Valor Energy Inc: Form 10-Q for the period ended Dec 31, 2023

The following discussion and analysis of our results of operations and financial condition should be read together with our unaudited condensed consolidated financial statements and the notes thereto, which are included elsewhere in this Report and our Annual Report on Form 10-K for the year ended March 31, 2023 (the “Annual Report”) filed with the SEC. Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Overview

We are a provider of automobile transaction and related services, connecting auto dealers, financial institutions and consumers, who are mostly existing and prospective ride-hailing drivers affiliated with different operators of online ride-hailing platforms in the People’s Republic of China (“PRC” or “China”). We provide automobile transaction and related services through our wholly owned subsidiaries, Sichuan Senmiao Yicheng Assets Management Co., Ltd., a PRC limited liability company (“Yicheng”), Chengdu Corenel Technology Limited, a PRC limited liability company (“Corenel”), and our majority owned subsidiaries, Chengdu Jiekai Technology Ltd. (“Jiekai”), and Hunan Ruixi Financial Leasing Co., Ltd. (“Hunan Ruixi”), a PRC limited liability company, and equity investee company, Sichuan Jinkailong Automobile Leasing Co., Ltd. (“Jinkailong”). Since October 2020, we also operate an online ride-hailing platform through Hunan Xixingtianxia Technology Co., Ltd. (“XXTX”), a wholly-owned subsidiary of Sichuan Senmiao Zecheng Business Consulting Co., Ltd., our wholly-owned subsidiary (“Senmiao Consulting”). Our platform enables qualified ride-hailing drivers to provide application-based transportation services mainly in Chengdu, Changsha and other 24 cities in China. Substantially all of our operations are conducted in China.

Our Automobile Transactions and Related Services

Our Automobile Transaction and Related Services are mainly comprised of (i) automobile operating lease where we provide car rental services to individual customers to meet their personal needs with lease term no more than twelve months (the “Auto Operating Leasing”); (ii) service fees from new energy vehicles (“NEVs”) leasing, automobile purchase and management services where we charge NEVs lessees or automobile purchasers for a series of the services provided to them throughout the leasing or purchase process based on the chosen product solutions, such as ride-hailing driver training, assisting with a series of administrative procedures and other consulting services (the “Purchase and NEVs Services”); (iii) automobile sales where we sell new purchased or used cars to our customers (the “Auto Sales”); (iv) automobile financing where we provide our customers with auto finance solutions through financing leases (the “Auto Financing”); (v) auto management and guarantee services provided to online ride-hailing drivers after the delivery of automobiles (the “Auto Management and Guarantee Services”); and (vi) other supporting services provided to online ride-hailing drivers. We started our facilitation and supporting services in November 2018, the sale of automobiles in January 2019, and financial and operating leasing in March 2019, respectively.

Since November 22, 2018, the acquisition date of Hunan Ruixi, and as of December 31, 2023, we and our former VIEs have facilitated financing for an aggregate of 1,687 automobiles with a total value of approximately $23.5 million, sold an aggregate of 1,468 automobiles with a total value of approximately $14.1 million and delivered approximately 3,310 automobiles under operating leases (including 1,826 automobiles used to be delivered by Jinkailong before March 31, 2022) and 161 automobiles under financing leases to customers, the vast majority of whom are online ride-hailing drivers.

The table below provides a breakdown of the number of vehicles sold or delivered under different leasing arrangements or managed/guaranteed by us and corresponding revenue generated for the three and nine months ended December 31, 2023 and 2022:

As of March 31, 2022, we deconsolidated Jinkailong and its operation result was not included in our consolidated statements of operations and comprehensive loss since then. However, although Jinkailong ceased to be within our consolidation scope since March 31, 2022, Hunan Ruixi, Corenel and Jiekai continuously provide automobile transaction and related services, mainly Auto Operating Leasing, similar to Jinkailong’s business operations in Changsha and Chengdu. During the three months ended December 31, 2023, our Auto Operating Leasing, Auto Financing and other services income accounted for approximately 89.5%, 1.1% and 9.4% of our total revenue from our automobile transactions and related services, respectively, while our Auto Operating Leasing, Auto Financing and other services income accounted for approximately 83.9%, 0.9% and 15.2% for the three months ended December 31, 2022, respectively. During the nine months ended December 31, 2023, our Auto Operating Leasing, Auto Sales, Auto Financing and other services income accounted for approximately 88.2%, 0.3%,1.1% and 10.4% of our total revenue from our automobile transactions and related services, respectively, while our Auto Operating Leasing, Auto Sales, Auto Financing and other services income accounted for approximately 76.7%, 6.7%, 0.9% and 15.7% for the nine months ended December 31, 2022, respectively.

