time pick up and delivery metrics. To deliver high performance attention while maximizing value to its Carrier customers, Fr8App plans to grow its Carrier sales force to quickly respond to high volume primary loads and spot loads, as necessary.
Fr8App intends to establish a very well-trained bilingual sales force and operations team and will kickstart its “Fr8App University” Program. Fr8App intends to help grow its sales and operations teams by developing a college recruiting program and hiring qualified individuals to train them within the industry.
Fr8App will continue to invest in its technology to improve and differentiate its Platform, as well as, expand its TMS offerings for Shippers. Fr8App plans on integrating more of its business customers through customized API’s and launching a fleet management system for Carriers.
Focusing on automation
| ● | Go Digital: Fr8App believes that by providing more sophisticated automation to the relatively untapped digital commercial freight market in Mexico, and expanding upon initial efforts in the U.S. and Canada, it will strengthen its position within the domestic transportation segments in Mexico and the U.S. and grow its revenue stream. By leveraging existing relationships with Shippers, Fr8App will train Carriers utilizing the Platform to improve operations and gain more transportation loads. Fr8App plans to introduce “native onboarding” through API integration with relationship management integration software coupled with building out of internal tools and capabilities. Fr8App would like Shippers and Carriers to work toward making its Platform totally “self-serve” where Carriers and Shippers gain access to the Platform without human intervention. Its goal is to automate sales and operations functionality throughout the process while providing real-time visibility for all parties; – Shippers, Carriers and Fr8App. | |
| ● | Be digital: Fr8App intends to continue refining and automating its operational flow and maximize efficiencies while thoughtfully growing its brokerage division. Fr8App is investing in adding development efforts to expand its technology team and to work towards building out more internal tools to maximize efficiency in its brokerage division such as real-time pricing tools by coupling historical lane data analytics with API integration as well as other unique internal data sets. |
Balancing contractual and spot business
Primary markets are markets with established regular routes that are contracted for over a period of time. and spot markets are negotiated at a specific periods of in time and, usually in response to some form of short-term overage that was not originally planned by a Carrier. Fr8App understands the importance of balancing its efforts and business between primary and spot markets. As Fr8App moves forward advances in serving the domestic with Mexico domestic and U.S.-Mexico cross-border markets opportunities, Fr8App will try to leverage spot opportunities presented by different global situations, such as high market volatility as a result of COVID-19, the trade wars, and other macroeconomic factors creating a shortage of supply and surplus in demand. As the market stabilizes, Fr8App will increasingly try to target higher volume, long-term contractual business directly from Shippers.
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E. Critical Accounting Estimates.
Following is a Summary of our critical accounting policies.
Basis of Presentation
These consolidated financial statements and related notes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”), expressed in U.S. dollars. In the opinion of the management, the accompanying consolidated financial statements reflect all normal recurring adjustments, which in the opinion of management, are necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in accordance with GAAP. The accompanying consolidated financial statements include the accounts of Freight App US and its wholly owned subsidiary, Freight App Mexico. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, allowance for doubtful accounts, valuation of share-based compensation and warrants, accrued expenses, useful lives of internally developed software and property and equipment, whether an arrangement is or contains a lease, the discount rate used for operating leases, fair value of financial instruments, income tax accruals and the valuation allowance for deferred income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash consists of funds held in bank accounts. Cash equivalents consist of short-term, highly liquid investments with original maturities of 90 days or less at the time of purchase and generally include money market accounts.
Concentrations of Credit Risk
The Company maintains cash accounts with financial institutions. At times, balances in these accounts may exceed federally insured limits. The amounts over the federally insured limits as of December 31, 2021 and 2020 was $2,661,919 and $2,249,070, respectively. No losses have been incurred to date on any deposit balances.
The financial instrument that potentially subjects the Company to concentration of credit risk is accounts receivable. At December 31, 2021, two customers accounted for 46% and 11% of the Company’s accounts receivable, respectively, and as of December 31, 2020, three customers accounted for 11%, 12% and 13% of the Company’s accounts receivable, respectively.
For the year ended December 31, 2021, one customer accounted for 37% of the Company’s revenues. For the year ended December 31, 2020, one customer accounted for 13% of the Company’s revenues.
Fair Value Measurements
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used when available. Observable inputs are what market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are those that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.
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The three levels of the fair value hierarchy are described below:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations that require inputs that are unobservable for the asset and liability in which there is little, if any, market activity.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include trade accounts receivable, accounts payable, accrued expenses, and debt at variable interest rates, approximate their fair values at December 31, 2021 and 2020, respectively, principally due to the short-term nature, maturities or nature of interest rates of the above listed items.
Accounts Receivable
Accounts receivable are recorded at the net invoiced amount, net of allowances for doubtful accounts, and do not bear interest. They include unbilled amounts for services rendered in the respective period but not yet billed to the customer until a future date, which typically occurs within one month. The Company periodically reviews accounts receivable balances and provides an allowance for doubtful accounts to the extent deemed uncollectible. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. In accordance with Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, the Company also considers reasonable and supportable forecasts of future economic conditions and their expected impact on customer collections in determining the allowance for credit losses. Balances are considered past due based on invoiced terms. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2021 and 2020, the allowance for doubtful accounts was $77,483 and $0, respectively.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or circumstances exist that indicate the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the future undiscounted cash flows expected to be generated by the assets. If the asset or asset group is considered to be impaired, an impairment loss would be recorded to adjust the carrying amounts to the estimated fair value. Management has determined that no impairment of long-lived assets exists, and accordingly, no adjustments to the carrying amounts of the Company’s long-lived assets have been made for the year ended December 31, 2021 and 2020.
Property and Equipment
Property and equipment consisting of office and computer equipment, furniture and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives, ranging between three to seven years.
| Useful Lives | |
| Equipment | 3 years |
| Furniture | 7 years |
| Leasehold improvements | The shorter of 3 years or the term of the lease |
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Capitalized Software
The Company complies with the guidance of ASC Topic 350-40, “Intangibles—Goodwill and Other—Internal Use Software”, in accounting for of its internally developed system projects that it utilizes to provide its services to customers. These system projects generally relate to software of the Company that is not intended for sale or otherwise marketed. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Once a project has reached the development stage, the Company capitalizes direct internal and external costs until the software is substantially complete and ready for its intended use. Costs for upgrades and enhancements are capitalized, whereas, costs incurred for maintenance are expensed as incurred. These capitalized software costs are amortized on a project-by- project basis over the expected economic life of the underlying software on a straight-line basis, which is generally three years. Amortization commences when the software is available for its intended use.
Warrant Liability
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. The Company accounts for the warrants issued in connection with certain promissory notes in accordance with the guidance contained in ASC 815 under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities.
Accordingly, the Company classifies the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the statement of operations. The fair value of the warrants was estimated using a Black-Scholes option pricing formula. The warrant volatility assumption within the Black-Scholes model represents a Level 3 measurement within the fair value measurement hierarchy.
Advertising
Advertising costs are expensed as incurred. Advertising costs amounted to $421 and $10,257for the years ended December 31, 2021 and 2020, respectively.
Income Taxes
The Company follows ASC Topic 740-10-65-1 in accounting for uncertainty in income taxes by prescribing rules for recognition, measurement and classification in financial statements of tax positions taken or expected to be in a tax return. This prescribes a two-step process for the financial statement measurement and recognition of a tax position. The first step involves the determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires that any tax position that meets the more likely than not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is a greater than 50 percent likelihood of being realized upon ultimate settlement. This topic also provides guidance on the accounting for related interest and penalties, financial statement classification and disclosure. The Company’s policy is that any interest or penalties related to uncertain tax positions are recognized in income tax expense when incurred. The Company has no uncertain tax positions or related interest or penalties requiring accrual at December 31, 2021 and 2020.
Foreign Currency Translation
The financial statements of the Company’s subsidiary operating in Mexico are prepared to conform to U.S. GAAP and translated into U.S. Dollars by applying a current exchange rate. The local currency has been determined to be the functional currency. Assets and liabilities of non-U.S. operations are translated at period-end exchange rates. Items appearing in the consolidated statements of operations are translated using average exchange rates during each period. Translation gains and losses are reported in accumulated other comprehensive income (loss) as a component of stockholders’ equity (deficit).
Deferred Financing Costs and Debt Discount
Costs incurred in connection with obtaining certain financing are deferred and amortized on an effective interest method basis over the term of the related obligation. Debt discounts are also amortized using the effective interest method, unless the interest method approximates the straight-line method. Amortization of such costs are included in interest expense, while the unamortized balances of deferred financing fees and debt discount are presented as reductions of the carrying value of the related debt.
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Intangible Assets
Intangible assets include the Company’s domain name and are accounted for based on ASC Topic 350 “Intangibles – Goodwill and Other.” The Company’s intangible assets that have finite lives, consisting of intellectual property, are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, the Company would test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), the Company would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. The Company evaluates the useful lives for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.
Foreign Operations
Operations outside the United States include a wholly-owned subsidiary in Mexico. Foreign operations are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange.
Revenue Recognition
The Company’s revenues are accounted for under FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The Company generates revenues primarily from shipments executed by the Company’s freight transportation brokerage services to shippers through the Company’s freight rideshare marketplace. Shippers contract with the Company to utilize the Company’s network of independent freight carriers to transport freight. Those shipments are the Company’s performance obligation, arising under contracts the Company has entered into with customers that define the price for each shipment and payment terms. The Company’s acceptance of the shipment request establishes enforceable rights and obligations for each contract. By accepting the shipper’s order, the Company has responsibility for transportation of the shipment from origin to destination. Under such contracts, revenue is recognized when obligations are satisfied, which occurs over time with the transit of shipments from origin to destination. This is appropriate as the customer simultaneously receives and consumes the benefits as the Company performs its obligation. The Company determines revenue in-transit using the input method, under which revenue is recognized based on the duration of time that has lapsed from the departure date (start of transportation services) to the arrival date (completion of transportation services). Measurement of revenue in-transit requires the application of significant judgement. The Company calculates the estimated percentage of an order’s transit time that is complete at period end, and apply that percentage of completion of the order’s estimated revenue. Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing services. Accessorial charges for fuel surcharge, loading and unloading, stop charges, and other immaterial charges are part of the consideration received for the single performance obligation of delivering shipments.
Payment for the Company’s services is generally due within 30 to 45 days upon delivery of the shipment. Contracts entered into with customers do not contain material financing components.
The Company’s contracts with customers have a duration of one year or less and do not require any significant start-up costs, and as such, costs incurred to obtain contracts associated with these contracts are expensed as incurred.
Through the Company’s freight brokerage services, the Company is responsible for identifying and directing independent freight carriers to transport the shipper’s goods. The transportation of the loads is outsourced to third-party carriers. The Company is a principal in these arrangements, and therefore records revenue associated with these contracts on a gross basis. The Company controls the service and has primary responsibility to meet the customer’s requirements. The Company invoices and collects from its customers and also maintains discretion over pricing. Additionally, the Company is responsible for selection of third-party transportation providers to the extent used to satisfy customer freight requirements.
The timing of revenue recognition, billings, cash collections, and allowance for doubtful accounts results in billed and unbilled receivables on the Company’s consolidated balance sheet. The Company receives the unconditional right to bill when shipments are delivered to their destination.
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Convertible Debt
The Company evaluates convertible debt to determine the impact (if any) of 1) embedded conversion option; 2) beneficial conversion feature; 3) bifurcation; 4) derivative liability; and 5) fair value adjustments and other expenses thereto. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt under ASC Topic 470, “Debt” (“ASC 470”), the Company will continue its evaluation process of these instruments as derivative financial instruments under ASC Topic 815, “Derivatives and Hedging” (“ASC 815”).
Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt, for which the fair value option is not elected at issuance, is accounted for as straight debt with no accounting recognition of the embedded equity option.
The convertible debt the Company issued prior to 2020, had the following typical characteristics for a conventional convertible debt:
| ● | The debt security is convertible into the common stock of the issuer at a specified price at the option of the holder. | |
| ● | The debt security was sold at a price or has a value at issuance not significantly in excess of the face amount. | |
| ● | It bears an interest rate that is lower than the Company would obtain for nonconvertible debt. | |
| ● | If converted, the Company must deliver shares of the its stock to the investor (i.e., physical settlement). There is no cash conversion feature by which the convertible debt can be settled in full or in part in cash upon conversion. | |
| ● | The initial conversion price of the security is greater than the market value of the common stock at time of issuance and there is no beneficial conversion feature (“BCF”) upon issuance to be bifurcated and separately accounted for. |
Since the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company accounts for convertible debt instruments in accordance with ASC 470-20, Debt with Conversion and Other Options.
Share-Based Compensation
The Company accounts for share-based awards, including stock options and restricted stock awards, issued to employees in accordance with ASC Topic 718, “Compensation—Stock Compensation”. In addition, the Company issues stock options to non-employees in exchange for consulting services and accounts for these in accordance with the provisions of ASC 718, as amended by ASU 2018-07. Compensation expense is measured at the grant, based on the calculated fair value of the award, and recognized as an expense over the requisite service period, which is generally the vesting period of the grant.
For modification of stock compensation awards, the Company records the incremental fair value of the modified award as share-based compensation on the date of modification for vested awards or over the remaining vesting period for unvested awards. The incremental compensation is the excess of the fair value of the modified award on the date of modification over the fair value of the original award immediately before the modification. In addition, the Company records the remaining unrecognized compensation cost for the original cost for the original award on the modification date over the remaining vesting period for unvested awards.
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For options granted to non-employees, the expected life of the option used is the contractual term of each such option. All other assumptions used to calculate the grant date fair value are generally consistent with the assumptions used for options granted to employees.
For purposes of calculating share-based compensation, the Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the Company’s stock price, which is determined by a third party 409(a) valuation, and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.
The expected volatility is primarily based on the historical volatility of peer company data while the expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected option term. The dividend yield assumption is based on the Company’s history and expectation of no dividend payouts. If factors change and the Company employs different assumptions, share-based compensation expense may differ significantly from what has been recorded in the past. If there is a difference between the assumptions used in determining share-based compensation expense and the actual factors which become known over time, specifically with respect to anticipated forfeitures, the Company may change the input factors used in determining share-based compensation costs for future grants. These changes, if any, may materially impact the Company’s results of operations in the period such changes are made.
Incremental compensation costs arising from subsequent modifications of awards after the grant date are recognized when incurred. In addition, the Company accounts for forfeitures of awards as they occur. For share-based awards that vest based on performance conditions, expense is recognized when it is probable that the conditions will be met.
The fair value of options and share awards granted under the stock option plan during the years ended December 31, 2021 and 2020 was estimated at the date of grant using the Black-Scholes option pricing model and the following assumptions for grants:
| 2021 | 2020 | |||||||
| Risk-free interest rates | 0.100% - 0.986 | % | 0.20 | % | ||||
| Expected life of options | 5 years | 5 years | ||||||
| Expected volatility | 78.50% – 103.50 | % | 104.20 | % | ||||
| Expected dividend yield | 0.00 | % | 0.00 | % | ||||
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of outstanding common shares for the period, considering the effect of participating securities series A preferred stock and series seed preferred stock. Diluted earnings (loss) per share are calculated by dividing net earnings (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. At December 31, 2021 and 2020, there were 918,625 and 1,685,827 common share equivalents, respectively, excluding 2020 Bridge Notes and the 2021 Bridge Notes which were issued at a conversion price determinable at certain future events and not at specified conversion price (see Note 11). For the years ended December 31, 2021 and 2020, these potential shares were excluded from the shares used to calculate diluted loss per share as their effect would have been antidilutive.
Segments
Operating segments are defined as components of an entity for which separate financial information is available. The Company reviews financial information presented on a consolidated basis for the purposes of making operating decisions, allocating resources and evaluating financial performance. As such, the Company has determined that it operates in one operating and one reportable segment. The Company presents financial information about its operating segment and geographical areas in Note 15 to the consolidated financial statements.
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Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize assets and liabilities in the balance sheet for rights and obligations created by leases with terms of more than twelve months. Lessor accounting will not be fundamentally changed; however, some changes may be required to align and conform to lessee guidance. In July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. For private entities the new standard applies to fiscal years starting after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. The Company adopted ASU No. 2016-02 on January 1, 2020 and the adoption of this guidance did not have a material impact on its consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-08 “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer.” ASU No. 2019-08 amends and clarifies ASU No. 2018-07, which was adopted by the Company on January 1, 2019, to require that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. For entities that have already adopted the amendments in ASU No. 2018-07, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. The Company adopted ASU No. 2019-08 on January 1, 2020 and the adoption of this guidance did not have a material impact on its consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04 “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” ASU No. 2019-04 was issued as part of the FASB’s ongoing project to improve upon its ASC, and to clarify and improve areas of guidance related to recently issued standards on credit losses, hedging, and recognition and measurement. This guidance contains several effective dates but is applicable to the Company’s fiscal year beginning January 1, 2020. The Company adopted ASU No. 2019-04 on January 1, 2020 and the adoption of this guidance did not have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU No. 2019-12 is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning January 1, 2021. The Company adopted ASU No. 2019-12 on January 1, 2021 and the adoption of this guidance did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was within the scope of those models before the adoption of ASU 2020-06. ASU 2020-06 also requires that the effect of potential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares. This amendment removes current guidance that allows an entity to rebut this presumption if it has a history or policy of cash settlement.
Furthermore, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share, the treasury stock method will be no longer available. In addition, ASU 2020-06 clarifies that an average market price should be used to calculate the diluted EPS denominator in cases in which the exercise prices may change on the basis of an entity’s share price or changes in the entity’s share price may affect the number of shares that may be used to settle a financial instrument and that an entity should use the weighted-average share count from each quarter when calculating the year-to-date weighted-average share. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
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In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 provides guidance on optional expedients for a limited time to ease the operational burden in accounting for (or recognizing the effects of) reference rate reform (LIBOR) on financial reporting. This guidance is effective upon the ASUs issuance on March 12, 2020 and companies may elect to apply the amendments prospectively through December 31, 2022. The Company’s credit facilities already contain comparable alternative reference rates that would automatically take effect upon the LIBOR phase out, and it is also reviewing its commercial contracts that may utilize LIBOR as a reference rate. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
The following table sets forth information regarding our executive officers and directors as of the date of this annual report. All these officers and directors assumed their respective positions on February 14, 2022 upon the closing of the Merger.
| Directors and Executive Officers | Age | Position/Title | ||
| Javier Selgas | 37 | Chief Executive Officer and Director | ||
| Mike Flinker | 66 | President | ||
| Paul Freudenthaler | 57 | Chief Financial Officer and Secretary | ||
| Luisa Irene Lopez Reyes | 50 | Chief Operating Officer | ||
| Nicholas H. Adler | 46 | Director | ||
| William Samuels | 45 | Director | ||
| Marc Urbach | 49 | Director |
Executive Officers
Javier Selgas, Chief Executive Officer and director, was Fr8App’s Chief Technology Officer from March to September 2020, and was responsible for all of Fr8App’s technologies and products. From May 2017 to March 2020, Javier was the Country Manager in Osigu, a technology company in the healthcare space, leading its new operation in Spain. From February 2013 to May 2017, Javier also headed AJEgroup’s IT division in Asia Pacific region playing a key role in the continued development of strategic IT growth and supplier relationships, ensuring flexibility in response to an increasingly demanding corporation. Prior to joining AJEGroup, Javier dedicated his professional career as an IT consultant in big corporations such as Endesa and Ibermatica. Javier earned a Master’s Degree from Barcelona University, and a Bachelor of Science degree in Software Engineering from European University.
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Mike Flinker, President, is a 40 year transportation industry veteran. Mike joined Fr8App in September 2020. In 1987, Mike co-founded FLS Transportation Services Inc. (“FLS”) where he served as the President from inception until his retirement in August 2018. FLS started as a cross-border logistics company operating solely between Canada and the U.S. and eventually expanded to the domestic U.S. market in 2005. FLS was the largest cross-border logistics company in Canada and within 11 years, went on to become the 20th largest logistics company in the U.S. FLS was sold to a mid-market private equity fund in March 2020. Prior to founding FLS, Mike worked for Clarke Transport Inc., Canadian Pacific and Reimer Express Inc. (a division of Roadway Express). Mike served on the boards of multiple charities and is currently heading the capital campaign for Cedars Cancer Center which is the cancer center for the McGill University Health Center.
Paul Freudenthaler, Chief Financial Officer and Secretary, joined Fr8App in September 2020. Prior to joining Fr8App, Paul has served as the chief financial officer for several leading companies in both the U.S. and Mexico. From August 2015 to April 2016, he was the chief financial officer for EZ Corp., the Mexico division of Crediamigo, a payroll discount lender. From November 2016 to August 2020, Paul was the chief financial officer of Ascentium Capital, the largest independent small business lender in the U.S. Paul drove the growth and successful sale of Ascentium Capital from private equity investors to one of the largest banks in the United States. Paul was the chief financial officer for Old Mutual in Latin America from June 2012 to July 2015, Macquarie in Mexico City from June 2009 to May 2012 and Irwin Union Bank in the United States from August 2005 to August 2008. Paul’s experience includes successful public offerings and a number of acquisitions totaling well over $1 billion in both Mexico and the United States. Paul was born in Canada and grew up in Mexico City, before spending the following 30 years splitting his time among Mexico, the U.S. and Canada. Paul earned his MBA in Finance from The Wharton School of Business, a CPA License from Texas State Board of Public Accounting, and a Bachelor of Commerce in Accounting and Economics from the University of Calgary, Canada.
Luisa Irene Lopez Reyes, Chief Operating Officer, joined Fr8App in August 2021. From December 2017 to July 2021, Luisa had the responsibility to start Landstar operations in Mexico and to develop business for domestic and cross border divisions. During October 2015 to November 2017 Luisa served as an Operations Director for School and Personnel Transportation Division for GRUPO TRAXION. Prior to running transportation business, Luisa has performed as an Operation Head in different transnational companies: Editorial Televisa 2015-2017, Danone Water Division 2014, PriceShoes 2009-2013, ConAgra Foods 2006-2009, Nestlé 2000-2006. During her professional career Luisa has received awards as the best logistics provider from WM and DHL trough innovation and IT platforms implementation achieving efficiencies in logistics processes. Luisa have a Business Coaching Master, Supply Chain Management Certification and a Bachelor Degree in PR.
Non-Employee Directors
Nicholas H. Adler, our current Chairman of the Board, is a practicing attorney in Nashville, Tennessee specializing in defense litigation, bankruptcy, foreclosure, and real estate matters. He has been a partner at Brock & Scott PLLC since 2012. Nick is admitted to practice law in New York and Tennessee as well as all Federal districts within Tennessee. After his graduation from law school, Nick practiced with a large international firm in New York specializing in securities regulation. Since 2005, his practice has focused on the representation of national and regional credit grantors in Tennessee. He is also active in real estate development and asset management in Nashville. Nick earned his B.A. in political science from Vanderbilt University and his J.D. from The Washington and Lee University School of Law.
William Samuels, a current member of our Board, is a practicing attorney in Manhattan, New York specializing in intellectual property law. He has been a partner at Warshaw Burstein, LLP since June 2020. Between October 2017 and May 2020, he was a partner at Scarinci & Hollenbeck LLC and prior to that, he was a partner at W.R. Samuels Law PLLC starting January 2010. He is Treasurer of the New York State Bar Intellectual Property Section and co-chair of that section’s Trademark Law Committee. He earned his BA in English Literature from Georgetown University, MA in English Literature from the University of Pennsylvania and J.D. from Emory University.
Marc Urbach, a current member of Fr8App’s Board of Directors, is the owner of Doorstep Delivery Logistics LLC and has been its Chief Executive Officer since August 2020, and consultant at OTS Ventures Inc. since January 2017. Prior to that, he was the President/CFO and board member of Ideanomics, Inc. (formerly known as YOU On Demand Holdings, Inc.) He has been an executive at various private and public companies in the past 25 years. He earned his B.S. in Accounting from Babson College.
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B. Compensation.
Executive Compensation
The following table sets forth the amount of compensation that was paid, earned and/or accrued during the fiscal year ended December 31, 2021, to each of our officers and directors above.
| Name | Compensation ($) | |||
| Directors and Officers | ||||
| Warren Wang1 | $ | 276,000 | ||
| Hon Man Yun1 | 108,000 | |||
| Hong Chen1 | 36,000 | |||
| Xiaoyue Zhang1 | 36,000 | |||
| Ming Yi1 | 36,000 | |||
| Total | $ | 492,000 | ||
| 1. | Messrs. Warren Wang, Hon Man Yun, Ming Yi (Martin), Hong Chen and Xiaoyue Zhang, resigned from the board of directors and from the position of the Chief Executive Officer and Chief Financial Officer in the case of Messrs. Warren Wang and Hon Man Yun, respectively, effective on February 14, 2022. |
We have not set aside or accrued any amounts to provide pension, retirement or similar benefits to our executive officers and directors. Our PRC subsidiaries and consolidated variable interest entity are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
C. Board practices.
Board of Directors
Our board of directors consists of four directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract or arrangement in which he is interested, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered, provided (a) such director, if his interest in such contract or arrangement is material, has declared the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice and (b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit committee. The directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
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Audit Committee. Our audit committee consists of Messrs. Adler, Samuels and Urbach. Mr. Urbach is the chairman of our audit committee. We have determined that Messrs. Adler, Samuels and Urbach satisfy the “independence” requirements of NASDAQ Rule 5605 and Rule 10A-3 under the Securities Exchange Act of 1934. Our board of directors has determined that Mr. Urbach qualifies as an audit committee financial expert and has the accounting or financial management expertise as required under Item 407(d)(5)(ii) and (iii) of Regulation S-K. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:
| ● | appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; | |
| ● | reviewing with the independent auditors any audit problems or difficulties and management’s response; | |
| ● | discussing the annual audited financial statements with management and the independent auditors; | |
| ● | reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; | |
| ● | reviewing and approving all proposed related party transactions; | |
| ● | meeting separately and periodically with management and the independent auditors; and | |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
A copy of the audit committee’s current charter is available at our corporate website at: https://www.fr8.app/investors/governance/.
Compensation Committee. Our compensation committee consists of Messrs. Adler and Urbach. The compensation committee will assist the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee will be responsible for, among other things:
| ● | reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; | |
| ● | reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; | |
| ● | reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and | |
| ● | selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. |
A copy of the compensation committee’s current charter is available at our corporate website at: https://www.fr8.app/investors/governance/.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Messrs. Adler and Samuels. The nominating and corporate governance committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee will be responsible for, among other things:
| ● | selecting and recommending to the board nominees for election by the shareholders or appointment by the board; |
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| ● | reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; | |
| ● | making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and | |
| ● | advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. |
A copy of the nominating and corporate governance committee’s current charter is available at our corporate website at: https://www.fr8.app/investors/governance/
Duties of Directors
Under British Virgin Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. Our company has the right to seek damages if a duty owed by our directors is breached. A shareholder may in certain limited exceptional circumstances have the right to seek damages in our name if a duty owed by the directors is breached.
Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our board of directors include, among others:
| ● | convening shareholders’ meetings; | |
| ● | declaring dividends and distributions; | |
| ● | appointing officers and determining the term of office of the officers; | |
| ● | exercising the borrowing powers of our company and mortgaging the property of our company; and | |
| ● | approving the transfer of shares in our company, including the registration of such shares in our share register. |
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Terms of Directors and Officers
Our directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders. Each of our directors will hold office until the expiration of his or her term as provided in the written agreement with our company, if any, and until his or her successor has been elected or appointed. A director will cease to be a director if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found by our company to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated. Our officers are elected by and serve at the discretion of the board of directors.
Employment Agreements and Indemnification Agreements
Fr8App’s current Chief Executive Officer joined Fr8App in March 2020 as its Chief Technology Officer, and became the Chief Executive Officer in September 2020. Both President and Chief Financial Officer of Fr8App joined Fr8App in September 2020. Fr8App’s Chief Operating Officer joined Fr8App in August 2021. Set forth below are compensation arrangements based on their current employment agreements with Fr8App. All employment agreements were continued under the same terms at the time of the Merger and all options and equity compensation items adjusted consistent with the exchange ratio related the Merger.
Under his Employment Agreement with Fr8App, Javier Selgas serves as Fr8App’s Chief Executive Officer, receives an annual base salary of $250,000 and is eligible for a discretionary bonus payable in the first fiscal quarter after the end of each fiscal year. He is entitled to receive (i) an option grant for 154,066 shares of Fr8App Common Stock at $0.25 per share, fully vested upon grant, and (ii) an option grant for 308,131 shares of Fr8App Common Stock at an exercise price equivalent to the Applicable Per Share Merger Consideration upon the Closing of the Merger, vesting over four years starting in September 2021. In the event Javier Selgas is terminated without cause or for good reason, he will be entitled to receive continued payment of his base salary for six months immediately following the termination date. He was awarded an additional stock option grant for 92,439 shares of Fr8App Common Stock at $0.80 per share, vesting over four years starting in December 2021.
Under his Executive Services Agreement with Fr8App, Mike Flinker serves as the President, receives an annual base salary of $220,000 and is eligible to receive a discretionary bonus payable in the first fiscal quarter after the end of each fiscal year. He is entitled to receive an option grant for 231,099 shares of Fr8App Common Stock at the Applicable Per Share Merger Consideration upon the Closing of the Merger, vesting over four years starting in September 2020. In the event Mike Flinker is terminated without cause or for good reason, he will be entitled to receive continued payment of his base salary for three months immediately following the termination date.
Under his Employment Agreement with Fr8App, Paul Freudenthaler serves as Fr8App’s Chief Financial Officer, receives an annual base salary of $250,000 and is eligible to receive a discretionary bonus payable in the first fiscal quarter after the end of each fiscal year. He is entitled to receive (i) an option grant for 77,033 shares of Fr8App Common Stock at $0.25 per share, fully vested upon grant, and (ii) an option grant for 385,164 shares of Fr8App Common Stock at the Applicable Per Share Merger Consideration upon the Closing of the Merger, vesting over four years starting in September 2020. In the event Paul Freudenthaler is terminated without cause or for good reason, he will be entitled to receive continued payment of his base salary for six months immediately following the termination date. He was awarded an additional stock option grant for 92,439 shares of Fr8App Common Stock at $0.80 per share, vesting over four years starting in December 2021.
Under her Employment Agreement with Fr8App, Luisa Irene Lopez Reyes serves as Fr8App’s and Freight App Mexico’s Chief Operating Officer, receives an annual base salary of MXP$3,000,000 and is eligible to receive a discretionary bonus payable within the first 2-1/2 months after the end of the applicable fiscal year. She is entitled to receive (i) an option grant for 32,764 shares of Fr8App Common Stock at $0.80 per share, fully vested upon grant, and (ii) an option grant for 163,818 shares of Fr8App Common Stock at the Applicable Per Share Merger Consideration, vesting over four years starting on the one year anniversary date of the Effective Date of the Merger. In the event that Ms. Reyes is terminated without cause or for good reason, she will be entitled to receive continued payment of her base salary for three months immediately following the termination date.
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Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
We have entered into board services agreements and indemnification agreements with each of our independent director appointees and our CEO who is a non-independent member of the Company’s board of directors. These agreements set forth the services to be provided and compensation to be received by our independent directors and the indemnifications provided to them by the Company. Pursuant to these agreements, the directorship of our independent director appointees will last until the earlier of (i) the date on which the director resigns, or (ii) is removed in accordance with the Company’s governing documents and applicable law.
NASDAQ Requirements
Our ordinary shares are currently listed on the NASDAQ Capital Market and, for so long as our securities continue to be listed, we will remain subject to the rules and regulations established by NASDAQ Stock Market as being applicable to listed companies. NASDAQ has adopted, and from time-to-time adopts, amendments to its Marketplace Rule 5600 that imposes various corporate governance requirements on listed securities. Section (a)(3) of Marketplace Rule 5615 provides that foreign private issuers such as our company are required to comply with certain specific requirements of Marketplace Rule 5600, but, as to the balance of Marketplace Rule 5600, foreign private issuers are not required to comply if the laws of their home jurisdiction do not otherwise mandate compliance with the same or substantially similar requirement.
We currently comply with those specifically mandated provisions of Marketplace Rule 5600. In addition, we have elected to voluntarily comply with certain other requirements of Marketplace Rule 5600, notwithstanding that our home jurisdiction does not mandate compliance with the same or substantially similar requirements; although we may in the future determine to cease voluntary compliance with those provisions of Marketplace Rule 5600 that are not mandatory. However, we have elected not to comply with the following provisions of Marketplace Rule 5600, since the laws of the British Virgin Islands do not require compliance with the same or substantially similar requirements:
| ● | our independent directors do not hold regularly scheduled meetings in executive session (rather, all board members may attend all meetings of the Board of Directors); | |
| ● | the compensation of our executive officers is recommended but not determined by an independent committee of the board or by the independent members of the Board of Directors; and our CEO is not prevented from being present in the deliberations concerning his compensation; | |
| ● | related party transactions are not required to be reviewed and we are not required to solicit member approval of stock plans, including: those in which our officers or directors may participate; stock issuances that will result in a change in control; the issuance of our stock in related party acquisitions or other acquisitions in which we may issue 20% or more of our outstanding shares; or, below market issuances of 20% or more of our outstanding shares to any person; and | |
| ● | we are not required to hold an in-person annual meeting to elect directors and transact other business customarily conducted at an annual meeting (rather, we complete these actions by written consent of holders of a majority of our voting securities). |
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We may in the future determine to voluntarily comply with one or more of the foregoing provisions of Marketplace Rule 5600. For example, we have voluntarily decided to compose of the majority of our board of directors with independent directors as defined by the NASDAQ rules.
D. Employees.
As of December 31, 2021, we had 10 employees, all located in New York, Hong Kong, Shenzhen and Beijing, China. The following table sets forth the number of our employees by function as of the same date:
| Functional Area | Number of Employees | % of Total | ||||||
| Senior management | 2 | 20.00 | % | |||||
| Administrative staff | 1 | 10.00 | % | |||||
| Accounting staff | 2 | 20.00 | % | |||||
| Product and service advisors | 2 | 20.00 | % | |||||
| Human resources and administrative personnel | 1 | 10.00 | % | |||||
| IT staff | 1 | 10.00 | % | |||||
| Risk management | 1 | 10.00 | % | |||||
| Total | 10 | 100 | % | |||||
As required by regulations in China, we participate in various employee social security plans that are organized by local governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required under Chinese law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.
We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes.
E. Share ownership.
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this annual report by:
| ● | each of our directors and executive officers; and | |
| ● | each of our principal shareholders who beneficially own more than 5% of our total outstanding ordinary shares; |
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The calculations in the table below are based on ordinary shares outstanding as of April 15, 2022. Unless otherwise indicated, each person has sole investment and voting power with respect to all shares shown as beneficially owned. The term “beneficial owner” of securities refers to any person who, even if not the record owner of the securities, has or shares the underlying benefits of ownership. These benefits include the power to direct the voting or the disposition of the securities or to receive the economic benefit of ownership of the securities. A person also is considered to be the “beneficial owner” of securities that the person has the right to acquire within 60 days by option or other agreement. Beneficial owners include persons who hold their securities through one or more trustees, brokers, agents, legal representatives or other intermediaries, or through companies in which they have a “controlling interest”, which means the direct or indirect power to direct the management and policies of the entity. The Company’s directors and executive officers do not have different voting rights than other shareholders of the Company.
| Name of Beneficial Owner1 | Number of Shares | % of Class | ||||||
| Five Percent Holders | ||||||||
ATW Opportunities Master Fund, L.P.2 17 State Street, 2100, New York, NY 10004 |
17,010,598 | 71.9 | % | |||||
ATW Master Fund II, L.P.2 17 State Street, 2100, New York, NY 10004 |
3,607,428 | 33.3 | % | |||||
PX Global Advisors LLC, 3 19 West 44th Street Suite 1001, New York, NY 10036 |
1,140,000 | 15.8 | % | |||||
SPAC Global, LLC4 86 Calle Cervantes 10 B, San Juan, PR 00807 |
909,091 | 12.6 | % | |||||
Chardan Capital Markets LLC5 17 State Street, 2130, New York, NY 10004 |
878,788 | 19.5 | % | |||||
| Directors and Named Executive Officers6: | ||||||||
| Javier Selgas7 | 288,873 | 3.8 | % | |||||
| Mike Flinker7 | 101,106 | 1.4 | % | |||||
| Luisa Irene Lopez Reyes7 | 39,590 | 0.5 | % | |||||
| Paul Freudenthaler7 | 245,542 | 3.3 | % | |||||
| Nicholas H. Adler8 | 13,333 | 0.2 | % | |||||
| William Samuels8 | 13,333 | 0.2 | % | |||||
| Marc Urbach8 | 7,778 | 0.1 | % | |||||
| All Directors and Executive Officers as Group | 709,555 | 9.0 | % | |||||
(1) For each person and group included in this table, percentage ownership is calculated by dividing the sum of the number of ordinary shares beneficially owned by such person or group and the number of the number of ordinary shares underlying share options or warrants held by such person or group that are exercisable within 60 days after the date of this annual report. by the sum of (i) 7,236,496 being the number of shares outstanding as of the date of this annual report and (ii) the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after the date of this annual report.
(2) ATW Opportunities Master Fund, L.P. and ATW Master Fund II, L.P. are limited partnerships, comprising Messrs Antonio Ruiz-Gimenez and Kerry Propper as General Partners. Accordingly. Both Messrs Ruiz-Gimenez and Propper hold joint voting and dispositive power of the ordinary shares held by the limited partnerships. ATW Opportunities Master Fund, L.P. beneficially owns 581,818 ordinary shares, preferred shares convertible to 5,738,429 ordinary shares and warrants convertible into 5,433,956 ordinary shares under various terms and conditions. ATW Master Fund II, LP beneficially owns zero ordinary shares, preferred shares convertible to 3,159,183 ordinary shares and warrants convertible into 448,245 ordinary shares under various terms and conditions.
(3) PX Global Advisors LLC, a Delaware limited liability corporation, owns 1,140,000 ordinary shares. PX Global Advisors LLC’s sole shareholder, director and officer is Pengfei Xie. As a result, Mr. Xie has the sole power to direct the vote and disposition of the shares and may be deemed, directly or indirectly, to be the beneficial owner of the shares held by PX Global Advisors LLC.
(4) SPAC Global, LLC, a limited liability company organized and existing under the laws of Puerto Rico owns 909,091 ordinary shares. SPAC Global, LLC’s sole shareholder, director and officer is Suying Liu.
(5) Chardan Capital Markets, LLC is a limited liability corporation. Mr. Steven Urbach has sole voting and dispositive power of the shares by virtue of his position as Chief Executive Officer. Chardan Capital Markets LLC owns warrants convertible into 878,788 ordinary shares under various terms and conditions.
(6) Unless otherwise indicated, the address for those listed below is c/o Freight App, Inc., at 2001 Timberloch Place, Suite 500, The Woodlands, Texas 77380.
(7) Each of the executive officers’ beneficial ownership represent options from the employee stock ownership plan convertible into ordinary shares that have vested within 60 days after the date of this report.
(8) Each of the directors’ holdings represent a mixture of restricted stock and stock options from the employee stock ownership plan convertible into ordinary shares that have vested within 60 days after the date of this report. Each of Messrs. Adler and Samuels own 13,333 ordinary shares. Mr. Urbach owns 5,556 ordinary shares and options convertible into 2,222 ordinary shares.
Item 7. Major Shareholders and Related Party Transaction
A. Major Shareholders.
Please refer to “Item 6.E. Directors, Senior Management and Employees—Share Ownership.”
B. Related party transactions.
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Contractual Arrangements between WFOE and Sheng Ying Xin
On February 17, 2016, Beijing Yingxin Yijia Network Technology Co., Ltd. (“BYYNT” or “WFOE”) entered into certain contractual arrangements with Sheng Ying Xin and the its shareholders (“SYX Shareholders”), as amended and re-signed on April 26, 2016. Pursuant to these contractual arrangements, WFOE shall have the power, rights and obligations equivalent in all material respects to those it would possess if it were the sole equity holder of Sheng Ying Xin, including absolute control rights and the rights to the assets, property and revenue of Sheng Ying Xin and the receipt of, approximately 100% of the net income of Sheng Ying Xin as a service fee to WFOE. SYX Shareholders did not receive any consideration in exchange for their agreements to give up their control over Sheng Ying Xin.
Each of the VIE Agreements is described in detail below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive Business Cooperation Agreement between Sheng Ying Xin and WFOE, WFOE provides Sheng Ying Xin with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis and to the extent permissible under the PRC laws, utilizing its advantages in technology, human resources, and information. For services rendered to Sheng Ying Xin by WFOE under this agreement, WFOE is entitled to collect a service fee on a monthly basis, which is approximately equal to the net income of Sheng Ying Xin.
The Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by WFOE with 30-day prior notice. Sheng Ying Xin does not have the right to terminate the agreement unilaterally. WFOE may unilaterally extend the term of this agreement with prior written notice.
The sole director and president of WFOE, Mr. Jianxin Lin, is currently managing Sheng Ying Xin pursuant to the terms of the Exclusive Business Cooperation Agreement. WFOE has absolute authority relating to the management of Sheng Ying Xin, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions.
Contracts that give us effective control of the variable interest entity
Share Pledge Agreement
Under the Share Pledge Agreement between the two SYX Shareholders and WFOE, the SYX Shareholders pledged all of their equity interests in Sheng Ying Xin to WFOE to guarantee the performance of Sheng Ying Xin’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. The SYX Shareholders also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. The SYX Shareholders further agreed not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest. All of the equity interest pledges with respect to the equity interests of Sheng Ying Xin according to the Share Pledge Agreement have been registered with relevant office of the Administration for Industry and Commerce in China.
The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Sheng Ying Xin. WFOE shall cancel or terminate the Share Pledge Agreement upon Sheng Ying Xin’s full payment of fees payable under the Exclusive Business Cooperation Agreement.
Exclusive Option Agreement
Under the Exclusive Option Agreement, the SYX Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Sheng Ying Xin at the exercise price of RMB1.00. The agreement remains effective for a term of ten years and may be renewed at WFOE’s election. Once WFOE exercise such option, the parties shall enter into a separate equity interest transfer or similar agreement.
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Power of Attorney
Under the Power of Attorney, the SYX Shareholders authorize WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the director, supervisor, the chief executive officer and other senior management members of Sheng Ying Xin.
Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.
This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this Power of Attorney, so long as the SYX Shareholder is a shareholder of Company.
Contractual Arrangements between Hongkong Shengqi Technology, WFOE and Sheng Ying Xin
On September 2, 2019, Hongkong Shengqi Technology Limited (“HKSQ”) became a shareholder of WFOE. HKSQ was incorporated in Hong Kong on August 29, 2019. Mr. Jianxin Lin is the sole shareholder of HKSQ. On September 26, 2019, a series of agreements were entered into among HKIFS, HKSQ and its shareholder (the “HKSQ VIE Agreements”). As a result of the HKSQ VIE Agreements, HKIFS become the primary beneficiary of HKSQ.
The contractual agreements among HKSQ, WFOE and Sheng Ying Xin essentially confer control and management as well as the economic benefits of Sheng Ying Xin onto WFOE. In spite of the shareholder change in WFOE, we are able to retain full control and management over Sheng Ying Xin and are still entitled to substantially all of the economic benefits of WFOE through the HKSQ VIE Agreements.
Accordingly, the results of operations, assets and liabilities of HKSQ, WFOE and Sheng Ying Xin have been included in the accompanying consolidated financial statements.
Each of the VIE Agreements is described in detail below:
Exclusive Business Cooperation Agreement
Pursuant to the terms of the certain Exclusive Business Cooperation Agreement dated September 26, 2019, between Hongkong Internet Financial Services Limited (“HKIFS”) and HKSQ (the “Exclusive Business Cooperation Agreement”), HKIFS is the exclusive technology services and consultancy service provider to HKSQ. HKSQ agreed to pay HKIFS all fees payable for technology services and consultancy service, the amount of which equals 100% of the net profit of HKSQ. Any payment from HKSQ to HKIFS must comply with applicable Chinese laws. HKIFS is also obligated to bears all losses of HKSQ. Further, the parties agreed that HKIFS shall retain sole ownership of all intellectual property developed in connection with providing technology services to HKSQ. The Exclusive Business Cooperation Agreement has a ten-year term. The term of these agreements may be extended if confirmed in writing by HKIFS, prior to the expiration of the term. The extended term shall be determined by HKIFS, and HKSQ shall accept such extended term unconditionally.