Our Ride-Hailing Platform Services

As part of our goal to provide an all-round solution for online ride-hailing drivers as well as to increase our competitive power in an increasingly competitive online ride-hailing industry and to take advantage of the market potential, in October 2020, we began operating our own online ride-hailing platform in Chengdu. The platform (called Xixingtianxia) was owned and operated by XXTX, of which Senmiao Consulting acquired the 100% equity interest pursuant to a series of investment and supplementary agreements. As of the filing date of this Report, Senmiao Consulting has made accumulated capital contribution of RMB40.41 million (approximately $5.69 million) to XXTX and the remaining amount is expected to be paid before December 31, 2025.

XXTX operates Xixingtianxia and holds a national online reservation taxi operating license. The platform is presently servicing online ride-hailing drivers in 26 cities in China, including Chengdu, Changsha and so on, providing them with a platform to view and take customer orders for rides. We currently collaborate with Gaode Map, a well-known aggregation platform in China on our ride-hailing platform services. Under our collaboration, when a rider uses the platform to search for taxi/ride-hailing services on the aggregation platform, the platform provides such rider a number of online ride-hailing platforms for selection, including ours and if our platform is selected by the rider, the order will then be distributed to registered drivers on our platform for viewing and acceptance. The rider may also simultaneously select multiple online ride-hailing platforms in which case, the aggregation platform will distribute the requests to different online ride-hailing platforms which they cooperate with, based on the number of available drivers using the platform in a certain area and these drivers’ historical performance, among other things. XXTX generates revenue from providing services to online ride-hailing drivers to assist them in providing transportation services to the riders looking for taxi/ride-hailing services. XXTX earns commissions for each completed order as the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. XXTX settles its commissions with the aggregation platforms on a weekly basis.

Meanwhile, in order to strengthen our market position in certain cities, during the nine months ended December 31, 2023, our subsidiary, Jiekai, and our equity investee company and former VIE, Jinkailong, cooperated with other online ride-hailing platforms (“Partner Platforms”), such as Chengdu Anma Zhixing Technology Co., Ltd. and Sichuan Peitu Kuaixing Technology Co., Ltd., whereby the online ride-hailing requests and orders shall be completed on Partner Platforms utilizing the network of cars and drivers of us and Jinkailong. Jiekai and Jinkailong earned rental income from drivers and earned commissions from Partner Platforms.

The acquisition of XXTX has brought us a new stream of revenue and enhanced our goal of providing an all-round solution for online ride-hailing drivers. We launched Xixingtianxia in specific markets within Chengdu in late October 2020, focusing on current driver customers. As of the filing date of this Report, we have expanded marketing of our ride-hailing platform to a larger pool of potential drivers and riders in Chengdu, Changsha and other 24 cities through cooperation with certain local car rental companies and through offering attractive incentives and awards to drivers. Since December 2023, in order to improve the efficiency of XXTX’s daily operation and profitability, XXTX has engaged Anhui Lianma Technology Co., Ltd. (“Anhui Lianma”), a third-party to co-operate the online ride-hailing platform by outsourcing certain daily operation work to Anhui Lianma in most of cities it operates platform in XXTX and Anhui Lianma will jointly share the operational profits, with the specific calculation method being defined in the cooperation agreement.

During the nine months ended December 31, 2023, approximately 4.1 million rides with gross fare of approximately $12.5 million were completed through Xixingtianxia and an average of approximately 5,400 ride-hailing drivers completed rides and earned income through Xixingtianxia (the “Active Drivers”) each month. During the nine months ended December 31, 2023, we earned online ride-hailing platform service fees of approximately $2.1 million, after netting off approximately $0.2 million incentives paid to Active Drivers.

During the nine months ended December 31, 2022, approximately 4.8 million rides with gross fare of approximately $15.7 million were completed through Xixingtianxia and an average of over 5,200 Active Drivers each month. During the nine months ended December 31, 2022, we earned online ride-hailing platform service fees of approximately $3.0 million, netting off approximately $0.4 million incentives paid to Active Drivers.

We plan to expand our driver base for the platform and automobile rental business while strengthening the royalty of the drivers who both lease our cars and use our platform while expanding, but our platform is available to others.