Contracts that give us effective control of the variable interest entity
Power of Attorney
Pursuant to the terms of a certain Power of Attorney Agreement dated September 26, 2019, among HKIFS and the shareholders of HKSQ (the “Power of Attorney”), each of the shareholders of HKSQ irrevocably appointed HKIFS as their proxy to exercise on each of such shareholder’s behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of HKSQ, including the appointment and election of directors of HKSQ. The term of the Power of Attorney is valid so long as such shareholder is a shareholder of HKSQ.
Exclusive Option Agreement
Pursuant to the terms of a certain Exclusive Option Agreement dated September 26, 2019, among HKIFS, HKSQ and the shareholders of HKSQ (the “Exclusive Option Agreement”), the shareholders of HKSQ granted HKIFS an irrevocable and exclusive purchase option (the “Option”) to acquire HKSQ’s equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. Accordingly, the Option is exercisable at any time at HKIFS’s discretion so long as such exercise and subsequent acquisition of HKSQ does not violate PRC law. The consideration for the exercise of the Option is RMB 1 in total. To the extent HKSQ shareholders receive any of such consideration, the Option requires HKSQ shareholders to transfer (and not retain) the same to Sheng HKSQ or HKIFS. The Exclusive Option Agreement has a ten-year term. The term of these agreements may be extended if confirmed in writing by HKIFS, and if no written confirmation was obtained from HKIFS, the Exclusive Option Agreement will be automatically renewed, the term of the renewed agreement will be determined till HKIFS’s written confirmation.
The contractual agreements between HKSQ, WFOE and Sheng Ying Xin essentially confer control and management as well as the economic benefits of Sheng Ying Xin onto WFOE. In spite of the shareholder change in WFOE, we are able to retain full control and management over Sheng Ying Xin and are still entitled to substantially all of the economic benefits of WFOE through the HKSQ VIE Agreements.
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Related party transactions
Transaction and balances from related parties:
The Company received consulting, accounting and recruiting services from various shareholders. The total cost of these services for the years ended December 31, 2021, 2020 and 2019 were $350,000, $353,000 and $152,000, respectively. The accounts payable to these various shareholders as of December 31, 2021 and December 31, 2020 were $140,000, $30,000, and $0 respectively.
The Company also provided freight services to a customer owned by a shareholder. The accounts receivable from this certain customer as of December 31, 2021, 2020 and 2019 was $0, $24,000 and $7,000, respectively. The revenue of these services for the years ended December 31, 2021, 2020 and 2019 was $99,000, $164,000 and 134,000, respectively.
In 2021, the Company issued various warrants to ATW, an affiliate of a shareholder and entered into various promissory notes with shareholders. (See Note 12 and 17 of audited financials).
For the year ended December 31, 2021, the Company entered into sublease agreement with PX Capital USA Inc. (“PX Capital”), incurring of rental of $112,100 for the period from January 1, 2021 to December 31, 2021. The Company also entered into consultant agreement with PX Capital for consultancy services rendered by PX Capital of $120,000 for the period from January 1, 2021 to December 31, 2021. The Company and PX Capital had a common Chief Executive Officer, Mr. Warren Wang.
For the year ended December 31, 2021, the Company has entered into an agreement with Wave Sync Corp. (“Wave Sync”) for the disposal of a used motor vehicle for $100,000. For the year ended December 31, 2021, the Company purchased equity shares of $250,000 from Montis Digital Limited, a company incorporated in Gibraltar, and $500,000 from Archax Holdings Ltd., a company incorporated in the United Kingdom. The Company then sold all of the equity shares to Wave Sync for a total of $750,000. Montis Digital Limited and Archax Holdings Ltd. are not related parties of the Company. The Company and Wave Sync had a common Chief Financial Officer, Mr. Hon Man Yun.
For the year ended December 31, 2020, the Company entered into sublease agreement with PX Capital, incurring rental of $68,000 for the period from April 1, 2020 to December 31, 2020. The Company had also entered into a consultant agreement with PX Capital for consultancy services rendered by PX Capital of $80,000 for the period from April 1, 2020 to December 31, 2020. The Company and PX Capital had a common Chief Executive Officer, Mr. Warren Wang.
Related parties of the Company represented entities that are directly or indirectly owned by directors and officers of the Company or in which the directors and officers of the Company has significant influence.
Due from related parties:
As of December 31, 2020, the Company has related party receivables of $81,756, due to advances made on behalf of related parties, including $46,416 due from Sheng Ying Xin (Beijing) Film Industry Co., Ltd., $30,214 from Beijing Zhiping Science.
As of December 31, 2019, the Company has related party receivables of $76,467, due to advances made on behalf of related parties, including $43,414 due from Sheng Ying Xin (Beijing) Film Industry Co., Ltd and $28,259 from Beijing Zhiping Science.
Due to related party:
As of December 31, 2021, the Company has related party payables of $100 due to Mr. Warren Wang the chief executive officer of the Company, who lend funds for the Company’s operations. The payables are unsecured, non-interest bearing and due on demand.
As of December 31, 2020 and 2019, the Company has related party payables of $358,241 and $279,925, respectively, due to Mr. Jianxin Lin, our founder, former Chairman of the board of directors and former chief executive officer and Mr Jinchi Xu, our former director and chief financial officer, who lent funds for the Company’s operations. The payables are unsecured, non-interest bearing and due on demand.
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Review, approval or ratification of transactions with related persons.
Our Audit Committee, consisting of independent directors, is charged with reviewing and approving all agreements and transactions which had been entered into with related parties, as well as reviewing and approving all future related party transactions.
C. Interests of experts and counsel.
No disclosure is required in response to this Item.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements.”
Legal Proceedings
On January 11, 2021, BG Strategic Advisors, LLC (“BGSA”) filed a complaint against Fr8App at the Florida Circuit Court, alleging breach and anticipatory breach of a contract, while seeking unspecified monetary damages. Fr8App believes that BGSA’s claims are without merits. On or about February 17, 2021, Fr 8App moved the case to the District Court for the Southern District of Florida. On February 25, 2021, Fr8App filed a counterclaim against BGSA and its affiliate for violations of the Investment Advisors Act of 1940, breach of fiduciary duty and other claims, seeking monetary damages and declaratory and injunctive relief. This litigation may be costly and may divert resources and management’s attention from Fr 8App’s business.
Apart from the above, we are currently not a party to any legal, arbitration or administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business, financial condition or results of operations, and we are not aware of any threat of any of the above-mentioned proceedings. However, we may from time to time become a party to various legal, arbitration or administrative proceedings arising.
Dividend Policy
Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under British Virgin Islands law, namely that our company may only pay dividends if the value of the company’s assets exceed its liabilities and the company is able pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing.
A. Offer and listing details.
Our shares began trading on NASDAQ Global Market on August 8, 2017 under the symbol “CIFS.” Prior to that there was no market for our ordinary shares.
In keeping with our plan to diversify our operations and rebrand ourselves, our corporate name was changed to “Hudson Capital Inc.” on April 23, 2020 and we began to trade under our new symbol, “HUSN” on May 8, 2020.
Our securities were transferred to the Capital Market at the opening of business on July 16, 2020.
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The following table sets forth the annual high and low last trade prices of our ordinary shares as reported by The NASDAQ Stock Market during the fiscal years 2021, 2020 and 2019 . The prices are inter-dealer prices, without retail markup, markdown or commission.
| Period | High | Low | ||||||
| Fiscal Year ended December 31, 2019 | $ | 4.96 | $ | 0.81 | ||||
| Fiscal Year ended December 31, 2020 | $ | 3.72 | $ | 0.352 | ||||
| Fiscal Year ended December 31, 2021 | $ | 10.6608 | $ | 4.9119 | ||||
The following table sets forth the high and low last trade prices of our common shares as reported by The NASDAQ Stock Market for each fiscal quarter of 2019, 2020 and 2021 . The prices are inter-dealer prices, without retail markup, markdown or commission.
| Period | High | Low | ||||||
| Fiscal Year 2019, quarter ended | ||||||||
| March 31, 2019 | $ | 4.96 | $ | 0.853 | ||||
| June 30, 2019 | $ | 3.87 | $ | 1.28 | ||||
| September 30, 2019 | $ | 2.20 | $ | 1.44 | ||||
| December 31, 2019 | $ | 1.60 | $ | 0.81 | ||||
| Fiscal Year 2020, quarter ended | ||||||||
| March 31, 2020 | $ | 1.20 | $ | 0.384 | ||||
| June 30, 2020 | $ | 1.18 | $ | 0.39 | ||||
| September 30, 2020 | $ | 0.839 | $ | 0.352 | ||||
| December 31, 2020 | $ | 3.72 | $ | 0.415 | ||||
| Fiscal Year 2021, quarter ended | ||||||||
| March 31, 2021 | $ | 10.6608 | $ | 6.4317 | ||||
| June 30, 2021 | $ | 8.5683 | $ | 4.9119 | ||||
| September 30, 2021 | $ | 8.4581 | $ | 5.1322 | ||||
| December 31, 2021 | $ | 7.3789 | $ | 5.3084 | ||||
The following table sets forth the monthly high and low last trade prices of our ordinary shares as reported by The NASDAQ Stock Market for each month during the six months preceding the date of this annual report. The prices are inter-dealer prices, without retail markup, markdown or commission, and do not necessarily reflect actual transactions.
| Period | High | Low | ||||||
| Month Ended: | ||||||||
| March 31, 2022 | $ | 2.6700 | $ | 1.7000 | ||||
| February 28, 2022* | $ | 6.5529 | * | $ | 2.2050 | * | ||
| January 31, 2022 | $ | 5.9692 | $ | 4.1850 | ||||
| December 31, 2021 | $ | 7.3789 | $ | 4.6696 | ||||
| November 30, 2021 | $ | 5.1982 | $ | 4.5595 | ||||
| October 31, 2021 | $ | 5.6167 | $ | 4.7137 | ||||
| September 30, 2021 | $ | 6.3216 | $ | 5.1542 | ||||
*The Company effected a 2.2:1 reverse split of its ordinary shares on February 14, 2022.
B. Plan of distribution.
No disclosure is required in response to this Item.
C. Markets.
Our shares have been listed on The NASDAQ Global Market since August 8, 2017 initially under the symbol “CIFS.” On April 10, 2020, our board of directors resolved to change the Company’s name to “Hudson Capital Inc.” to re-brand the Company and better reflect the plans for its next phase of growth. The name change was effected with the British Virgin Islands Registrar of Corporate Affairs on April 23, 2020 and our name change and new ticker symbol on the NASDAQ Global Market was changed to “HUSN” on May 8, 2020. Our shares were transferred to the Capital Market at the opening of business on July 16, 2020 and continues to trade under the “HUSN” symbol. Prior to that there was no market for our ordinary shares.
D. Selling Shareholders.
No disclosure is required in response to this Item.
E. Dilution.
No disclosure is required in response to this Item.
F. Expenses of the Issue.
No disclosure is required in response to this Item.
Item 10. Additional Information.
A. Share Capital.
No disclosure is required in response to this Item.
B. Memorandum and articles of association.
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General
Hudson Capital Inc. is a BVI business company incorporated on September 28, 2015 and our affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, the BVI Act, and the applicable laws of the British Virgin Islands, or the BVI (including applicable common law).
Our amended and restated memorandum and articles of association authorizes us to issue an unlimited number of shares of a single class each with a par value of $0.005.
The following description of our share capital and our constitutional rules under our memorandum and articles of association is qualified in its entirety by reference to our amended and restated memorandum and articles of association, which have been filed as an exhibit.
Memorandum and Articles of Association
The following discussion describes our amended and restated memorandum and articles of association that (subject to any limitations, restrictions or modifications in our memorandum or articles of association; and subject to any rights or restrictions attaching to any shares) will be in effect upon the completion of this offering:
Objects and Purposes, Register, and Shareholders. Subject to the BVI Act and BVI law, our objects and purposes are unlimited. Our register of members will be maintained by our transfer agent, Island Stock Transfer. Under the BVI Act, a BVI company may treat the registered holder of a share as the only person entitled to (a) exercise any voting rights attaching to the share, (b) receive notices, (c) receive a distribution in respect of the share and (d) exercise other rights and powers attaching to the share. Consequently, as a matter of BVI law, where a shareholder’s shares are registered in the name of a nominee such as Cede & Co, the nominee is entitled to receive notices, receive distributions and exercise rights in respect of any such shares registered in its name. The beneficial owners of the shares registered in a nominee’s name will therefore be reliant on their contractual arrangements with the nominee in order to receive notices and dividends and ensure the nominee exercises voting and other rights in respect of the shares in accordance with their directions.
Directors’ Powers. Under the BVI Act, subject to any modifications or limitations in a company’s memorandum and articles of association, a company’s business and affairs are managed by, or under the direction or supervision of, its directors; and directors generally have all powers necessary to manage a company. A director must disclose any interest he has on any proposal, arrangement or contract not entered into in the ordinary course of business and on usual terms and conditions. An interested director may (subject to the memorandum and articles) vote on a transaction in which he has an interest. In accordance with, and subject to, our memorandum and articles, the directors may by resolution of directors exercise all the powers of the Company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the Company or of any third party.
Rights, Preferences and Restrictions of Ordinary Shares. Subject to the restrictions described under the section titled “Dividend Policy” above, our directors may (subject to the memorandum and articles) authorize dividends at such time and in such amount as they determine. Each ordinary share is entitled to one vote on any resolution of shareholders. In the event of a liquidation or dissolution of the Company, our shareholders are (subject to the memorandum and articles) entitled to share ratably in all surplus assets remaining available for distribution to them after payment and discharge of all claims, debts, liabilities and obligations of the Company and after provision is made for each class of shares (if any) having preference over the ordinary shares. There are no sinking fund provisions applicable to our ordinary shares. Holders of our ordinary shares have no pre-emptive rights. Subject to the provisions of the BVI Act, we may, (subject to the memorandum and articles) the consent of the shareholder whose shares are to be purchased, repurchase our ordinary shares in certain circumstances provided that the Company will, immediately after the repurchase, satisfy the solvency test. The Company will satisfy the solvency test, if (i) the value of the Company’s assets exceeds its liabilities; and (ii) the Company is able to pay its debts as they fall due.
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In accordance with the BVI Act:
(i) the Company may purchase, redeem or otherwise acquire its own shares in accordance with either (a) Sections 60, 61 and 62 of the BVI Act (save to the extent that those Sections are negated, modified or inconsistent with provisions for the purchase, redemption or acquisition of its own shares specified in the Company’s memorandum and articles); or (b) such other provisions for the purchase, redemption or acquisition of its own shares as may be specified in the Company’s memorandum and articles. The Company’s memorandum and articles provide that such Sections 60, 61 and 62 do not apply to the Company; and
(ii) where a company may purchase, redeem or otherwise acquire its own shares otherwise than in accordance with Sections 60, 61 and 62 of the BVI Act, it may not purchase, redeem or otherwise acquire the shares without the consent of the member whose shares are to be purchased, redeemed or otherwise acquired, unless the Company is permitted by the memorandum and articles to purchase, redeem or otherwise acquire the shares without that consent; and
(iii) unless the shares are held as treasury shares in accordance with Section 64 of the BVI Act, any shares acquired by the Company are deemed to be cancelled immediately on purchase, redemption or other acquisition.
Variation of the Rights of Shareholders. As permitted by the BVI Act and our memorandum and articles, the rights attached to shares of the Company may (subject to the memorandum and articles) only, whether or not the Company is being wound up, be varied with the consent in writing of or by a resolution passed at a meeting by the holders of more than fifty percent of the issued shares of that class, except where a different majority is required under our memorandum and articles or the BVI Act. A greater majority is required in relation to a scheme of arrangement and may be required in relation to a plan of arrangement, as described under “—Summary of Certain Significant Provisions of BVI Law—Mergers, Consolidations and Similar Arrangements” below.
Shareholder Meetings. In accordance with, and subject to, our memorandum and articles, (a) any director of the Company may convene meetings of the shareholders at such times as the director considers necessary or desirable (and the director convening a meeting of shareholders may fix as the record date for determining those shareholders that are entitled to vote at the meeting the date notice is given of the meeting, or such other date as may be specified in the notice, being a date not earlier than the date of the notice); and (b) upon the written request of shareholders entitled to exercise 30% or more of the voting rights in respect of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders. Under BVI law, the memorandum and articles of association may be amended to decrease but not increase the required percentage to call a meeting above 30%. In accordance with, and subject to, our memorandum and articles, (a) the director convening a meeting shall give not less than 7 days’ notice of a meeting of shareholders to those shareholders whose names on the date the notice is given appear as shareholders in the register of members of the Company and are entitled to vote at the meeting; and the other directors; (b) a meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding at least 90% of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation to all of the ordinary shares that that shareholder holds; (c) a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50%of the votes of the ordinary shares or class or series of ordinary shares entitled to vote on resolutions of shareholders to be considered at the meeting; and (d) if within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the request of the shareholders, shall be dissolved; in any other case it shall stand adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the ordinary shares entitled to vote on the matters to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved.
Dividends. Subject to the BVI Act and our memorandum and articles, our directors may, by resolution, declare dividends at a time and amount as they think fit if they are satisfied, based on reasonable grounds, that, immediately after distribution of the dividend, the value of our assets will exceed our liabilities and we will be able to pay our debts as they fall due. There is no further BVI law restriction on the amount of funds which may be distributed by us by dividend, including all amounts paid by way of the subscription price for ordinary shares regardless of whether such amounts may be wholly or partially treated as share capital or share premium under certain accounting principles. Shareholder approval is not (except as otherwise provided in our memorandum or articles) required to pay dividends under BVI law. In accordance with, and subject to, our memorandum and articles, no dividend shall bear interest as against the Company (except as otherwise provided in our memorandum or articles).
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Disclosure of the Securities and Exchange Commission’s Position on Indemnification for Securities Act Liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Transfer of Shares. Subject to any applicable restrictions or limitations arising pursuant to (i) our memorandum and articles; or (ii) the BVI Act, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve (such instrument of transfer being signed by the transferor and containing the name and address of the transferee). Our memorandum and articles also (save as otherwise provided therein) provide that shares may be dealt with by means of a system utilized for the purposes of holding and transferring of shares in uncertificated form.
Summary of Certain Significant Provisions of BVI Law
The BVI Act differs from laws applicable to US corporations and their shareholders. Set forth below is a summary of certain significant provisions of the BVI Act applicable to us (save to the extent that such provisions have been, to the extent permitted under the BVI Act, negated or modified in our memorandum and articles in accordance with the BVI Act).
Mergers, Consolidations and Similar Arrangements. The BVI Act provides for mergers as that expression is understood under US corporate law. Common law mergers are also permitted outside of the scope of the BVI Act. Under the BVI Act, two or more companies may either merge into one of such existing companies, or the surviving company, or consolidate with both existing companies ceasing to exist and forming a new company, or the consolidated company. The procedure for a merger or consolidation between the Company and another company (which need not be a BVI company, and which may be the Company’s parent, but need not be) is set out in the BVI Act. The directors of the BVI company or BVI companies which are to merge or consolidate must approve a written plan of merger or consolidation which must also be authorized by a resolution of members (and the outstanding shares of every class of shares that are entitled to vote on the merger or consolidation as a class if the memorandum or articles so provide or if the plan of merger or consolidation contains any provisions that, if contained in a proposed amendment to the memorandum or articles, would entitle the class to vote on the proposed amendment as a class) of the shareholders of the BVI company or BVI companies which are to merge. A foreign company which is able under the laws of its foreign jurisdiction to participate in the merger or consolidation is required by the BVI Act to comply with the laws of that foreign jurisdiction in relation to the merger or consolidation. The Company must then execute articles of merger or consolidation, containing certain prescribed details. The plan and articles of merger or consolidation are then filed with the Registrar of Corporate Affairs in the BVI, or the Registrar. If the surviving company or the consolidated company is to be incorporated under the laws of a jurisdiction outside BVI, it shall file the additional instruments required under Section 174(2)(b) of the BVI Act. The Registrar then (if he is satisfied that the requirements of the BVI Act have been complied with) registers, in the case of a merger, the articles of merger or consolidation and any amendment to the memorandum and articles of the surviving company and, in the case of a consolidation, the memorandum and articles of association of the new consolidated company and issues a certificate of merger or consolidation (which is conclusive evidence of compliance with all requirements of the BVI Act in respect of the merger or consolidation). The merger or consolidation is effective on the date that the articles of merger or consolidation are registered by the Registrar or on such subsequent date, not exceeding thirty days, as is stated in the articles of merger or consolidation but if the surviving company or the consolidated company is a company incorporated under the laws of a jurisdiction outside the BVI, the merger or consolidation is effective as provided by the laws of that other jurisdiction.
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As soon as a merger or consolidation becomes effective (inter alia), (a) the surviving company or consolidated company (so far as is consistent with its amended memorandum and articles, as amended or established by the articles of merger or consolidation) has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies; (b) the memorandum and articles of any surviving company are automatically amended to the extent, if any, that changes to its amended memorandum and articles are contained in the articles of merger; (c) assets of every description, including choses-in-action and the business of each of the constituent companies, immediately vest in the surviving company or consolidated company; (d) the surviving company or consolidated company is liable for all claims, debts, liabilities and obligations of each of the constituent companies; (e) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against a constituent company or against any shareholder, director, officer or agent thereof, is released or impaired by the merger or consolidation; and (f) no proceedings, whether civil or criminal, pending at the time of a merger or consolidation by or against a constituent company, or against any shareholder, director, officer or agent thereof, are abated or discontinued by the merger or consolidation, but: (i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company or consolidated company or against the shareholder, director, officer or agent thereof, as the case may be or (ii) the surviving company or consolidated company may be substituted in the proceedings for a constituent company but if the surviving company or the consolidated company is incorporated under the laws of a jurisdiction outside the BVI, the effect of the merger or consolidation is the same as noted foregoing except in so far as the laws of the other jurisdiction otherwise provide.
The Registrar shall strike off the register of companies each constituent company that is not the surviving company in the case of a merger and all constituent companies in the case of a consolidation (save that this shall not apply to a foreign company).
If the directors determine it to be in the best interests of the Company, it is also possible for a merger to be approved as a court approved plan of arrangement or as a scheme of arrangement in accordance with (in each such case) the BVI Act. The convening of any necessary shareholders meetings and subsequently the arrangement must be authorized by the BVI court. A scheme of arrangement requires the approval of 75% of the votes of the shareholders or class of shareholders, as the case may be. If the effect of the scheme is different in relation to different shareholders, it may be necessary for them to vote separately in relation to the scheme, with it being required to secure the requisite approval level of each separate voting group. Under a plan of arrangement, a BVI court may determine what shareholder approvals are required and the manner of obtaining the approval.
Continuation into a Jurisdiction Outside the BVI. In accordance with, and subject to, our memorandum and articles, the Company may by resolution of shareholders or by a resolution passed unanimously by all directors of the Company continue as a company incorporated under the laws of a jurisdiction outside the BVI in the manner provided under those laws. The Company does not cease to be a BVI company unless the foreign law permits continuation and the BVI company has complied with the requirements of that foreign law. Where a company that wishes to continue as a company incorporated under the laws of a jurisdiction outside the BVI has a charge registered in respect of the property of the company undersection 163 of the BVI Act which has not been released or satisfied, it shall, before continuing and provided that the charge does not contain a covenant prohibiting continuation of the company outside the BVI, provide a written declaration addressed to the Registrar specifying that: (a) a notice of satisfaction or release in respect of the charge has been filed and registered under section 165 of the BVI Act; (b) where paragraph (a) has not been complied with, the chargee to whom the registered charge relates has been notified in writing of the intention to continue the company as a company incorporated under the laws of a jurisdiction outside the BVI and the chargee has given his or her consent or has not objected to the continuation; or (c) where paragraph (a) has not been satisfied and the chargee, after notification under paragraph (b), has not given his or her consent or objected to the continuation, the chargee’s interest secured by the registered charge shall not be diminished or in any way compromised by the continuation and the charge shall operate as a liability of the continued company incorporated under the laws of a jurisdiction outside of the BVI. Where a company is continued under the laws of a jurisdiction outside the BVI, (a) the company continues to be liable for all of its claims, debts, liabilities and obligations that existed prior to its continuation, (b) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against the company or against any shareholder, director, officer or agent thereof, is released or impaired by its continuation as a company under the laws of the jurisdiction outside the BVI, (c) no proceedings, whether civil or criminal, pending by or against the company, or against any shareholder, director, officer or agent thereof, are abated or discontinued by its continuation as a company under the laws of the jurisdiction outside the BVI, but the proceedings may be enforced, prosecuted, settled or compromised by or against the Company or against the shareholder, director, officer or agent thereof, as the case may be; and (d) service of process may continue to be effected on the registered agent of the company in the BVI in respect of any claim, debt, liability or obligation of the Company during its existence as a company under the BVI Act.
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Directors. In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or restrictions attaching to any ordinary shares), (a) the directors are elected by resolution of shareholders or by resolution of directors for such term as the shareholders or directors determine; (b) each director holds office for the term, if any, fixed by the resolution of shareholders or resolution of directors appointing him, or until his earlier death, resignation or removal. If no term is fixed on the appointment of a director, the director serves indefinitely until his earlier death, resignation or removal: (c) a director may be removed from office (i) with or without cause, by a resolution of shareholders passed at a meeting of shareholders called for the purposes of removing the director or for purposes including the removal of the director or by a written resolution passed by a least 75% of the shareholders of the Company entitled to vote or (ii) with cause, by a resolution of directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal of the director; (d) a director may resign his office by giving written notice of his resignation to the Company and the resignation has effect from the date the notice is received by the Company at the office of its registered agent or from such later date as may be specified in the notice and a director shall resign forthwith as a director if he is, or becomes, disqualified from acting as a director under the BVI Act; (e) the directors may at any time appoint any person to be a director either to fill a vacancy or as an addition to the existing directors and where the directors appoint a person as director to fill a vacancy, the term shall not exceed the term that remained when the person who has ceased to be a director ceased to hold office; (f) a vacancy in relation to directors occurs if a director dies or otherwise ceases to hold office prior to the expiration of his term of office; and (g) a director is not required to hold ordinary shares as a qualification to office.
In accordance with, and subject to, our memorandum and articles, (a) any one director of the Company may call a meeting of the directors by sending a written notice to each other director; (b) the directors of the Company or any committee thereof may meet at such times and in such manner as the directors may determine to be necessary or desirable; (c) a director shall be given not less than 3 days’ notice of meetings of directors, but a meeting of directors held without 3 days’ notice having been given to all directors shall be valid if all the directors entitled to vote at the meeting who do not attend waive notice of the meeting, and for this purpose the presence of a director at a meeting shall constitute waiver by that director and the inadvertent failure to give notice of a meeting to a director, or the fact that a director has not received the notice, does not invalidate the meeting; (d) a meeting of directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than one-half of the total number of directors, unless there are only 2 directors in which case the quorum is two; (e) a director may by a written instrument appoint an alternate who need not be a director and the alternate shall be entitled to attend meetings in the absence of the director who appointed him and to vote or consent in place of the director until the appointment lapses or is terminated; (f) a resolution of directors is passed if either (i) the resolution is approved at a duly convened and constituted meeting of directors of the Company or of a committee of directors of the Company by the affirmative vote of a majority of the directors present at the meeting who voted except that where a director is given more than one vote, he shall be counted by the number of votes he casts for the purpose of establishing a majority; or (ii) the resolution is consented to in writing by a majority of directors or by a majority of members of a committee of directors of the Company, as the case may be, unless (in either case) the BVI Act or our memorandum and articles require a different majority.
Indemnification of Directors. In accordance with, and subject to, our memorandum and articles (including the limitations detailed therein), the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who (a) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director of the Company; or (b) is or was, at the request of the Company, serving as a director of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise.
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In accordance with, and subject to, our memorandum and articles (including the limitations detailed therein), (a) the indemnity referred to above only applies if the person acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the person had no reasonable cause to believe that their conduct was unlawful; (b) the decision of the directors as to whether the person acted honestly and in good faith and with a view to the best interests of the Company and as to whether the person had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient for the purposes of the articles, unless a question of law is involved; and (c) the termination of any proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by itself, create a presumption that the person did not act honestly and in good faith and with a view to the best interests of the Company or that the person had reasonable cause to believe that his conduct was unlawful.
In accordance with, and subject to, our memorandum and articles, the Company may purchase and maintain insurance in relation to any person who is or was a director, officer or liquidator of the Company, or who at the request of the Company is or was serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity, whether or not the Company has or would have had the power to indemnify the person against the liability as provided in the articles.
Directors and Conflicts of Interest. As noted above, pursuant to the BVI Act and the Company’s memorandum and articles of association, a director of a company who has an interest in a transaction and who has declared such interest to the other directors, may:
| (a) | vote on a matter relating to the transaction; | |
| (b) | attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and | |
| (c) | sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction, |
and, subject to compliance with the BVI Act shall not, by reason of his office be accountable to the Company for any benefit which he derives from such transaction and no such transaction shall be liable to be avoided on the grounds of any such interest or benefit.
In accordance with, and subject to, our memorandum and articles, (a) a director of the Company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to all other directors of the Company; and (b) for the purposes noted foregoing, a disclosure to all other directors to the effect that a director is a member, director or officer of another named entity or has a fiduciary relationship with respect to the entity or a named individual and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that entity or individual, is a sufficient disclosure of interest in relation to that transaction.
Shareholders’ Suits. The enforcement of the Company’s rights will ordinarily be a matter for its directors.
In certain circumstances, a shareholder has the right to seek various remedies against the Company in the event the directors are in breach of their duties under the BVI Act. Pursuant to Section 184B of the BVI Act, if a company or director of a company engages, proposes to engage in, or has engaged in conduct that contravenes the provisions of the BVI Act or the memorandum or articles of association of the Company, the BVI court may, on application of a shareholder or director of the Company, make an order directing the Company or director to comply with, or restraining the Company or director from engaging in conduct that contravenes, the BVI Act or the memorandum or articles.
Furthermore, pursuant to Section 184I(1) of the BVI Act a shareholder of a company who considers that the affairs of the Company have been, are being or are likely to be, conducted in a manner that is, or any acts of the Company have been, or are likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him in that capacity, may apply to the BVI court for an order which, inter alia, can require the Company or any other person to pay compensation to the shareholder.
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The BVI Act provides for a series of remedies available to shareholders. Where a company incorporated under the BVI Act conducts some activity which contravenes the BVI Act or the Company’s memorandum and articles of association, the court can issue a restraining or compliance order. Under Section 184G of the BVI Act, a shareholder of a company may bring an action against the Company for breach of a duty owed by the Company to him as a shareholder. A shareholder also pursuant to Section 184C of the BVI Act may, with the leave of the BVI court, bring proceedings or intervene in proceedings in the name of the Company, in certain circumstances. Such actions are known as derivative actions. The BVI court may only grant leave to bring a derivative action where it is satisfied that:
| ● | the Company does not intend to bring, diligently continue or defend or discontinue proceedings; and | |
| ● | it is in the interests of the Company that the conduct of the proceedings not be left to the directors or to the determination of the shareholders as a whole. |
When considering whether to grant leave, the BVI court is also required to have regard to the following matters:
| ● | whether the shareholder is acting in good faith; | |
| ● | whether a derivative action is in the Company’s interests, taking into account the directors’ views on commercial matters; | |
| ● | whether the proceedings are likely to succeed; | |
| ● | the costs of the proceedings in relation to the relief likely to be obtained; and | |
| ● | whether an alternative remedy to the derivative claim is available. |
Any shareholder of a company may apply to the BVI court under the Insolvency Act, 2003 of the BVI, or the Insolvency Act, for the appointment of a liquidator to liquidate the Company and the court may appoint a liquidator for the Company if it is of the opinion that it is just and equitable to do so.
Appraisal Rights. The BVI Act provides that any shareholder of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a) a merger if the company is a constituent company, unless the company is the surviving company and the shareholder continues to hold the same or similar shares; (b) a consolidation, if the company is a constituent company; (c) any sale, transfer, lease, exchange or other disposition of more than 50% in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including: (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; (d) a compulsory redemption of 10% or fewer of the issued shares of the company required by the holders of 90% or more of the votes of the outstanding shares of the company pursuant to the terms of Section 176 of the BVI Act; and (e) an arrangement, if permitted by the BVI court.
Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the BVI or their individual rights as shareholders as established by the company’s memorandum and articles of association. There are common law rights for the protection of shareholders that may be invoked, largely derived from English common law. For example, under the rule established in the English case known as Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the affairs of the company conducted properly according to law and the constituent documents of the Company. As such, if those who control the Company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following:
| ● | a company is acting or proposing to act illegally or beyond the scope of its authority; | |
| ● | the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained; | |
| ● | the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or | |
| ● | those who control the Company are perpetrating a “fraud on the minority.” |
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Share Repurchases and Redemptions. As permitted by the BVI Act and subject to our memorandum and articles of association, shares may be repurchased, redeemed or otherwise acquired by us by resolution of directors and with the consent of the shareholder whose shares are being purchased. Depending on the circumstances of the redemption or repurchase, our directors may need to determine that, immediately following the redemption or repurchase, we will be able to satisfy our debts as they fall due and the value of our assets exceeds our liabilities. Our directors may only exercise this power on our behalf, subject to the BVI Act, our memorandum and articles of association and to any applicable requirements imposed from time to time by the SEC, the or any other stock exchange on which our securities are listed.
Inspection of Books and Records. Under the BVI Act, members of the general public, on payment of a nominal fee, can obtain copies of the public records of a company available at the office of the Registrar, including the Company’s certificate of incorporation, its memorandum and articles of association (with any amendments thereto), records of license fees paid to date, any articles of dissolution, any articles of merger, and a register of charges created by the Company (if the Company has elected to file such a register or an applicable chargee has caused the same to be filed).
A shareholder of a company is entitled, on giving written notice to the Company, to inspect:
| (a) | the memorandum and articles of association; | |
| (b) | the register of members; | |
| (c) | the register of directors; and | |
| (d) | the minutes of meetings and resolutions of shareholders and of those classes of shares of which he is a shareholder. |
In addition, a shareholder may make copies of or take extracts from the documents and records referred to in (a) through (d) above. However, subject to the memorandum and articles of association of the Company, the directors may, if they are satisfied that it would be contrary to the Company’s interests to allow a shareholder to inspect any document, or part of any document, specified in (b), (c) or (d) above, refuse to permit the shareholder to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records. Where a company fails or refuses to permit a shareholder to inspect a document or permits a shareholder to inspect a document subject to limitations, that shareholder may apply to the BVI court for an order that he should be permitted to inspect the document or to inspect the document without limitation.
Our registered agent is Maples Corporate Services (BVI) Limited, Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands. A company is required to keep a copy of its register of members and register of directors at the offices of its registered agent in the BVI, and the Company is required to notify any changes to the originals of such registers (assuming the originals are held elsewhere) to the registered agent, in writing, within 15 days of any change; and to provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept.
Where the place at which the original register of members or the original register of directors of the Company is changed, the Company must provide the registered agent with the physical address of the new location of the records within 14 days of the change of location.
A company is also required to keep at the office of its registered agent or at such other place or places, within or outside the BVI, as the directors may determine the minutes of meetings and resolutions of shareholders and of classes of shareholders; and the minutes of meetings and resolutions of directors and committees of directors. If such records are kept at a place other than at the office of the Company’s registered agent, the Company is required to provide the registered agent with a written record of the physical address of the place or places at which the records are kept and to notify the registered agent, within 14 days, of the physical address of any new location where such records may be kept.
Dissolution; Winding Up. As permitted by the BVI Act and subject to our memorandum and articles of association, we may be voluntarily liquidated and dissolved under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities or we are able to pay our debts as they fall due and the value of our assets equals or exceeds our liabilities.
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We also may be wound up and dissolved in circumstances where we are insolvent in accordance with the terms of the Insolvency Act.
Anti-Money Laundering Laws. In order to comply with legislation and regulations aimed at the prevention of money laundering we are required to adopt and maintain anti-money laundering procedures, and may require subscribers to provide evidence to verify their identity. Where permitted, and subject to certain conditions, we also may delegate the maintenance of our anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person. We reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept the application, in which case any funds received will be returned without interest to the account from which they were originally debited.
If any person resident in the BVI knows or suspects that another person is engaged in money laundering or terrorist financing and the information for that knowledge or suspicion came to his or her attention in the course of his or her business the person will be required to report his belief or suspicion to the Financial Investigation Agency of the BVI, pursuant to the Proceeds of Criminal Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.
Exchange controls. We know of no BVI laws, decrees, regulations or other legislation that limit the import or export of capital or the payment of dividends to shareholders holders who do not reside in the BVI.
Material Differences in BVI Law and our Amended and Restated Memorandum and Articles of Association and Delaware Law
Our corporate affairs are governed by our amended and restated memorandum and articles of association and the provisions of applicable BVI law, including the BVI Act and BVI common law. The BVI Act differs from laws applicable to US corporations and their shareholders. The following table provides a comparison between certain statutory provisions of the BVI Act (together with the provisions of our memorandum and articles of association) and the Delaware General Corporation Law relating to shareholders’ rights.
| Shareholder Meetings | ||
| BVI | Delaware | |
| ● In accordance with, and subject to, our memorandum and articles, (a) any director of the company may convene meetings of the shareholders at such times and in such manner as the director considers necessary or desirable; and (b) upon the written request of shareholders entitled to exercise 30% or more of the voting rights in respect of the matter for which the meeting is requested the directors shall convene a meeting of shareholders | ● May be held at such time or place as designated in the charter or the by-laws, or if not so designated, as determined by the board of directors | |
| ● May be held inside or outside the BVI | ● May be held inside or outside Delaware | |
| ● In accordance with, and subject to, our memorandum and articles, (a) the director convening a meeting shall give not less than 7 days’ notice of a meeting of shareholders to those shareholders whose names on the date the notice is given appear as shareholders in the register of members of the company and are entitled to vote at the meeting; and the other directors; and (b) the director convening a meeting of shareholders may fix as the record date for determining those shareholders that are entitled to vote at the meeting the date notice is given of the meeting, or such other date as may be specified in the notice, being a date not earlier than the date of the notice | ● Whenever shareholders are required to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, and the means of remote communication, if any | |
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| Shareholder’s Voting Rights | ||
| BVI | Delaware | |
| ● In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) a shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder; and (b) the instrument appointing a proxy shall be produced at the place designated for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. The notice of the meeting may specify an alternative or additional place or time at which the proxy shall be presented | ● Any person authorized to vote may authorize another person or persons to act for him by proxy | |
| ● In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50% of the votes of the ordinary shares or class or series of ordinary shares entitled to vote on resolutions of shareholders to be considered at the meeting; and (b) if within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the request of shareholders, shall be dissolved; in any other case it shall stand adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the Shares or each class or series of ordinary shares entitled to vote on the matters to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved | ● The charter or bylaws may specify the number to constitute a quorum but in no event shall a quorum consist of less than one-third of shares entitled to vote at a meeting. In the absence of such specifications, a majority of shares shall constitute a quorum | |
| ● In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) at any meeting of the chairman appropriate whether any resolution proposed has been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes of the meeting. If the chairman has any doubt as to the outcome of the vote on a proposed resolution, he shall cause a poll to be taken of all votes cast upon such resolution. If the chairman fails to take a poll then any shareholder present in person or by proxy who disputes the announcement by the chairman of the result of any vote may immediately following such announcement demand that a poll be taken and the chairman shall cause a poll to be taken. If a poll is taken at any meeting, the result shall be announced to the meeting and recorded in the minutes of the meeting; and (b) a resolution of shareholders is passed if either (i) the resolution is approved at a duly convened and constituted meeting of the shareholders of the company by the affirmative vote of a majority of the votes of the ordinary shares entitled to vote thereon which were present at the meeting and were voted; or (ii) the resolution is consented to in writing by a majority of the votes of ordinary shares entitled to vote thereon; unless (in either case) the BVI Act or our memorandum and articles require a different majority | ||
| ● In accordance with, and subject to, our memorandum and articles, (a) the rights attached to ordinary shares as specified in the memorandum and articles may only, whether or not the company is being wound up, be varied with the consent in writing of or by a resolution passed at a meeting by the holders of more than 50% of the issued ordinary shares of that class, except where some other majority is required under our memorandum and articles of association or the BVI Act | ● Except as provided in the charter documents, changes in the rights of shareholders as set forth in the charter documents require approval of a majority of its shareholders | |
| ● In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), the company may amend its memorandum or articles by a resolution of shareholders or by a resolution of directors, save that no amendment may be made by a resolution of directors: (i) to restrict the rights or powers of the shareholders to amend the memorandum or articles; (ii) to change the percentage of shareholders required to pass a resolution of shareholders to amend the memorandum or articles; (iii) in circumstances where the memorandum or articles cannot be amended by the shareholders; or (iv) to certain specified clauses of the memorandum of association | ● The memorandum and articles of association may provide for cumulative voting | |
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| Directors | ||
| BVI | Delaware | |
| ● In accordance with, and subject to, our memorandum and articles, the minimum number of directors shall be one | ● Board must consist of at least one member | |
| ● In accordance with, and subject to, our memorandum and articles (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) the directors are elected by resolution of shareholders or by resolution of directors for such term as the shareholders or directors determine; (b) each director holds office for the term, if any, fixed by the resolution of shareholders or resolution of directors appointing him, or until his earlier death, resignation or removal. If no term is fixed on the appointment of a director, the director serves indefinitely until his earlier death, resignation or removal: (c) a director may be removed from office (i) with or without cause, by a resolution of shareholders passed at a meeting of shareholders called for the purposes of removing the director or for purposes including the removal of the director or by a written resolution passed by a least 75% of the shareholders of the company entitled to vote or (ii) with cause, by a resolution of directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal of the director; (d) a director may resign his office by giving written notice of his resignation to the company and the resignation has effect from the date the notice is received by the company at the office of its registered agent or from such later date as may be specified in the notice and a director shall resign forthwith as a director if he is, or becomes, disqualified from acting as a director under the BVI Act; (e) the directors may at any time appoint any person to be a director either to fill a vacancy or as an addition to the existing directors and where the directors appoint a person as director to fill a vacancy, the term shall not exceed the term that remained when the person who has ceased to be a director ceased to hold office; (f) a vacancy in relation to directors occurs if a director dies or otherwise ceases to hold office prior to the expiration of his term of office; and (g) a director is not required to hold ordinary shares as a qualification to office. | ● Number of board members shall be fixed by the by laws, unless the charter fixes the number of directors, in which case a change in the number shall be made only by amendment of the charter | |
| ● Directors do not have to be independent | ● Directors do not have to be independent | |
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| Fiduciary Duties | ||
| BVI | Delaware | |
● Directors owe duties at both common law and under statute including as follows:
● Duty to act honestly and in good faith and in what the director believes to be in the best interests of the company;
● Duty to exercise care, diligence and skill that a reasonable director would exercise in the same circumstances; and
● Duty to exercise powers for a proper purpose and directors shall not act, or agree to the company acting, in a manner that contravenes the BVI Act or the memorandum and articles of association; |
● Directors and officers must act in good faith, with the care of a prudent person, and in the best interest of the corporation | |
| ● Directors and officers must refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits | ||
| ● The BVI Act provides that a director of a company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into, or to be entered into, by the company, disclose the interest to the board of the company. However, the failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the transaction was not required to be disclosed because the transaction is between the company and the director himself and is in the ordinary course of business and on usual terms and conditions. Additionally, the failure of a director to disclose an interest does not affect the validity of the transaction entered into by the company if (a) the material facts of the interest of the director in the transaction are known by the shareholders entitled to vote at a meeting of shareholders and the transaction is approved or ratified by a resolution of shareholders or (b) the company received fair value for the transaction | ● Directors may vote on a matter in which they have an interest so long as the director has disclosed any interests in the transaction | |
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| Shareholder Derivative Actions | ||
| BVI | Delaware | |
● Generally speaking, the company is the proper plaintiff in any action. A shareholder may, with the leave of the BVI court, bring proceedings or intervene in proceedings in the name of the company, in certain circumstances. Such actions are known as derivative actions. The BVI court may only grant leave to bring a derivative action where the following circumstances apply:
● the company does not intend to bring, diligently continue or defend or discontinue the proceedings; and
● it is in the interests of the company that the conduct of the proceedings not be left to the directors or to the determination of the shareholders as a whole when considering whether to grant leave, the BVI court is also required to have regard to the following matters: |
● In any derivative suit instituted by a shareholder of a corporation, it shall be averred in the complaint that the plaintiff was a shareholder of the corporation at the time of the transaction of which he complains or that such shareholder’s stock thereafter devolved upon such shareholder by operation of law | |
i.
ii.
iii.
iv.
v. |
whether the shareholder is acting in good faith;
whether a derivative action is in the interests of the company, taking into account the directors’ views on commercial matters;
whether the action is likely to succeed;
the costs of the proceedings in relation to the relief likely to be obtained; and
whether an alternative remedy to the derivative claim is available |
● Complaint shall set forth with particularity the efforts of the plaintiff to obtain the action by the board or the reasons for not making such effort
● Such action shall not be dismissed or compromised without the approval of the Delaware Court of Chancery |
C. Material Contracts.
Other than contracts entered into the ordinary course of business, during the two preceding fiscal years the Company has entered into the following material contracts (which are included as exhibits to this annual report):
| 1. | On April 9, 2020, we entered into subscription agreements with three accredited investors for the sale and issuance of two million shares (2,000,000) ordinary shares of the Companyat a per-share price of $0.40 for aggregate gross proceeds of $800,000 (the “Private Placement). The subscription agreements contain customary representations, warranties and agreements by the Company and customary conditions to closing. We closed the Private Placement on May 12, 2020. |
| 2. | On June 19, 2020, we entered into a securities purchase agreement with certain for the purchase and sale of 4,352,941 of the Company’s ordinary shares, at a purchase price of $0.85 per share, for an aggregate purchase price of approximately $3.7 million. Pursuant to a placement agent agreement dated June 19, 2020, by and between the Company and Chardan Capital Markets LLC, the Company engaged Chardan to act as the Company’s placement agent in connection with the offering. Pursuant to the Placement Agent Agreement, the Company agreed to pay Chardan a cash fee equal to 6.0% of the gross proceeds received by the Company in the offering and to reimburse Chardan for its legal expenses in the amount of up to $50,000. The net proceeds to the Company from the offering, after deducting placement agent fees and estimated offering expenses, will be approximately $3.328 million. The registered direct offering was expected to close on or about June 23, 2020, subject to customary closing conditions. The shares were offered, and issued, pursuant to the Prospectus included in the Company’s Registration Statement on Form F-3 (Registration No. 333-233408), filed with the Securities and Exchange Commission (the “Commission”) on August 22, 2019 as amended by the Prospectus supplement filed with the Commission on June 23, 2020. |
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| 3. | On July 29, 2020, we entered into a securities purchase agreement with certain purchasers for the purchase and sale of 3,555,556 of the Company’s ordinary shares, at a purchase price of $0.45 per share, for an aggregate purchase price of approximately $1.6 million. Pursuant to a placement agent agreement dated July 29, 2020, by and between the Company and Chardan Capital Markets LLC, the Company engaged Chardan to act as the Company’s placement agent in connection with the registered direct offering. Pursuant to the Placement Agent Agreement, the Company agreed to pay Chardan a cash fee equal to 5.0% of the gross proceeds received by the Company in the offering and to reimburse Chardan for its legal expenses in the amount of up to $50,000. In addition, one investor has agreed with the Company and Chardan to be subject to a lock-up period of 30 days pursuant to a Lock-up Agreement dated July 29, 2020. During the applicable lock-up period, such investor may not offer for sale, contract to sell, sell, distribute, grant any option, right to warrant to purchase, pledge, hypothecate or otherwise dispose of, directly or indirectly, any of our ordinary shares or any securities convertible into, or exercisable or exchangeable for our ordinary shares. Certain limited transfers are permitted during the lock-up period if the transferee agrees to these lock-up restrictions. The net proceeds to the Company from the offering, after deducting placement agent fees and estimated offering expenses, will be approximately $1.39 million. The registered direct offering was expected to close on or about July 31, 2020, subject to customary closing conditions. |
| 4. | On October 10, 2020, we entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), with Hudson Capital Merger Sub I, Inc., a Delaware corporation and wholly-owned subsidiary of us (“Merger Sub I”), Hudson Capital Merger Sub II, Inc., a Delaware corporation and wholly-owned subsidiary of Merger Sub I (“Merger Sub II”), Fr8App and ATW Master Fund II, L.P., as the representative of the stockholders of Fr8App (the “Stockholders’ Representative”). Pursuant to the Merger Agreement, we would merge with and into Merger Sub I to redomesticate from the British Virgin Islands (“BVI”) to Delaware, with Merger Sub I as the surviving corporation. Immediately thereafter, Merger Sub I shall divest its existing business to a private or over-the-counter listed company owned by our existing shareholders. Immediately after the Spinoff, Merger Sub II will merge with and into Fr8App, with Fr8App as the surviving corporation and wholly-owned subsidiary of Merger Sub I. There were numerous amendments to this Merger Agreement before being terminated on October 10, 2021. |
| 5. | On September 16, 2021, we entered into a securities purchase agreement with ATW Opportunities Master Fund, L.P. (“ATW”) pursuant to which we agreed to sell for an aggregate purchase price of $2,700,000, an aggregate of 630,000 ordinary shares, par value $0.005 and a pre-funded warrant to purchase 650,000 ordinary shares (the “Securities Purchase”). The closing of the Securities Purchase will be subject to customary closing conditions. The net proceeds from the Securities Purchase, after expenses, were approximately $2.6 million, of which $1.5 million will be used to fund a loan to Fr8App (the “Fr8App Loan”) evidenced by a promissory note issued by Fr8App to us dated September 16, 2021 (the “Promissory Note”). In connection with the Fr8App Loan, Fr8App also issued to us a warrant (the “Fr8App Warrant”) to purchase certain securities of Fr8App in an aggregate value of $2,700,000. We assigned the Fr8App Warrant to ATW and executed a Warrant Assignment Agreement on the same date. The ordinary shares, the warrant and the ordinary shares underlying the warrant were issued pursuant to the prospectus included in the Company’s Registration Statement on Form F-3 (Registration No. 333-233408), which was filed with Commission on August 22, 2019 and was declared effective on September 19, 2019, and a prospectus supplement that was filed with the SEC on the closing of the Securities Purchase by ATW. |
| 6. | On December 13, 2021, we into a new merger agreement between Merger Sub I, Fr8App and the Stockholders’ Representative (the “New Merger Agreement”) to acquire all the issued and outstanding securities of Fr8App and assume Fr8App as our direct, wholly–owned subsidiary. Pursuant to the new merger agreement, a Certificate of Merger would be filed with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law, whereby Merger Sub I shall be merged with and into Fr8App. Following the Merger, the separate corporate existence of Merger Sub I shall cease, and Fr8App would continue as the surviving corporation in the Merger whereupon the Certificate of Incorporation of Merger Sub I and by-laws then in effect, shall cease and the organizational documents of Fr8App after the Merger will be in the form as agreed by the Company and Fr8App. On December 29, 2021, we, Merger Sub I, Fr8App and ATW entered entered into an Amendment No. 1 to Merger Agreement to amend the new merger agreement. This Amendment No. 1 to Merger Agreement redefined “Merger Consideration” and replaced Schedule 6.1 and Section 12.4(b) of the new merger agreement.The Merger closed on February 14, 2022. |
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| 7. | On December 13, 2021, we entered into a securities purchase agreement with ATW Opportunities Master Fund, L.P. (“ATW”) pursuant to which we agreed to sell for an aggregate purchase price of $862,000, a pre-funded warrant to purchase 431,000 ordinary shares. The closing of the aforementioned securities purchase would be subject to customary closing conditions. On December 16, 2021, we and ATW entered into an Amendment No. 1 to the Purchase Agreement (“Amendment No. 1”) to (i) amend Section 2.1 of the purchase agreement to increase the subscription amount to $2,355,000 and amend the warrant to purchase 1,177,500 ordinary shares instead and (ii) amend Section 5.1 of the purchase agreement to provide that the closing of the securities purchase shall occur before the Merger. With the exception of these amendments, all other provisions of the purchase agreement remained the same. |
| 8. | On December 29, 2021, we , ATW and Steven Oliveira (“Oliveira”) entered into an Assignment of Securities Purchase Agreement to assign the right to purchase 499,751 pre-funded warrants (the “Oliveira Warrant”) for a per warrant purchase price of $2.00 (for an aggregate purchase price of $999,502) and the related obligations under the Purchase Agreement from ATW to Steven Oliveira (the “Oliveira Securities Purchase”). The assignment and the aforesaid Oliveira Securities Purchase closed on December 29, 2021. Oliveira also notified us and exercised his right to convert the Oliveira Warrant into ordinary shares on the same day. The net proceeds from the Oliveira Securities Purchase, after expenses, were approximately $999,502, of which $950,000 will be used to fund a loan to Fr8App evidenced by a promissory note issued by Fr8App to us dated September 20, 2021.The Oliveira Warrant and the ordinary shares underlying the Oliveira Warrant were issued pursuant to the prospectus included in the Company’s Registration Statement on Form F-3 (Registration No. 333-233408), which was filed with the Commission on August 22, 2019 and was declared effective on September 19, 2019, and a prospectus supplement that was filed with the Commission on the closing of the Oliveira Securities Purchase. |
| 9. | On February 10, 2022, we, ATW and ten investors (“Assignees”) entered into an Assignment of Securities Purchase Agreement to assign the right to purchase 677,750 pre-funded warrants (the “Assignee Warrants”) for a per warrant purchase price of $2.00 (for an aggregate purchase price of $1,356,178) and the related obligations under the December 13, 2021 purchase agreement from ATW to the Assignees (the “Assignees’ Securities Purchase”). The assignment and the aforesaid Assignees’ Securities Purchase closed on February 10, 2022. The Assignees also notified us and exercised their right to convert the Assignee Warrants into ordinary shares on the same day. The net proceeds from the Assignees’ Securities Purchase, after expenses, were approximately $1,356.178, which were used to fund a loan to Fr8App evidenced by a promissory note issued by Fr8App to us dated February 10, 2022.The Assignee Warrants and the ordinary shares underlying the Assignee Warrants are issued pursuant to the prospectus included in the Company’s Registration Statement on Form F-3 (Registration No. 333-233408), which was filed with the Commission on August 22, 2019 and was declared effective on September 19, 2019, and a prospectus supplement that was filed with the Commission on the closing of the Assignees’ Securities Purchase. |
| 10. | On February 9, 2022, the Company, Fr8App, ATW Opportunities Master Fund, L.P. (“ATW Opportunities”) together with certain existing stockholders of Fr8App (collectively, the “SPA Investors”) entered into an amended and restated Securities Purchase Agreement (the “A&R SPA”) pursuant to which the Company agreed to, among other things, issue four series of warrants (Series A, Series B, Series C and Series D) to purchase an aggregate of 16,257,671 of the Company’s ordinary shares. These warrants will remain exercisable for a period of seven years after issuance. The exercise price of Series A, Series B, Series C and Series D Warrants are $1.50, $1.20, $0.75 and $1.125 per ordinary share, respectively, subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. |
| 11. | On February 9, 2022, the Company and ATW Opportunities, together with certain investors (collectively, the “PIPE Investors”) entered into a Securities Purchase Agreement pursuant to which the Company agreed to sell and issue to the PIPE Investors an aggregate of 2,333,333 restricted Series B Preferred Shares along with Series A warrants to purchase 2,333,333 of the Company’s ordinary shares, in a private placement for an aggregate purchase price of $3,500,000 (the “At-Merger Financing”) upon closing of the Merger. The 2,333,333 restricted Series B Preferred Shares are initially convertible into restricted ordinary shares on a 1:1 basis. In addition, the Company has a post-closing obligation to issue to PIPE Investors Series A warrants to purchase an aggregate of 2,333,333 ordinary shares at $1.50 per share, subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions.The A&R SPA and the At-Merger Financing closed on February 14, 2022. The Company relied on the exemption from registration of the abovementioned securities pursuant to an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D thereunder. |
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| 12. | In connection with the A&R SPA and At-Merger Financing, the Company and the PIPE Investors (including ATW Opportunities) entered into a registration rights agreement, whereby the Company agreed to file a registration statement to register for resale the Conversion Shares (defined in the Registration Rights Agreement) of an aggregate of 37,182,008 shares held as soon as practicable within six (6) months from the closing of the Merger. The registration statement must be declared effective by the 60th day following filing or, in the event the SEC notifies the Company that it will “review” the registration statement, the 90th calendar day following the filing date and with respect to any additional registration statements which may be required pursuant to the Registration Rights Agreement, the 60th calendar day following the date on which an additional registration statement is required to be filed thereunder. |
D. Exchange controls.
There are no material British Virgin Islands laws, decrees, regulations or other legislation that impose foreign exchange controls on us or that affect our payment of dividends, interest or other payments to non-resident holders of our shares. British Virgin Islands law and our Memorandum of Association and Articles of Association impose no limitations on the right of non-resident or foreign owners to hold or vote our common shares. However, we operate through subsidiaries located in Mexico. Mexico has had a free market for foreign exchange since 1991, and the Mexican Government has allowed the peso to float freely against the U.S. dollar since December 1994. We have no control over or influence on this exchange rate policy. The Mexican Government has announced that it does not intend to change its floating exchange rate policy, but there is no guarantee that the Mexican Government will not change this policy.
E. Taxation.
The following is a summary of the material British Virgin Islands, Mexican and United States federal income tax consequences and considerations relevant to an investment in our ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of jurisdictions other than the British Virgin Islands, the Mexico and the United States. To the extent the discussion herein relates to matters of British Virgin Islands, Mexico or United States tax law, it is the opinion of Maples & Calder, ,our counsel as to matters of British Virgin Islands law, SMPS Legal, our counsel as to matters of Mexican law, and Sichenzia Ross Ference LLP, our counsel as to matters of United States federal law, respectively.
British Virgin Islands Taxation
Under British Virgin Islands law as currently in effect, a holder of ordinary shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the ordinary shares and all holders of ordinary shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.
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There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act or persons not resident in the British Virgin Islands. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges where the company and other companies within its group are not BVI land owning companies for the purposes of the BVI Act.
There is no income tax treaty currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.
Mexico Taxation
This summary of certain Mexican federal tax considerations refers only to holders of ordinary shares that are not residents of Mexico for Mexican tax purposes and that will not hold the ordinary shares or a beneficial interest therein through a permanent establishment for tax purposes (we refer to any such non-resident holder as a Foreign Holder). For purposes of Mexican taxation, an individual is a resident of Mexico if he/she has established his/her domicile in Mexico. When an individual also has a place of residence in another country, that individual will be considered a resident of Mexico for tax purposes, if such individual has his/her center of vital interest in Mexico. An individual would be deemed to have his/her center of vital interest in Mexico if, among other things: (a) more than 50% of his/her total income for the year were derived from Mexican sources, or (b) his/her principal center of professional activities were located in Mexico.
A legal entity is a resident of Mexico if:
| ● | it maintains the principal administration of its business in Mexico; or | |
| ● | it has established its effective management in Mexico. |
The principal administration of a business or the effective location of management is deemed to exist in Mexico if the individual or individuals having the authority to decide or effect the decisions of control, management, operation or administration are located in Mexico. Mexican resident entities are subject to income tax on their worldwide income at a 30% rate.
A Mexican national is presumed to be a resident of Mexico unless such person can demonstrate the contrary. If a legal entity or individual has a permanent establishment in Mexico, such permanent establishment shall be required to pay taxes in Mexico on income attributable to such permanent establishment in accordance with Mexican federal tax law.
Taxation of Dispositions. Capital gains resulting from the sale or other disposition of the ordinary shares by a Foreign Holder will not be subject to Mexican income or withholding taxes, to the extent that the book value of such shares does not derive directly or indirectly in more than 50% from real estate located in Mexico.
Other Mexican Tax Considerations. Under the Mexican Income Tax Law, any discount received by a non-resident upon purchase of the notes or bonds from a Mexican resident or a non-resident with a permanent establishment in Mexico is deemed interest income, and therefore, subject to taxes in Mexico. Such interest income results from the difference between the face value (plus accrued interest not subject to withholding) and the purchase price of such notes or bonds. Tax relief may be applicable under the double tax treaties entered into by Mexico.
Transfer and Other Taxes. There are no Mexican stamp, registration or similar taxes payable by a Foreign Holder in connection with the purchase, ownership or disposition of the Registered Securities. A Foreign Holder of the Registered Securities will not be liable for Mexican estate, succession, gift, inheritance or similar tax with respect to such securities.
Material United States Federal Income Tax Considerations
The following is a general summary of material U.S. federal income tax considerations relating to the purchase, ownership and disposition of the ordinary shares by U.S. Investors (as defined below) that purchase the ordinary shares pursuant to the public offering and hold such ordinary shares as capital assets as defined under the Internal Revenue Code of 1986, as amended, or the Code. This summary is based on the Code, the Treasury regulations issued pursuant to the Code, or the Treasury Regulations, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different interpretation. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the Internal Revenue Service, or IRS, would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. This summary is for general information only and does not address all of the tax considerations that may be relevant to specific U.S. Investors in light of their particular circumstances or to U.S. Investors subject to special treatment under U.S. federal income tax law (such as banks or other financial institutions, insurance companies, tax-exempt organizations, retirement plans, partnerships, regulated investment companies, dealers in stock, securities or currencies, brokers, real estate investment trusts, certain former citizens or residents of the United States, persons who acquire ordinary shares as part of a straddle, hedge, conversion transaction or other integrated investment, persons that have a “functional currency” other than the U.S. dollar, persons that own directly, indirectly or constructively 10.0% or more of our company’s shares, persons that are resident in or hold ordinary shares in connection with a permanent establishment outside the United States or persons that generally mark their securities to market for U.S. federal income tax purposes). This summary does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations.
As used in this summary, the term “U.S. Investor” means a beneficial owner of ordinary shares that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust, (a) if a court within the United States is able to exercise primary supervision over its administration and one or more “U.S. persons” (within the meaning of the Code) have the authority to control all of its substantial decisions, or (b) if a valid election is in effect for the trust to be treated as a U.S. person.
If an entity treated as a partnership for U.S. federal income tax purposes holds the ordinary shares, the tax treatment of such partnership and each partner thereof will generally depend upon the status and activities of the partnership and such partner. A holder that is treated as a partnership for U.S. federal income tax purposes should consult its own tax adviser regarding the U.S. federal income tax considerations applicable to it and its partners of the purchase, ownership and disposition of the ordinary shares.
Prospective investors should consult their tax advisers as to the particular tax considerations applicable to them relating to the purchase, ownership and disposition of ordinary shares, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.
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Taxation of Dividends
Subject to the PFIC discussion below, a U.S. Investor will be required to include in gross income the gross amount of any distribution paid on the ordinary shares (including any amount of taxes withheld by our company) out of our company’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Distributions in excess of our company’s current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of the U.S. Investor’s adjusted tax basis in the ordinary shares and thereafter as a gain from the sale of the ordinary shares, but only if our company calculates our earnings and profits in accordance with U.S. federal income tax principles. As our company does not at this time intend to makes such calculations, a U.S. Investor should expect to treat the entire amount of any distribution received as a dividend.
In case of a U.S. Investor that is a corporation, dividends paid on the ordinary shares will be subject to regular corporate rates and will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders with respect to dividends received from U.S. corporations.
Dividends received by an individual, trust or estate should be subject to a maximum income tax rate of 20% (plus the tax on investment income, discussed below). This reduced income tax rate is applicable to dividends paid by “qualified foreign corporations” and only if certain holding period requirements and other conditions are met. A non-U.S. corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the U.S. and which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the U.S. As we expect to be readily tradeable on the NASDAQ, our company should be a qualified foreign corporation paying dividends subject to a reduced rate of taxation.
Dividends received by an individual, trust or estate will be counted as investment income that is subject to the 3.8% surtax on net investment income. U.S. Investors should consult their own tax advisors to determine whether, based on all of their investment income, they are subject to this tax.
As described above in the discussion of “—People’s Republic of China Taxation,” in the event our company is treated as a PRC “resident enterprise” under PRC law, our company may be required to withhold PRC income tax on dividends paid on the ordinary shares under the new EIT Law. For U.S. federal income tax purposes, U.S. Investors will be treated as having received the amount of PRC taxes withheld by our company, and as then having paid over the withheld taxes to the PRC taxing authorities. As a result of this rule, the amount of dividend income included in gross income for U.S. federal income tax purposes by a U.S. Investor with respect to a payment of dividends may be greater than the amount of cash actually received (or receivable) by the U.S. Investor from our company with respect to the payment.
A U.S. Investor may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on the ordinary shares. A U.S. Investor who does not elect to claim a foreign tax credit for foreign income tax withheld, may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholding, but only for a year in which such investor elects to do so for all creditable foreign income taxes. For purposes of calculating the foreign tax credit limitation, dividends paid by our company will, depending on the circumstances of the U.S. investor, be either general or passive income.
Our company expects to pay dividends, if any, in non-U.S. currency. A dividend paid in non-U.S. currency must be included in a U.S. Investor’s income as a U.S. dollar amount based on the exchange rate in effect on the date such dividend is actually or constructively received, regardless of whether the dividend is in fact converted into U.S. dollars. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Investor generally will not recognize a foreign currency gain or loss. If the non-U.S. currency is converted into U.S. dollars on a later date, however, the U.S. Investor must include in income any gain or loss resulting from any exchange rate fluctuations. Such gain or loss will generally be ordinary income or loss, and will be from sources within the United States for foreign tax credit limitation purposes. U.S. Investors should consult their own tax advisors regarding the tax consequences to them if our company pays dividends in non-U.S. currency.
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Taxation of Sale, Exchange or Other Disposition of ordinary shares
Subject to the PFIC discussion below, a U.S. Investor generally will recognize capital gain or loss upon the sale, exchange or other disposition of ordinary shares in an amount equal to the difference, if any, between the amount realized on the sale, exchange or other disposition and the U.S. Investor’s adjusted tax basis in such ordinary shares. This capital gain or loss will be long-term capital gain or loss if the U.S. Investor’s holding period in the ordinary shares exceeds one year. Long-term capital gain of a non-corporate U.S. investor is generally taxed at preferential rates. The deductibility of capital losses is subject to limitations. The gain or loss will generally be income or loss from sources within the United States for U.S. foreign tax credit purposes. U.S. Investors are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on the disposition of ordinary shares, including the availability of the foreign tax credit under an investor’s own particular circumstances.
A U.S. Investor that receives non-U.S. currency on the disposition of the ordinary shares will realize an amount equal to the U.S. dollar value of the foreign currency received on the date of disposition (or in the case of cash basis and electing accrual basis taxpayers, the settlement date) whether or not converted into U.S. dollars at that time. Very generally, the U.S. Investor will recognize currency gain or loss if the U.S. dollar value of the currency received on the settlement date differs from the amount realized with respect to the ordinary shares. Any currency gain or loss on the settlement date or on any subsequent disposition of the foreign currency generally will be U.S. source ordinary income or loss.
Passive Foreign Investment Company
In general, a foreign corporation will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75.0% of its gross income is “passive income” or (ii) at least 50.0% of the average value of its total assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends, interest, certain royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. In determining whether a foreign corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25.0% interest (by value) is taken into account.
We do not expect to be a PFIC for the current taxable year or any future year. The PFIC determination, however, depends upon the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose and the application of these rules is uncertain in some respects. Under the income and asset tests, whether our company is a PFIC will be determined annually based upon the composition and nature of our income and the composition, nature and valuation of our assets, all of which are subject to change. For purposes of the asset test, any cash, including proceeds from the public offering, will generally be treated as a passive asset and the amount of cash held by our company in any year will depend, in part, on when our company spends the cash raised from the public offering and generated in its operations. In addition, the determination of our company’s PFIC status will depend upon the nature of the assets acquired by our company. Moreover, the determination of the value of our company’s assets may depend on its market capitalization, which may fluctuate, and on whether our variable interest entities are treated as wholly-owned subsidiaries. Accordingly, there can be no assurance that we will not be a PFIC in the current or any future year. In addition, there can be no assurance that the IRS will not challenge any determination by our company that it does not constitute a PFIC.
If our company is classified as a PFIC for any taxable year during which a U.S. Investor owns ordinary shares, the U.S. Investor, absent certain elections (including a mark-to-market election discussed below), will generally be subject to adverse rules (regardless of whether our company continues to be classified as a PFIC) with respect to (i) any “excess distributions” (generally, any distributions received by the U.S. Investor on the ordinary shares in a taxable year that are greater than 125 percent of the average annual distributions received by the U.S. Investor in the three preceding taxable years or, if shorter, the U.S. Investor’s holding period for the ordinary shares) and (ii) any gain realized on the sale or other disposition of ordinary shares.
Under these adverse rules (a) the excess distribution or gain will be allocated ratably over the U.S. Investor’s holding period, (b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which our company is classified as a PFIC will be taxed as ordinary income, and (c) the amount allocated to each of the other taxable years during which our company was classified as a PFIC will be subject to tax at the highest rate of tax in effect for the applicable class of taxpayers for that year and an interest charge will be imposed with respect to the resulting tax attributable to each such taxable year.
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If our company is a PFIC for any taxable year during which a U.S. Investor holds the ordinary shares, our company will continue to be treated as a PFIC with respect to that U.S. Investor for all succeeding years during which the U.S. Investor holds the ordinary shares. The U.S. Investor may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the special tax rules discussed above) as if the U.S. Investor’s ordinary shares had been sold on the last day of the last taxable year for which our company was a PFIC. If our company holds or acquires an interest in an entity which is itself a PFIC, such an interest may be treated as owned by a U.S. Investor. U.S. Investors should consult their own tax advisers regarding the consequences to them if our company holds or acquires an interest in an entity which is itself a PFIC.
Although the PFIC rules permit a U.S. holder of stock in a PFIC in certain circumstances to avoid some of the disadvantageous tax treatment described above by making a “qualified electing fund,” or QEF, election, a U.S. Investor will not be able to elect to treat our company as a QEF because our company does not intend to prepare the information that the U.S. Investor would need to make a QEF election.
If our company is a PFIC in any year with respect to a U.S. Investor, the disadvantageous tax treatment described above may in part be avoided with respect to our company if a U.S. Investor validly makes a mark-to-market election as of the beginning of such U.S. Investor’s holding period. If such election is made, such U.S. Investor generally will be required to take into account the difference, if any, between the fair market value of, and its adjusted tax basis in, the ordinary shares at the end of each taxable year as ordinary income or, to the extent of any net mark-to-market gains previously included in income, ordinary loss, and to make corresponding adjustments to the tax basis of such ordinary shares. In addition, any gain from a sale, exchange or other disposition of the ordinary shares will be treated as ordinary income, and any loss will be treated as ordinary loss (to the extent of any net mark-to-market gains previously included in income). A mark-to-market election is available to a U.S. Investor only if the ordinary shares are considered “marketable stock.” Generally, shares will be considered marketable stock if the shares are “regularly traded” on a “qualified exchange” within the meaning of applicable Treasury Regulations.
If our company is a PFIC in any year with respect to a U.S. Investor, the U.S. Investor will be required to file an annual return on IRS Form 8621 reporting his interest in our company and describing any distributions received on the ordinary shares and any gain realized on the disposition of the ordinary shares (as well as reporting any mark-to-market or other elections).
U.S. Investors should consult their tax advisors regarding the potential application of the PFIC regime, including eligibility for and the manner and advisability of making a mark-to-market election, and any reporting requirements that arise as a result of our classification as a PFIC.
Certain Reporting Requirements
Certain U.S. Investors are required to file information returns with the IRS, including IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, reporting transfers of cash (in excess of $100,000) or other property to our company and information relating to the U.S. Investor and our company. Substantial penalties may be imposed upon a U.S. Investor that fails to comply.
Certain individual U.S. Investors (and, under Treasury regulations, certain entities) may be required to report to the IRS (on Form 8938) information with respect to their investments in our ordinary shares not held through an account with a U.S. financial institution. U.S. Investors who fail to report required information could become subject to substantial penalties.
U.S. Investors are encouraged to consult with their own tax advisors regarding foreign financial asset reporting requirements with respect to their investment in our ordinary shares.
| 100 |
Backup Withholding Tax and Information Reporting Requirements
Under certain circumstances, U.S. backup withholding tax and/or information reporting may apply to U.S. Investors with respect to dividend payments made on or the payment of proceeds from the sale, exchange or other disposition of the ordinary shares, unless an applicable exemption is satisfied. U.S. Investors that are corporations generally are excluded from these information reporting and backup withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding tax rules will be allowed as a credit against a U.S. Investor’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Investor timely furnishes required information to the IRS.
F. Dividends and paying agents.
No disclosure is required in response to this Item.
G. Statement by experts.
No disclosure is required in response to this Item.
H. Documents on display.
We previously filed with the SEC our registration statement on Form F-1, as amended and prospectus under the Securities Act of 1933, with respect to our ordinary shares.
We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31, for fiscal years ending on or after December 15, 2011. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
In accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at www.fr8.app. In addition, we will provide hardcopies of our annual report free of charge to shareholders upon request.
I. Subsidiary Information.
Please refer to “Item 4. Information on the Company - C. Organization Structure.”
| 101 |
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Interest rate fluctuations, primarily due to the uncertain future behavior of markets, may have a material impact on the financial results of the Company. We have a short-term borrowing facility and plan to continue to use the facility over the medium to long term. This facility allows us to pledge our qualifying accounts receivable in exchange for cash until the underlying accounts receivable are collected. The provider of the short-term facility charges a variable rate indexed on the US prime rate. Our interest expenses could increase or decrease in a material way were the US prime rate increase or decrease in a material manner.
Diesel Prices
Our clientele consists of entities requiring services in over-the-road freight carriage. One of the largest components to the cost of this service is diesel fuel. Fuel prices, including gasoline and diesel have been highly volatile over the past 24 months. As carrier costs for servicing shipper requirements increase, our margins may compress in the short term as the markets adjust to higher or lower level of costs within the freight ecosystem. Our having to accommodate lower or higher margins due to higher volatility of costs or higher levels of uncertainty could have a material effect on our business.
Foreign Exchange Risk
The functional currency of our operating subsidiary is the US Dollar, but the majority of our labor force is paid in Mexican pesos and therefore our operations are exposed to foreign exchange rate fluctuations. The majority of our shipper clients are accustomed to working and invoicing in US Dollars but some of the domestics Mexico market is more accustomed to transacting in Mexican Pesos. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Mexican Peso to the U.S. dollar. Substantial changes in the exchange rate could have a material effect on our clients, our business and our profitability.
Item 12. Description of Securities Other than Equity Securities.
No disclosure is required in response to this Item.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
There are no defaults, dividend arrearages and delinquencies or other information required to be disclosed in response to this Item.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
There have been no modifications to the rights of security holders and there is no other information to disclose in response to this Item.
Item 15. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). As of December 31, 2021, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.
In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based upon that evaluation and subsequent evaluations conducted in connection with the audit of the Company’s consolidated financial statements for the year ended December 31, 2021, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and regulations.
| 102 |
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) (2013 framework) (the “COSO criteria”). Based on our evaluation and the COSO criteria, we determined that, as of December 31, 2021, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US GAAP.
Since the Company is not an accelerated filer, the auditor’s attestation report pursuant to SOX Section 404(b) is not required in this Annual Report.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal year 2021 and that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit committee financial expert.
In general, an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K, is an individual member of the Audit Committee who:
| ● | understands generally accepted accounting principles and financial statements, | |
| ● | is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves, | |
| ● | has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements, | |
| ● | understands internal controls over financial reporting, and | |
| ● | understands audit committee functions. |
An “audit committee financial expert” may acquire the foregoing attributes through:
| ● | education and experience as a principal financial officer, principal accounting officer, controller, public accountant, auditor or person serving similar functions; | |
| ● | experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person serving similar functions; experience overseeing or assessing the performance of companies or public accounts with respect to the preparation, auditing or evaluation of financial statements; or | |
| ● | other relevant experience. |
| 103 |
Our board of directors has determined that Mr. Marc Urbach qualifies as an audit committee financial expert and has the accounting or financial management expertise as required under Item 407(d)(5)(ii) and (iii) of Regulation S-K. He is independent as that term is used in NASDAQ Marketplace Rule 5605(a)(2).
Item 16B. Code of Ethics.
A Code of Ethics is a written standard designed to deter wrongdoing and to promote:
| ● | honest and ethical conduct, | |
| ● | full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements, | |
| ● | compliance with applicable laws, rules and regulations, | |
| ● | the prompt reporting violation of the code, and | |
| ● | accountability for adherence to the Code of Business Conduct and Ethics. |
We have adopted a Code of Conduct that complies with the descriptions set forth above for a Code of Ethics. Our Code of Conduct is applicable to all of our employees, and also contains provisions that set forth a higher level of expectations from our leaders. A copy of our Code of Conduct is incorporated by reference as an exhibit to this annual report and posted on our website at www.fr8.app.
Item 16C. Principal Accountant Fees and Services.
The following table shows the fees that we paid for audit and other services provided by Marcum Bernstein & Pinchuk LLP, our former independent registered public accounting firm, for fiscal years 2018 and 2019.
| Fiscal 2018 | Fiscal 2019 | |||||||
| Audit Fees | $ | - | $ | - | ||||
| Audit-Related Fees | 85,000 | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 85,000 | $ | - | ||||
Effective March 6, 2019, the Company engaged Wei Wei & Co., LLP, Certified Public Accountants (“Wei”) replace Marcum Bernstein & Pinchuk LLP as its new independent registered public accounting firm. The following table shows the fees that we paid for audit and other services provided by Wei for fiscal years 2018 and 2019.
| Fiscal 2018 | Fiscal 2019 | |||||||
| Audit Fees | $ | 200,000 | $ | - | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 200,000 | $ | - | ||||
Wei was dismissed on November 13, 2019 and effective November 14, 2019, the Company engaged Centurion ZD CPA & Co. (“Centurion”) as our new independent registered public accounting firm. The following table shows the fees that we paid for audit and other services provided by Centurion for fiscal years 2018, 2019, 2020 and 2021.
| Fiscal 2019 | Fiscal 2020 | Fiscal 2021 | ||||||||||
| Audit Fees | $ | 125,000 | $ | 75,000 | $ | 75,000 | ||||||
| Audit-Related Fees | - | - | 15,000 | |||||||||
| Tax Fees | - | - | - | |||||||||
| All Other Fees | - | - | - | |||||||||
| Total | $ | 125,000 | $ | 75,000 | $ | 90,000 | ||||||
Audit Fees —This category includes the audit of our annual financial statements and services that are normally provided by the independent auditors in connection with engagements for those fiscal years.
Audit-Related Fees — This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees”.
Tax Fees — This category consists of professional services rendered by the Company’s independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees — This category consists of fees for other miscellaneous items.
The Audit Committee has adopted a procedure for pre-approval of all fees charged by the Company’s independent registered public accounting firm. Under the procedure, the Audit Committee approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the entire Committee, or, in the period between meetings, by a designated member of the Audit Committee. Any such approval by the designated member is disclosed to the entire Audit Committee at the next meeting. The audit fees paid to Marcum Bernstein & Pinchuk LLP, Wei and Centurion with respect to fiscal years 2018 and 2019 were all approved by the Audit Committee.
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Item 16D. Exemptions from the Listing Standards for Audit Committees.
There have been no exemptions from listing standards required to be disclosed in response to this Item.
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
There have been no purchases of equity securities required to be disclosed in response to this Item.
Item 16F. Change in Registrant’s Certifying Accountant.
Not Applicable,
Item 16G. Corporate Governance.
Our ordinary shares are currently listed on the NASDAQ Capital Market and, for so long as our securities continue to be listed, we will remain subject to the rules and regulations established by the NASDAQ Stock Market that apply to listed companies. NASDAQ rules include various corporate governance requirements applicable to listed securities. While all NASDAQ-listed companies are subject to certain of these corporate governance requirements, foreign private issuers such as our company are exempt from other corporate governance requirements if the laws of their home jurisdiction do not otherwise require compliance. Since our home jurisdiction does not mandate compliance with some of these NASDAQ rules, we have opted out of compliance with them. A more detailed description of the NASDAQ requirements that we are not subject to is contained elsewhere in this annual report under Item 6.C – “Board Practices; NASDAQ Requirements”.
Item 16H. Mine Safety Disclosure.
Not applicable.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 17. Financial Statements.
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements.
The following financial statements are filed as a part of this Form 20-F in Appendix A hereto:
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HUDSON CAPITAL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| 107 |
中正達會計師事務所
Centurion ZD CPA & Co.
Certified Public Accountants (Practising)
Unit 1304, 13/F., Two Harbourfront, 22 Tak Fung Street, Hunghom, Hong Kong 香港紅磡德豐街22號海濱廣場二期13樓1304室 Tel : (852) 2126 2388 Fax: (852) 2122 9078 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The
Board of Directors and Shareholders of Hudson Capital Inc. |
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hudson Capital Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Centurion ZD CPA & Co.
We have served as the Company’s auditor since 2020.
April 29, 2022
PCAOB ID:
| F-1 |
HUDSON CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| 2021 | 2020 | |||||||
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | - | - | ||||||
| Other receivables | ||||||||
| Loans to third parties, net | - | |||||||
| Prepayments | ||||||||
| Due from related parties | - | |||||||
| Total Current Assets | ||||||||
| Non-current assets | ||||||||
| Property and Equipment, net | ||||||||
| Intangible assets, net | - | |||||||
| Long-term prepayment | - | |||||||
| Goodwill | - | - | ||||||
| Deferred Tax Assets | - | - | ||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accrued payroll | $ | $ | ||||||
| Accounts payable | ||||||||
| Advance from customers | - | - | ||||||
| Other payables and accruals | ||||||||
| Due to related party | ||||||||
| Taxes payable | - | |||||||
| Total Current Liabilities | ||||||||
| Provision of other liabilities | - | |||||||
| Deferred tax liabilities | - | - | ||||||
| Total Liabilities | ||||||||
| Shareholders’ equity | ||||||||
| Common Stock ($* par value, shares authorized, and shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively) | ||||||||
| Additional paid in capital | ||||||||
| Statutory reserve | ||||||||
| Retained earnings | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
All of the VIE’s assets can be used to settle obligations of its primary beneficiary. Liabilities recognized as a result of consolidating the VIE do not represent additional claims on the Company’s general assets.
| * | - |
See notes to the consolidated financial statements
| F-2 |
HUDSON CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||
| Revenue | ||||||||||||
| - Third parties | $ | $ | $ | |||||||||
| - Related parties | - | - | - | |||||||||
| Total revenue | - | |||||||||||
| Cost of revenues | - | - | ||||||||||
| Gross profit | - | |||||||||||
| Operating expenses | ||||||||||||
| Selling and marketing expenses | - | |||||||||||
| General and administrative expenses | ||||||||||||
| Research & Development Expense | ||||||||||||
| Donation expenses | - | - | - | |||||||||
| Total Operating expenses | ||||||||||||
| (Loss) income from operations | ( | ) | ( | ) | ( | ) | ||||||
| Other income (expenses) | ||||||||||||
| Interest income on bank deposit | ||||||||||||
| Loss on disposal of a subsidiary | - | - | - | |||||||||
| Other income (expenses) | ( | ) | ||||||||||
| Interest income from loans to third parties | ||||||||||||
| Impairment loss on loans to third parties and property and equipment | - | ( | ) | ( | ) | |||||||
| Total other (expenses) income, net | ( | ) | ( | ) | ||||||||
| (Loss) Income before income tax expenses | ( | ) | ( | ) | ( | ) | ||||||
| Income tax (benefit) expenses | - | - | ||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive (loss) income | ||||||||||||
| Foreign currency translation (loss) gain | ( | ) | ||||||||||
| Comprehensive (loss) Income | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted average number of shares, basic and diluted | * | |||||||||||
| (Loss) per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | )* | |||
| * | - |
Warrants to purchase common stock are not included in the diluted loss per share calculations when their effect is antidilutive.
See notes to consolidated financial statements
| F-3 |
HUDSON CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2021 | 2020 | 2019 | ||||||||||
| Years ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Deferred taxes | - | - | ||||||||||
| Loss on disposal of fixed assets | - | - | ||||||||||
| Impairment loss on loans to third parties | - | |||||||||||
| Impairment loss on fixed assets | - | - | - | |||||||||
| Changes in operating assets and liabilities: | - | - | - | |||||||||
| Accounts receivable | - | ( | ) | |||||||||
| Other receivables | ||||||||||||
| Prepayments | ( | ) | ||||||||||
| Due from related parties | ( | ) | ||||||||||
| Long-term office rental deposit | - | - | - | |||||||||
| Accrued payroll | ( | ) | ( | ) | ||||||||
| Other payables and accruals | ( | ) | ( | ) | ||||||||
| Tax payable | ( | ) | ||||||||||
| Accounts Payable | - | - | - | |||||||||
| Other Assets | - | - | - | |||||||||
| Long-term prepayment | ||||||||||||
| Estimated Liabilities | ( | ) | ||||||||||
| Advance from customers | - | - | ( | ) | ||||||||
| Net cash (used in)/provided by operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | - | |||||||
| Loans to third parties | ( | ) | - | ( | ) | |||||||
| Collection of loans to third parties | - | - | - | |||||||||
| Proceeds on disposal of fixed assets | - | - | ||||||||||
| Net cash (used in)/provided by investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from related party | - | - | ( | ) | ||||||||
| Repayment to a related party | - | - | - | |||||||||
| Proceeds from shares and warrants placement (net of offering cost of $ | - | |||||||||||
| Net cash provided by/ (used in) financing activities | ( | ) | ||||||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||||||
| Cash at beginning of year | ||||||||||||
| Cash at end of year | $ | |||||||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Interest paid | $ | $ | $ | |||||||||
| Income taxes paid | $ | $ | $ | |||||||||
| Non- cash investing activities | ||||||||||||
| Deferred offering costs | $ | $ | $ | |||||||||
See notes to the consolidated financial statements
| F-4 |
HUDSON CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Shares | Amount | Capital | Reserve | Earnings | Loss | Equity | ||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Statutory | Retained | Comprehensive | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Reserve | Earnings | Loss | Equity | ||||||||||||||||||||||
| Balance as of January 1, 2019 | * | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
| Net (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Appropriations of statutory reserves | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | * | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Net (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Appropriations of statutory reserves | ( | ) | - | |||||||||||||||||||||||||
| Proceeds from issuance of common stock | * | |||||||||||||||||||||||||||
| Reverse split adjustments | - | ( | ) | - | ||||||||||||||||||||||||
| Foreign currency translation loss | ||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Appropriations of statutory reserves | - | - | - | |||||||||||||||||||||||||
| Proceeds from issuance of common stock | ||||||||||||||||||||||||||||
| Proceeds from issuance of warrant | ||||||||||||||||||||||||||||
| Foreign currency translation loss | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| * | - |
See notes to the consolidated financial statements
| F-5 |
NOTE 1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Hudson Capital Inc. (“HUSN” or the “Company”), formerly known as China Internet Nationwide Financial Services, Inc., incorporated in the British Virgin Islands (the “BVI”) on September 28, 2015, is engaged in the business of providing financial advisory services to meet the financial and capital needs of its clients, which comprise largely of small-to-medium sized enterprises, through the Company’s wholly-owned subsidiaries. On April 10, 2020, the board of directors of China Internet Nationwide Financial Services, Inc. (“CIFS”) resolved to change the Company’s name to “Hudson Capital Inc.” to re-brand the Company and better reflect the plans for its next phase of growth. The name change was effected with the British Virgin Islands Registrar of Corporate Affairs on April 23, 2020 and its name change and new ticker symbol on the Nasdaq was changed to HUSN with effect from May 8, 2020. The Company offers commercial payment advisory services, international corporate financing advisory services, intermediary bank loan advisory services and technical services. The Company’s wholly owned subsidiaries include: Hongkong Internet Financial Services Limited, (“HKIFS’) which was established in HongKong on October 7, 2015, and Beijing Yingxin Yijia Internet Technology Co., Ltd., (“Yingxin Yijia”) which was established on December 31, 2015 in Beijing, China by HKIFS. On September 2, 2019, Hong kong Shengqi technology limited(“HKSQ”) company became a shareholder of Beijing Yingxin Yijia. HKSQ was incorporated in Hong Kong on August 29, 2019. Mr. Lin Jianxin is a shareholder of HKSQ. On September 26, 2019, a series of agreements were entered into among HKIFS, HK Shengqi and its shareholders (the “VIE Agreements”). As a result of the VIE Agreements, HK become the primary beneficiary of HKSQ. HUSN is able to exercise control over Sheng Ying Xin and was entitled to substantially all of the economic benefits of Ying Xin Yi Jia through HKSQ, and HUSN treats Ying Xin Yi Jia as its variable interest entity (“VIE”) under U.S. GAAP. As a result, the results of operations, assets and liabilities of Ying Xin Yi Jia and its subsidiary (collectively “VIEs”) have been included in the accompanying consolidated financial statements.
Beijing
Sheng Ying Xin Management Consulting Co., Ltd. (“Sheng Ying Xin”) was incorporated in Beijing, China on September 16, 2014.
On December 29, 2016, Sheng Ying Xin incorporated Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”) in
the People’s Republic of China with registered capital of RMB
HUSN
is
On April 26, 2016, a series of agreements were entered into among Yingxin Yijia, Sheng Ying Xin and its shareholders (the “VIE Agreements”). As a result of the VIE Agreements, Yingxin Yijia become the primary beneficiary of Sheng Ying Xin. HUSN is able to exercise control over Sheng Ying Xin and was entitled to substantially all of the economic benefits of Sheng Ying Xin through Yingxin Yijia, and HUSN treats Sheng Ying Xin as its variable interest entity (“VIE”) under U.S. GAAP. As a result, the results of operations, assets and liabilities of Sheng Ying Xin and its subsidiary (collectively “VIEs”) have been included in the accompanying consolidated financial statements.
Since HUSN and its subsidiaries were formed in 2015 and did not have significant operations since inception as well as HUSN and Sheng Ying Xin are under common control, the VIE Agreements dated April 26, 2016 were considered a capital transaction in substance. Accordingly, the consolidated balance sheets as of December 31, 2019 and 2018 include the accounts and balances of HUSN and its subsidiaries, Sheng Ying Xin and its subsidiaries at their respective carrying values. The consolidated statements of income and comprehensive income for the period from inception through September 28, 2015 were the historical operations of Sheng Ying Xin.
| F-6 |
On
July 28, 2017, HUSN completed its initial public offering (“IPO”) and issued shares of common stock to investors at a price
of $per share for a total of $
On
March 10, 2017, Sheng Ying Xin set up a wholly owned subsidiary Fu Hui (Shenzhen) Commercial Factoring Co., Ltd (“FuhuiSZ”)
which mainly provides supply chain financing to commercial enterprises. On September 19, 2017 Sheng Ying Xin set up another wholly owned
subsidiary Yingda Xincheng (Beijing) Insurance Broker Co., Ltd (“Yin Da Xin Cheng”) which mainly provides insurance brokerage
services. On November 23, 2017, Sheng Ying Xin acquired a
On
May 25, 2018, HKIFS set up a wholly owned subsidiary CIFS (Xiamen) Fianncial leasing company which mainly provides financial leasing
services to commercial enterprises. Also on May 25, 2018, Sheng Yin Xin set up another wholly owned subsidiary Fuhui (Xiamen) Commercial
Factoring Co., Ltd which mainly provides factoring services to commercial enterprises. On July 11, 2018 Sheng Ying Xin set up another
wholly owned subsidiary Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd which mainly provides investment
research services. On July 25, 2018, Sheng Ying Xin set up a wholly-owned subsidiary Hangzhou Yuchuang Investment Partnership (Limited
Partnership) which is an investment vehicle for our strategic investing activities. On December 30, 2018, Sheng Yin Xin disposed Anytrust
and transferred its equity interest in Anytrust to Mr. Jainxin Lin, the Company’s Chief Executive Officer and Chairman of the Board,
with no consideration and incurred approximate loss of $
On September 2, 2019, Hongkong Shengqi Technology Limited (“HKSQ”) became a shareholder of WFOE. HKSQ was incorporated in Hong Kong on August 29, 2019. Mr. Jianxin Lin is the sole shareholder of HKSQ. On September 26, 2019, a series of agreements were entered into among HKIFS, HKSQ and its shareholder (the “HKSQ VIE Agreements”). As a result of the HKSQ VIE Agreements, HKIFS become the primary beneficiary of HKSQ.
The contractual agreements among HKSQ, WFOE and Sheng Ying Xin essentially confer control and management as well as the economic benefits of Sheng Ying Xin onto WFOE. In spite of the shareholder change in WFOE, we are able to retain full control and management over Sheng Ying Xin and are still entitled to substantially all of the economic benefits of WFOE through the HKSQ VIE Agreements.
Accordingly, the results of operations, assets and liabilities of HKSQ, WFOE and Sheng Ying Xin have been included in the accompanying consolidated financial statements.
On April 9, 2020, we incorporated a New York subsidiary, Hudson Capital USA Inc.
On September 9, 2020, we incorporated a Delaware subsidiary, Hudson Capital Merger Sub I Inc.
On September 9, 2020, we incorporated a Delaware subsidiary, Hudson Capital Merger Sub II Inc.
| F-7 |
As of December 31, 2021, the Company’s corporate structure is set forth below:
The following is a summary of the VIE agreements:
Exclusive Business Cooperation Agreement
Pursuant
to the terms of the certain Exclusive Business Cooperation Agreement dated April 26, 2016, between Sheng Ying Xin and Yingxin Yijia (the
“Exclusive Business Cooperation Agreement”), Yingxin Yijia is the exclusive technology services and consultancy service provider
to Sheng Ying Xin. Sheng Ying Xin agreed to pay Yingxin Yijia all fees payable for technology services and consultancy service, the amount
of which equals
Pursuant to the terms of the certain Exclusive Business Cooperation Agreement dated September 26, 2019, between HKIFS and HKSQ (the “Exclusive Business Cooperation Agreement”), HKIFS is the exclusive technology services and consultancy service provider to HKSQ. HKSQ agreed to pay HKIFS all fees payable for technology services and consultancy service, the amount of which equals 100% of the net profit of HKSQ. Any payment from HKSQ to HKIFS must comply with applicable Chinese laws. HKIFS is also obligated to bears all losses of HKSQ. Further, the parties agreed that HKIFS shall retain sole ownership of all intellectual property developed in connection with providing technology services to HKSQ. The Exclusive Business Cooperation Agreement has a term. The term of these agreements may be extended if confirmed in writing by HKIFS, prior to the expiration of the term. The extended term shall be determined by HKIFS, and HKSQ shall accept such extended term unconditionally.
| F-8 |
Power of Attorney
Pursuant to the terms of a certain Power of Attorney Agreement dated April 26, 2016, among Yingxin Yijia and the shareholders of Sheng Ying Xin (the “Power of Attorney”), each of the shareholders of Sheng Ying Xin irrevocably appointed Yingxin Yijia as their proxy to exercise on each of such shareholder’s behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of Sheng Ying Xin, including the appointment and election of directors of Sheng Ying Xin. The term of the Power of Attorney is valid so long as such shareholder is a shareholder of Sheng Ying Xin.
Pursuant to the terms of a certain Power of Attorney Agreement dated September 26, 2019, among HKIFS and the shareholders of HKSQ (the “Power of Attorney”), each of the shareholders of HKSQ irrevocably appointed HIIFS as their proxy to exercise on each of such shareholder’s behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of HKSQ, including the appointment and election of directors of HKSQ. The term of the Power of Attorney is valid so long as such shareholder is a shareholder of HKSQ.
The contractual agreements between WFOE and Sheng Ying Xin essentially confer control and management as well as the economic benefits of Sheng Ying Xin onto WFOE. In spite of the shareholder change in WFOE, we are able to retain full control and management over Sheng Ying Xin and are still entitled to substantially all of the economic benefits of WFOE through the HKSQ VIE Agreements.
Exclusive Option Agreement
Pursuant
to the terms of a certain Exclusive Option Agreement dated April 26, 2016, among Yingxin Yijia, Sheng Ying Xin and the shareholders of
Sheng Ying Xin (the “Exclusive Option Agreement”), the shareholders of Sheng Ying Xin granted Yingxin Yijia an irrevocable
and exclusive purchase option (the “Option”) to acquire Sheng Ying Xin’s equity interests and/or remaining assets,
but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. Accordingly, the Option
is exercisable at any time at Yingxin Yijia’s discretion so long as such exercise and subsequent acquisition of Sheng Ying Xin
does not violate PRC law. The consideration for the exercise of the Option is RMB
Pursuant
to the terms of a certain Exclusive Option Agreement dated September 26, 2019, among HKIFS, HKSQ and the shareholders of HKSQ (the “Exclusive
Option Agreement”), the shareholders of HKSQ granted HKIFS an irrevocable and exclusive purchase option (the “Option”)
to acquire HKSQ’s equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations
imposed by PRC law on such transactions. Accordingly, the Option is exercisable at any time at HKIFS’s discretion so long as such
exercise and subsequent acquisition of HKSQ does not violate PRC law. The consideration for the exercise of the Option is RMB
Share Pledge Agreement
Pursuant to the terms of a certain Share Pledge Agreement dated April 26, 2016 among Yingxin Yijia and the shareholders of Sheng Ying Xin (the “Share Pledge Agreement”), the shareholders of Sheng Ying Xin pledged all of their equity interests in Sheng Ying Xin, including the proceeds thereof, to guarantee all of Yingxin Yijia’s rights and benefits under the Exclusive Business Cooperation agreement, the Power of Attorney and the Exclusive Option Agreement. Prior to termination of the Share Pledge Agreement, the pledged equity interests cannot be transferred without Yingxin Yijia’s prior written consent. All of the equity interest pledges with respect to the equity interests of Sheng Ying Xin according to the Share Pledge Agreement have been registered with the relevant office of the Administration for Industry and Commerce in China. The Share Pledge Agreement will be valid until all the payments related to the services provided by Yingxin Yijia to Sheng Ying Xin due under the Exclusive Business Cooperation Agreements have been fulfilled. Therefore, the Share Pledge Agreement shall only be terminated when the payments related to the ten-year Exclusive Business Cooperation Agreement are paid in full and Yingxin Yijia does not intend to extend the term of the Exclusive Business Cooperation Agreement.
| F-9 |
Summarized below is the information related to the combined VIEs’ assets and liabilities as of December 31, 2021 and 2020, respectively:
SCHEDULE OF VIES' ASSETS AND LIABILITIES
| As of December 31, 2021 | As of December 31, 2020 | |||||||
| Current assets | $ | $ | ||||||
| Plant and equipment, net | - | |||||||
| Other non-current assets | - | |||||||
| Total assets | - | |||||||
| Total liabilities | - | ( | ) | |||||
| Net assets (liabilities) | $ | $ | ( | ) | ||||
Summarized below is the information related to the financial performance of the VIEs reported in the Company’s consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2021, 2020 and 2019, respectively:
SCHEDULE OF VIES' REPORTED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Year ended December 31, 2021 | Year
ended | Year
ended | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of revenues | $ | $ | $ | |||||||||
| Total operating expenses | $ | $ | $ | |||||||||
| Net loss | $ | $ | $ | |||||||||
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation
(c) Foreign currency translation and transactions
The functional currency of HUSN, Hudson Capital USA Inc., Hudson Capital Merger Sub I Inc., Hudson Capital Merger Sub II Inc., HKIFS and HKSQ are in United States dollars (“US$” or “$”). The functional currency of Yingxin Yijia, CIFS (Xiamen) Financial Leasing, Sheng Ying Xin and its subsidiaries are Renminbi (“RMB”), and the PRC is the primary economic environment in which the Company operates.
| F-10 |
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income (loss) for the respective periods.
For financial reporting purposes, the financial statements of the Company’s PRC subsidiary and the financial statements of the VIEs are prepared using RMB and are translated into the Company’s reporting currency, the US$. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and Shareholders’ equity is translated at historical exchange rates except for the change in retained earnings during the year which is the result of the net income (loss). The cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of shareholders’ equity.
The exchange rates used are as follows:
SCHEDULE OF EXCHANGE RATES APPLIED FOR FOREIGN CURRENCY
December 31, 2021 | December 31, 2020 | |||||||
| RMB exchange rate at balance sheets dates, | ||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Average exchange rate for each year | ||||||||||||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. The source of the exchange rates is generated from the People’s Bank of China.
(d) Use of estimates
The preparation of these consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. Management makes its estimates based on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements mainly include the allowance for doubtful accounts, the valuation allowance of deferred tax assets, the estimated useful lives of long-lived assets, the impairment assessment of goodwill, intangibles and other long-lived assets, and the fair value of identifiable assets and liabilities acquired through business combination.
| F-11 |
(e) Cash
Cash
and cash equivalents consist of cash on hand, cash on deposit and other highly liquid investments which are unrestricted as to withdrawal
or use, and which have original maturities of three months or less when purchased. The Company maintains cash with various financial
institutions mainly in the US and PRC. As of December 31, 2021 and 2020, the Company had
(f) Accounts receivable and loans to third parties
Accounts
receivable and loans to third parties are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible
accounts as needed. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses
in the Company’s existing accounts receivable and loans receivable. The Company determines the allowance based on aging data, historical
collection experience, customer specific facts and economic conditions. Based on management’s assessment of the collectability
of the accounts receivable and loans to third party, allowance for loans to third party was $
(g) Property and Equipment
The
Company records equipment at cost less accumulated depreciation. The Company computes depreciation using the straight-line method over
the estimated useful lives of the assets with a
Estimated useful lives of property and equipment:
SCHEDULE OF ESTIMATED USEFUL LIVES OF PROPERTY AND EQUIPMENT
| Useful Life | ||
| Furniture | ||
| Electronic equipment | ||
| Motor vehicle | ||
| Leasehold improvements |
The Company eliminates the cost and related accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of operations. The Company charges maintenance, repairs and minor renewals directly to expense as incurred.
(h) Intangible Assets
Intangible assets, comprising accounting software and big data platform, which are separable from the property and equipment, are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the assets.
| F-12 |
(i) Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. For the year ended December 31, 2021, the Company did not recognize any impairment loss of its long-lived assets. For the year ended December 31, 2020, the Company did not recognize any impairment loss of its long-lived assets. For the year ended December 31, 2019, the Company did not recognize any impairment loss of its long-lived assets.
(j) Statutory Reserve
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).
Appropriations
to the statutory surplus reserve is required to be at least
(k) Revenue recognition
The Company adopted ASC Topic 606, “Revenue from Contracts with Customers” effective January 1, 2019, applying the modified retrospective method.
In accordance with ASC Topic 606, revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In determining when and how much revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company’s services include commercial payment advisory services, intermediary bank loan advisory services, international corporate financing advisory services, technical services and factoring services.
For commercial payment advisory service after signing contracts with the client, the Company starts to identify and select banks and financial products and coordinates with banks to structure financing solutions for the client. Then the client prepares application materials and sends them to the bank. When approved by the bank, the client will deposit cash with the bank or purchases wealth management products sold by the bank. After this step, the bank will issue a letter of guarantee, which the client will pledge as security for the acceptance bills. The letter of guarantee is a document that the bank provides certifying itself as guarantor. The Company’s service fee is a percentage of the amount of cash deposited with or wealth management products purchased from the bank by the client. The Company recognizes revenue after the client receives a credit contract from the bank and when the Company receives a contract completion confirmation from the client.
| F-13 |
For intermediary bank loan advisory services, the Company matches small-to-medium sized enterprises (“SMEs”) with financing sources. The Company charges borrowers an introduction fee which is calculated at a percentage of the loan. The Company recognizes revenue after the client receives a bank credit contract from the bank and when the Company receives a contract completion confirmation from the client. The Company typically receives the contract completion confirmation when the client receives the bank financing and signs off on the contract completion confirmation.
For international corporate financing advisory services, the Company works with overseas banks to structure and provide clients with financing solutions to obtain facilities from overseas banks for the clients’ offshore affiliates. After signing the contract with the client, the Company will identify overseas banks and domestic banks, structure financing solutions and facilitate application processes. After the client provides security to the domestic bank, the domestic bank will issue a letter of guarantee to the overseas bank. The overseas bank will provide credit to the affiliate designated by the client. The Company’s service fee is a percentage of credit granted by the overseas bank to the offshore affiliate. The Company recognizes revenue after the offshore affiliate receives credit approval notice from the offshore bank and when the Company receives a contract completion confirmation from the client. The Company typically receives the contract completion confirmation when the affiliate receives the bank financing and the client signs off on the contract completion confirmation.
For technical services, after signing the contract, the Company provides the clients with the technical services and charges a fee for the technical service. The Company recognizes revenue when the services are rendered.
For factoring services, generally after we checked the documents such as client information, contracts, invoices supporting the client’s credit worth, authenticity of the business contracts and the collectability of receivables, we will sign the factoring service contract with client. Upon signing the contract, we request the client to pay us the management fee which we record as revenue upon receipt. After signing the factoring contract, we will wire the factored amount to the client’s designated party, generally its suppliers, and will collect the amount over the contact period. At each month end we will record the factoring service revenue based on the service fee ratio and the amount we factored.
There is no claw back provisions or other guarantees. Full services fees are due upon the contract completion confirmation from the client.
(l) Taxation
The Company follows the guidance of ASC Topic 740 “Income taxes” and uses the assets and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets, if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in statement of operations and comprehensive income (loss) in the period that includes the enactment date.
| F-14 |
The Company follows a more likely than not threshold and a two-step approach for the measurement of tax positions and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including the resolution of related appeals or litigation process, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
The Company has elected to classify interest related to an uncertain tax position (if and when required) to interest expense, and classify penalties related to an uncertain tax position (if and when required) as part of other expense in the consolidated statements of operations and comprehensive income (loss).
The
tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after
those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore
uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional
tax liabilities. The tax returns of the Company’s PRC subsidiaries and VIEs are subject to examination by the relevant tax authorities.
According to the PRC Tax Administration Law on the Levying and Collection of Taxes, the statute of limitations is three years if the
underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended
to five years under special circumstances, where the underpayment of taxes is more than RMB
(m) Cost of revenues
The Company’s cost of revenues mainly consists of revenue-generating staff costs.
(n) Research and development expenses
The
Company accounts for expenses for the enhancement, maintenance and technical support for the Company’s Internet platforms and intellectual
property that are used in its daily operations as research and development expenses. Research and development costs are charged to expense
when incurred.
(o) Comprehensive income (loss)
The Company presents comprehensive income (loss) in accordance with ASC 220, “Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income (loss) and its components in the consolidated financial statements. Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income (loss), as presented in the Company’s consolidated balance sheets are the cumulative foreign currency translation adjustments.
| F-15 |
Earnings (loss) per share (“EPS”) are calculated in accordance with ASC Topic 260, “Earnings Per Share”. Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common stock. The dilutive effect of outstanding common share warrants and options are reflected in the diluted earnings per share by application of the treasury stock method when the impact is dilutive. Potential common shares that have an anti-dilutive effect are excluded from the calculation of diluted EPS. There is dilutive effect for the years ended December 31, 2021, 2020 and 2019.
(q) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, other receivable and short term loans approximate their fair values because of the short-term nature of these instruments.
(r) Goodwill
Goodwill is the excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business combination.
The Company tests goodwill for impairment at the reporting unit level on an annual basis and between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. The Company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required.
(s) Jobs Act accounting election
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, the financial statements may not be comparable to companies that comply with public company effective dates.
(t) Recently issued accounting standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”, which will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. The standard did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and carrying amount of goodwill which was the step 2 test before. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard did not have a material impact on our consolidated financial statements.
| F-16 |
In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software — Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use software. The ASU also requires that the costs for implementation activities during the application development phase be capitalized in a hosting arrangement service contract, and costs during the preliminary and post implementation phase are expensed. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The standard did not have a material impact on our consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, (“ASU 2018-17”). ASU 2018-17 requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety for determining whether a decision-making fee is a variable interest. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. Entities are required to apply the amendments in ASU 2018-17 retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The standard did not have a material impact on our consolidated financial statements
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, (“ASU 2019-04”). ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next annual reporting period; early adoption is permitted. The standard did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. ASU 2019-12 will be effective for the Company in the first quarter of 2021. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations, cash flows or disclosures.
| F-17 |
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, (“ASU 2020-03”). ASU 2020-03 improves various financial instruments topics, including the CECL Standard. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments related to Issue 1, Issue 2, Issue 4 and Issue 5 were effective upon issuance of ASU 2020-03. The amendments related to Issue 3, Issue 6 and Issue 7 were effective for the Company beginning on January 1, 2020. The Company does not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be applied anytime between the first quarter of 2020 and the fourth quarter of 2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures.
Other than the above, management does not believe that any of the recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements.
(u) Going Concern
The
Company has suffered from losses from operation and significant accumulated deficits. It’s net loss for the year ended December
31, 2021, 2020 and 2019 were $
| F-18 |
NOTE 3. CASH
Cash consisted of the following:
SCHEDULE OF CASH
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Cash on hand | $ | $ | ||||||
| Cash in banks | ||||||||
| Total cash | $ | $ | ||||||
NOTE 4. OTHER RECEIVABLES
Other receivables consisted of the following:
SCHEDULE OF OTHER RECEIVABLES
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Interest receivable | $ | $ | ||||||
| Others | ||||||||
| Total | $ | $ | ||||||
Interest receivable represents interest income earned on loans to third parties (See Note 5).
NOTE 5. LOANS TO THIRD PARTIES
The Company lends their own funds to eligible third parties occasionally and receives interest income to better utilize the Company’s cash.
Loans to third parties consisted of direct loans and entrusted loan as follows:
SCHEDULE OF LOANS TO THIRD PARTIES
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Direct loans to third parties | $ | $ | ||||||
| Entrusted loans to third parties | ||||||||
| Impairment on uncollectable loans | ( | ) | ( | ) | ||||
| Total loans to third parties | $ | $ | ||||||
Direct loans
The Company lends their own funds directly to third parties. Due to the COVID-19 pandemic, in year ended December 31, 2020, the Company has agreed to extend the due dates of the loans to A, B and C. The detailed direct loan information as of December 31, 2021 is as follows:
SCHEDULE OF DIRECT LOAN INFORMATION
| Borrower | Amount | Annual Interest rate | Due dates (after extension) | |||||||
| A | $ | % | ||||||||
| B | % | |||||||||
| C | % | |||||||||
| C | % | |||||||||
| D | % | |||||||||
| D | % | |||||||||
| Total | $ | |||||||||
| F-19 |
All the above loans to A, B and C were fully impaired as at December 31, 2021 and December 31, 2020 and no extension agreements were executed for them and are overdue.
On October 10, 2020, we entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), with Hudson Capital Merger Sub I, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub I”), Hudson Capital Merger Sub II, Inc., a Delaware corporation and Merger Sub I’s wholly-owned subsidiary, Freight App, Inc. (formerly known as FreightHub, Inc.), a Delaware corporation (“Fr8 App”) and ATW Master Fund II, L.P., as the representative of the stockholders of Fr8 App (the “Stockholders’ Representative”).
This Merger Agreement was terminated on December 13, 2021 after the Board determined it was in our best interest to change strategies. In its stead, a new merger agreement was entered into between, us, Merger Sub I, Fr8 App and the Stockholders’ Representative on December 13, 2021 (the “New Merger Agreement”).
On February 14, 2022, a Certificate of Merger was filed with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law, whereby in accordance with the New Merger Agreement, Merger Sub I merged with and into Fr8 App, with Fr8 App surviving the Merger and continuing as a direct wholly-owned subsidiary of the Company (the “Merger”). The Merger closed on February 14, 2022 and the separate corporate existence of Merger Sub I and its Certificate of Incorporation and by-laws then in effect ceased, and the organizational documents of Fr8 App after the Merger is in the form as agreed by the Company and Fr8 App. As Borrower D is Fr8 App and the loan is becoming loan to related party after the Merger.
| Borrower | Amount | Annual Interest rate | Due dates (after extension) | |||||||
| A | $ | % | ||||||||
| B | % | |||||||||
| C | % | |||||||||
| C | % | |||||||||
| Total | $ | |||||||||
All the above loans were fully impaired as at December 31, 2020 and no extension agreements were executed for them and are overdue.
The interest income from such direct loans was $
| F-20 |
Entrusted loans
The Company also deposits (“entrust”) its funds in trust accounts with certain bank lenders, who will, in turn, make loans to borrowers.
The balance of entrusted loans as of December 31, 2021 was $36,782,173 to four borrowers. The detailed entrusted loan information as of December 31, 2021 is as follows:
SCHEDULE OF ENTRUSTED LOAN INFORMATION
| Borrower | Amount | Annual Interest rate | Due dates | |||||||
| A | $ | % | ||||||||
| A | % | |||||||||
| B | % | |||||||||
| B | % | |||||||||
| C | % | |||||||||
| C | % | |||||||||
| E | % | |||||||||
| Total | $ | |||||||||
The
balance of entrusted loans as of December 31, 2020 was $
| Borrower | Amount | Annual Interest rate | Due dates | |||||||
| A | $ | % | ||||||||
| A | % | |||||||||
| B | % | |||||||||
| B | % | |||||||||
| C | % | |||||||||
| C | % | |||||||||
| E | % | |||||||||
| Total | $ | |||||||||
The
interest income from such entrusted loans was $
| F-21 |
NOTE 6. DUE FROM RELATED PARTIES
Due from related party consists of the following:
SCHEDULE OF DUE FROM RELATED PARTY
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Sheng Ying Xin (Beijing) Film Industry Co., Ltd. | $ | - | $ | |||||
| Beijing ZhipingScience and Technology Development Co., Ltd. | - | |||||||
| Anytrust Information Technology Co., Ltd | - | |||||||
| Total due from related party | $ | $ | ||||||
As
of December 31, 2021 and December 31, 2020, the Company has related party receivable of $ and $
NOTE 7. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Furniture | $ | $ | ||||||
| Electronic equipment | ||||||||
| Motor vehicle | - | |||||||
| Leasehold improvement | - | - | ||||||
| Total property and equipment | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Less: impairment | - | - | ||||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
NOTE 8. INTANGIBLE ASSETS, NET
The intangible assets consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Accounting software | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
Amortization
expense was $
| F-22 |
NOTE 9. RELATED PARTY TRANSACTIONS
For
the year ended December 31, 2021, the Company has entered into sublease agreement with PX Capital USA Inc. (“PX Capital”)
for payment of rental of $
For
the year ended December 31, 2021, the Company has entered into agreement with Wave Sync Corp. (“Wave Sync”) for disposal
of used motor vehicle of $
For
the year ended December 31, 2020, the Company has entered into sublease agreement with PX Capital USA Inc. (“PX Capital”)
for payment of rental of $
Due from related parties:
As
of December 31, 2021, the Company has $
As
of December 31, 2020, the Company has related party receivables of $
As
of December 31, 2019, the Company has related party receivables of $
Due to related party:
As
of December 31, 2021, the Company has related party payables of $
As
of December 31, 2020 and 2019, the Company has related party payables of $
NOTE 10. EMPLOYEE DEFINED CONTRIBUTION PLAN
Full
time employees of the Company in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension
benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require
that the PRC subsidiaries and VIEs of the Company make contributions to the government for these benefits based on certain percentages
of the employees’ salaries. The employee benefits were expensed as contribution was made. The Company has no legal obligation for
the benefits beyond the contributions made. The total amounts for such contributions were approximately $
| F-23 |
NOTE 11. STOCKHOLDERS’ EQUITY
On
June 23, 2020 and July 31, 2020, we closed on two registered direct offerings for the purchase and sale of of the Company’s
ordinary shares, at a purchase price of $ per share, for an aggregate purchase price of approximately $
On
October 26, 2020, we filed Amended and Restated Memorandum and Articles of Association with the Registrar of Corporate
On
September 16, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with ATW Opportunities
Master Fund, L.P. (“ATW”) pursuant to which the Company agreed to sell for an aggregate purchase price of $
Pursuant
to the terms and provisions of the Purchase Agreement, the Warrant was paid in full amount and same as offering price of the Ordinary
Shares. On February 14, 2022, the
The
warrants issued in the private placement described above are exercisable for a fixed number of shares, and are classified as equity instruments
under ASC 815-40-25-10. The Company accounted for the warrants issued in the private placement based on the fair value method under ASC
Topic 505, and the fair value of the warrants was calculated using the Black-Scholes model under the following assumptions: estimated
life of years, volatility of %, risk-free interest rate of % and dividend yield of 0%. No estimate of forfeitures was made
as the Company has a short history of granting options and warrants. The fair value of the warrants issued to investors at grant date
was $
| Grant date | September 28, 2021 | |||
| Share price at date of grant | $ | |||
| Exercise price at date of grant | $ | |||
| Volatility | % | |||
| Warrant life | years | |||
| Dividend yield | % | |||
| Risk-free interest rate | % | |||
| Average fair value at grant date | $ | |||
The following is a summary of the warrant activity for the year ended December 31, 2021:
SUMMARY OF WARRANT ACTIVITY
| Number of Warrants | Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | - | |||||||||||
| Exercisable at January 1, 2021 | - | |||||||||||
| Granted | ||||||||||||
| Exercised/surrendered | ( | ) | ||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||
| Exercisable at December 31, 2021 | $ | |||||||||||
| F-24 |
NOTE 12. TAXATION
| a) | Corporate Income Taxes |
HUSN is incorporated in the BVI. Under the current law of the BVI, HUSN is not subject to tax on income or capital gains. Additionally, if dividends are paid by HUSN to its shareholders, no BVI withholding tax will be imposed.
Hudson Capital USA Inc., Hudson Capital Merger Sub I Inc. and Hudson Capital Merger Sub II Inc. were incorporated in the United States and are subject to taxes in the United States. They have evaluated their respective income tax positions and have determined that they do not have any uncertain tax positions. They will recognize interest and penalties related to any uncertain tax positions through their income tax expense.
Hudson Capital Merger Sub I Inc. and Hudson Capital Merger Sub II Inc. are subject to franchise tax filing requirements in the State of Delaware.
HKIFS and HKSQ were incorporated in Hong Kong and does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the financial statements as HKFS and HKSQ has no assessable profits for the years ended December 31, 2021, 2020 and 2019.
The
HUSN’s PRC subsidiary, Yingxin Yijia, CIFS (Xiamen) Financial Leasing and its variable interest entities, Sheng Ying Xin and its
subsidiaries being incorporated in the PRC, are governed by the income tax law of the PRC and are subject to PRC enterprise income tax
(“EIT”). Effective from January 1, 2008, the EIT rate of PRC is
The components of the income tax expense are as follows:
SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE
Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||
| Current | $ | - | $ | - | $ | |||||||
| Deferred | - | - | - | |||||||||
| Total | $ | $ | $ | |||||||||
Reconciliation of the income tax expenses at the PRC statutory EIT rate of 25% for the years ended December 31, 2021, 2020, and 2019 and the Company’s effective income tax expenses is as follows:
SCHEDULE OF INCOME TAX RECONCILIATION
| Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||
| (Loss) before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| PRC statutory EIT rate | % | % | % | |||||||||
| Income tax (benefit) computed at statutory EIT rate | ( | ) | ( | ) | ( | ) | ||||||
| Reconciling items: | ||||||||||||
| Valuation allowance | ||||||||||||
| Effect of tax holidays | ||||||||||||
| Temporary difference | ||||||||||||
| Permanent difference | ||||||||||||
| Income tax (benefit) expense | $ | $ | $ | |||||||||
| F-25 |
| b) | Deferred Taxes |
Deferred income tax was measured using the enacted income tax rates for the periods in which they are expected to be reversed. Significant components of the Company’s deferred income tax assets and liabilities consist of follows:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Deferred income tax assets | ||||||||
| Net operating loss carry forwards | $ | $ | - | |||||
| Total Deferred income tax assets | - | - | ||||||
| Less: Valuation allowance | - | - | ||||||
| Net deferred income tax assets | $ | $ | ||||||
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Deferred income tax liabilities | ||||||||
| Intangible assets from business combination | $ | - | $ | - | ||||
| Total deferred income tax liabilities | $ | $ | ||||||
The
Company’s NOL was mainly from the Company’s VIE and subsidiaries’ cumulative net operating losses (“NOL”)
of approximately $
| c) | Taxes Payable |
Yingxin
Yijia, CIFS (Xiamen) Financial Leasing and its variable interest entities, Sheng Ying Xin and its subsidiaries, who provided services
in China and therefore are subject to Chinese value-added tax (“VAT”). Sales revenue represents the invoiced value of services,
net of the VAT.
Taxes payable consisted of the following:
SCHEDULE OF TAX PAYABLE
As of December 31, 2021 | As of December 31, 2020 | |||||||
| Corporate income tax payable | $ | - | $ | |||||
| Value added tax payable | - | |||||||
| Other surtaxes payable | - | |||||||
| Total | $ | $ | ||||||
| F-26 |
SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED
| For the years ended December, 31 | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Numerator: | ||||||||||||
| Net (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Denominator: | ||||||||||||
| Weighted average number of common stock outstanding-basic and diluted | * | |||||||||||
| (Loss) per share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | )* | |||
| * |
NOTE 14. CONCENTRATION OF RISK
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. As of December 31, 2021, 2020 and 2019, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in Mainland China and Hong Kong, which management believes are of high credit quality.
Under PRC law, it is generally required that a commercial bank in the PRC that holds third party cash deposits protect the depositors’ rights over and interests in their deposited money. PRC banks are subject to a series of risk control regulatory standards, and PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit crisis.
| F-27 |
Currency convertibility risk
The significant part of the Company’s businesses is transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. These exchange control measures imposed by the PRC government authorities may restrict the ability of the Company’s PRC subsidiary and VIEs to transfer its net assets to the Company through loans, advances or cash dividends.
Concentration of customers
There was no revenue for the year ended December 31, 2021. No customers have outstanding accounts receivable balances as of December 31, 2021.
There was only one customer of total revenue for the year ended December 31, 2020, which was prepaid revenue recognised in 2020. No customers have outstanding accounts receivable balances as of December 31, 2020.
There
was no customer whose revenue accounts for more than
NOTE 15. COMMITMENTS AND CONTINGENCIES
The following table sets forth the Company’s office lease commitment as of December 31, 2021:
SCHEDULE OF FUTURE MINIMUM PAYMENTS FOR OPERATING LEASES
| Office Rental | ||||
| Year ending December 31, | ||||
| 2022 | $ | |||
| Total | $ | |||
For
the years ended December 31, 2021, 2020 and 2019, rental expenses under operating leases were approximately $
For
the year ended December 31, 2020, the Company has written back an accrued payroll for the Company’s VIEs amounting to $
In the ordinary course of business, the Company may be subject to legal proceedings regarding contractual and employment relationships and a variety of other matters. The Company records contingent liabilities resulting from such claims, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. The company is not currently involved in any such claims.
| F-28 |
NOTE 16. RESTRICTED NET ASSETS
Relevant
PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiary and VIEs only from their retained
earnings, if any, determined in accordance with PRC GAAP. In addition, the Company’s subsidiary and VIEs in China are required
to make annual appropriations of
The ability of our PRC subsidiaries to make dividends and other payments to us may also be restricted by changes in applicable foreign exchange and other laws and regulations.
Foreign currency exchange regulation in China is primarily governed by the following rules:
| ● | Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; | |
| ● | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
As
of December 31, 2021 and 2020 there were approximately $
NOTE 17. REVERSE STOCK SPLIT
On
October 13, 2020,
On
October 29, 2020,
Also, see Significant events Note 18.
| F-29 |
NOTE 18. SIGNIFICANT EVENTS
In December 2019, there was an outbreak of the novel coronavirus (COVID-19) in China that has since spread to many other regions of the world. The outbreak was subsequently labeled as a global pandemic by the World Health Organization in March 2020. It is anticipated that the COVID-19 outbreak may ultimately have a material adverse impact on the Company’s results of operations, financial position and cash flow in 2020 including, but not limited to:
Transportation delays and cost increases, more extensive travel restrictions, closures or disruptions of businesses and facilities or social, economic, political or labor instability in the affected areas, may impact the Company’s customers’ operations. Customers may not be able to repay their loans on time due to lack of capital.
The extent of the impact of COVID-19 on the Company’s operations and financial results depends on future developments and is highly uncertain due to the unknown duration and severity of the outbreak. The situation is changing rapidly and future impacts may materialize that are not yet known. The Company continues to monitor the situation closely and may implement further measures to provide additional financial flexibility and improve the Company’s cash position and liquidity.
On
April 9, 2020, the Company entered into subscription agreements with three accredited investors for the sale and issuance of two million
shares () ordinary shares of the Company, $ par value per share (“Ordinary Shares”) at a per-share price of
$ for aggregate gross proceeds of $
In keeping with our plan to diversity our operations and rebrand ourselves, our corporate name was changed to “Hudson Capital Inc.” on April 23, 2020 and we began to trade under our new symbol, “HUSN” on May 8, 2020. On April 9, 2020, we incorporated a New York subsidiary, Hudson Capital USA Inc.
On June 23, 2020 and July 31, 2020, we closed
on two registered direct offerings for the purchase and sale of of the Company’s ordinary shares, at a purchase price of $per share, for an aggregate purchase price of approximately $
Our securities were transferred to the Capital Market at the opening of business on July 16, 2020.
On August 20, 2020, Mr. Jinchi Xu tendered his resignation as Chief our Financial Officer and director and on the same day, we appointed Mr. Hon Man Yun to succeed Mr. Xu as Chief Financial Officer and director.
On September 9, 2020, we incorporated Hudson Capital Merger Sub I Inc. in Delaware, which in turn incorporated Hudson Capital Merger Sub I Inc. in Delaware as a wholly-owned subsidiary.
On
October 26, 2020, we filed Amended and Restated Memorandum and Articles of Association with the Registrar of Corporate
| F-30 |
In a bid to strategically adjust our business to diversify into new business opportunities, on October 10, 2020, we entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), with Hudson Capital Merger Sub I, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub I”), Hudson Capital Merger Sub II, Inc., a Delaware corporation and Merger Sub I’s wholly-owned subsidiary, Freight App, Inc. (formerly known as FreightHub, Inc.), a Delaware corporation (“Fr8 App”) and ATW Master Fund II, L.P., as the representative of the stockholders of Fr8 App (the “Stockholders’ Representative”).
This Merger Agreement was terminated on December 13, 2021 after the Board determined it was in our best interest to change strategies. In its stead, a new merger agreement was entered into between, us, Merger Sub I, Fr8 App and the Stockholders’ Representative on December 13, 2021 (the “New Merger Agreement”). Under the New Merger Agreement, the Company acquires all the issued and outstanding securities of Freight App and assume Freight App as its direct, wholly–owned subsidiary.
On
September 16, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with ATW Opportunities
Master Fund, L.P. (“ATW”) pursuant to which the Company agreed to sell for an aggregate purchase price of $
NOTE 19. SUBSEQUENT EVENTS
On
February 9, 2022, Fr8App, ATW Opportunities together with certain existing stockholders of Fr8App (collectively, the “SPA Investors”)
entered into an amended and restated Securities Purchase Agreement with the Company (the “A&R SPA”) pursuant to which
the Company agreed to, among other things, issue four series of warrants (Series A, Series B, Series C and Series D) to purchase an aggregate
of
As
part of the Merger, on February 9, 2022, the Company and ATW Opportunities Master Fund, L.P. (“ATW Opportunities”), together
with certain investors (collectively, the “PIPE Investors”) entered into a Securities Purchase Agreement pursuant to which
the Company agreed to sell and issue to the PIPE Investors an aggregate of restricted Series B Preferred Shares along with
Series A warrants to purchase
On February 14, 2022, a Certificate of Merger was filed with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law, whereby in accordance with the New Merger Agreement, Merger Sub I merged with and into Fr8 App, with Fr 8App surviving the Merger and continuing as a direct wholly-owned subsidiary of the Company (the “Merger”). The Merger closed on February 14, 2022 and the separate corporate existence of Merger Sub I and its Certificate of Incorporation and by-laws then in effect ceased, and the organizational documents of Fr8 App after the Merger is in the form as agreed by the Company and Fr8 App.
| F-31 |
On February 14, 2022, the Ordinary Shares have been issued for the effectiveness of the Warrant.
On
February 14, 2022, the Company entered into a Stock Sale and Purchase Agreement with Wave Sync Corp. for selling all shares of Hudson
Capital USA Inc. to Wave Sync. Corp. for $
In
order to focus on its core business as a North American transportation logistics technology platform company and improving operations,
the Company has decided to divest any non-core, non-performing businesses and to sell its wholly-owned subsidiary, Hong Kong Internet
Financial Services (“HKIFS”), to private investors. On March 30, 2022, the Company entered into a Buough and Sold Note with
a private investor and executed an Instrument of Transfer to transfer its one (1) shall in its wholly-owned Hong Kong subsidiary, Hongkong
Internet Financial Services Limited (“HKIFS”) to the private investor for HK$
The divestment of HKIFS will result in the Company departing from its legacy People’s Republic of China financial advisory business and shifting its priorities towards being situated in geographical locations of its core businesses. The sale of HKIFS was completed on March 30, 2022 and included all of the prior operations, obligations and commitments related to its Chinese operations. The Company expects immaterial financial effects from the sale outside of incurring minimal legal expenses to assemble and formalize the transaction. Following is Hudson’s structure following the sale of HKIFS:
Except for the above mentioned matters, no other material events are required to be adjusted or disclosed as of the report date of the consolidated financial statements.
| F-32 |
Item 19. Exhibits.
The following Exhibits are filed as part of this Form 20-F:
| 108 |
| 109 |
| 14#### | Code of Ethics. | |
| 23.1 | Consent report of Centurion ZD CPA & Co. |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Previously filed with the Draft Registration Statement on Form F-1, filed with the SEC on November 4, 2016 and incorporated herein by reference.
** Previously filed with the Registration Statement on Form F-1 (Registration Number: 333-217326), filed with the SEC on April 17, 2017 and incorporated herein by reference.
*** Previously filed with the 1st Amendment to the Registration Statement on Form F-1 (Registration Number: 333-217326), filed with the SEC on May 10, 2017 and incorporated herein by reference.
**** Previously filed with the Annual Report on Form 20-F, filed with the SEC on May 15, 2018 and incorporated herein by reference.
† Previously filed with the Annual Report on Form 20-F, filed with the SEC on May 10, 2019 and incorporated herein by reference.
†† Previously filed with the Annual Report on Form 20-F, filed with the SEC on June 15, 2020 and incorporated herein by reference.
††† Previously filed with the Current Report on Form 6-K, filed with the SEC on June 23, 2020 and incorporated herein by reference.
†††† Previously filed with the Current Report on Form 6-K, filed with the SEC on July 31, 2020 and incorporated herein by reference.
+ Previously filed with the Current Report on Form 6-K, filed with the SEC on October 15, 2020 and incorporated herein by reference.
++ Previously filed with the Current Report on Form 6-K, filed with the SEC on October 28, 2020 and incorporated herein by reference.
+++ Previously filed with the Amendment No. 2 to Registration statement on Form S-4/A filed with the SEC on February 8, 2021 and incorporated herein by reference.
# Previously filed with the Current Report on Form 6-K, filed with the SEC on December 14, 2021 and incorporated herein by reference.
## Previously filed with the Current Report on Form 6-K, filed with the SEC on December 17, 2021 and incorporated herein by reference.
### Previously filed with the Current Report on Form 6-K, filed with the SEC on December 30, 2021 and incorporated herein by reference.
#### Previously filed with the Current Report on Form 6-K, filed with the SEC on February 11, 2022 and incorporated herein by reference.
#### Previously filed with the Current Report on Form 6-K, filed with the SEC on February 14, 2022 and incorporated herein by reference.
& Previously filed with the Current Report on Form 6-K, filed with the SEC on September 28, 2021 and incorporated herein by reference.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| HUDSON CAPITAL INC. | ||
| By: | /s/ Javier Selgas | |
| Name: | Javier Selgas | |
| Title: | Chairman and Chief Executive Officer | |
Date: April 29, 2022
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