Key Factors and Risks Affecting Results of Operations

Ability to Increase Our Automobile Lessee and Active Driver Base

Our revenue growth has been largely driven by the expansion of our automobile lessee base and the corresponding revenue generated from operating and financial leasing. After the acquisition of XXTX, our revenue growth also depends on the number of completed online ride-hailing orders on our platform, which largely depends on the number of Active Drivers who complete ride-hailing transactions on our platform. We acquire customers for our Automobile Transaction and Related Services, as well as for our Online Ride-hailing Platform Services, through the network of third-party sales teams, referral from online ride-hailing platforms and our own efforts including online advertising and billboard advertising. We also send out fliers and participate in trade shows to advertise our services. We plan to maintain the number of our Active Drivers by marketing our platform to our existing and prospective automobile lessees in the cities we now operate in. We expect the expansion of our Active Driver base to promote the growth of our automobile rental business because we offer automobile rental solutions/incentives specifically targeted at drivers using our platform and the Partner Platforms. An effective cross-selling strategies between our automobile leasing business and Online Ride-hailing Platform Services business is important to our expansion and revenue growth. We also plan to strengthen our marketing efforts through the collaboration with certain automobile dealers and through our own team by employing more experienced staffs and improving the quality and variety of our services. As of December 31, 2023, we had 5 and 38 employees in our own sales department and sales department of our equity investee company, Jinkailong, respectively.

Management of Automobile Rentals

Due to the fierce competition of online ride-hailing industry in Chengdu, the demand for short-term car rentals remained stable during the three months ended December 31, 2023. To meet the demand in Chengdu and Changsha, we purchased and leased automobiles from third parties for our operating lease. The daily management and timely maintenance of leased automobiles will have a significant effect on the growth of our income from leasing automobiles in the next twelve months. The effective management of our automobiles through our proprietary system and experienced auto-management team could provide qualified automobiles to potential lessees, either for personal use or providing online ride-hailing services. As of December 31, 2023, we had one parking lot, an exhibition hall and 4 employees in Changsha, and our equity investee company, Jinkailong, had one parking lot and 17 employees in Chengdu, for parking and management of automobiles for operating lease. During the three months ended December 31, 2023 and 2022, the average utilization of the automobiles for operating lease was approximately 80.6% and 42.9%, respectively. During the nine months ended December 31, 2023 and 2022, the average utilization of the automobiles for operating lease was approximately 77.6% and 65.0%, respectively.

Our Service Offerings and Pricing

The growth of our revenue depends on our ability to improve existing solutions and services provided, continue identifying evolving business needs, refine our collaborations with business partners and provide value-added services to our customers. The attraction of new automobile leases depends on our leasing solutions with attractive rental price and flexible leasing terms. We have also adopted a stable pricing formula, considering the historical and future expenditure, remaining available leasing months and market price to determine our rental price for varied rental solutions. Furthermore, our product designs affect the type of automobile leases we attract, which in turn affect our financial performance. The attraction of new Active Drivers depends on the comprehensive income they could earn from our own or cooperated platform, which is mainly affected by the number of orders distributed to them through our platform and the amount of the incentives paid to them from platforms. Our revenue growth also depends on our abilities to effectively price our services, which enables us to attract more customers and improve our profit margin.

Ability to Retain Key Business Cooperators

Historically, we have set up a series of strategy and business relationships with certain affiliates of some famous and leading companies of NEVs manufacturers, online ride-hailing platforms, local NEVs leasing companies, and travel service providers to develop our Automobile Transaction and Related Services and Online Ride-hailing Platform Services. We earned commission or services fee from them, purchased and leased automobiles for our business at a favorable price. The close relationships have provided us with the necessary capacity to support the development of our online ride-hailing platform and leasing business. To retain these valuable cooperators and continuously explore opportunities to collaborate with them in more areas is important to us to have considerable resources to support the exploration and expansion of our business into new cities.

Ability to Collect Receivables on a Timely Basis

We used to advance the purchase price of automobiles and all service expenses when we provide related services to the purchasers. We collect the receivables due from automobile purchasers from their monthly installment payments and repay financial institutions on behalf of the purchasers every month. As of December 31, 2023, we had accounts receivable of approximately $11,000 and advanced payments of approximately $5,000 due from the historical automobile purchasers which will be collected through installment payments on a monthly basis during the relevant affiliation periods. For receivables from Auto Operating Leasing, we usually settle the rental income with each online ride-hailing driver monthly based on the product solutions they chose. In accordance with the development of the operating lease business, our Partner Platforms, such as Gaode, agree to temporarily “lock-up” the fares of the rides which Active Drivers earn from the platform to ensure the timely collection of its rental receivables from those Active Drivers. Besides, during the nine months ended December 31, 2023, we settled our commissions with the Partner Platforms for our online ride-hailing platform services and automobile rental income on a monthly basis. As of December 31, 2023, we had accounts receivable of online ride-hailing service fees of approximately $10,000 in total.

The efficiency of collection of the monthly and weekly payments has a material impact on our daily operation. Our risk and asset management department has set up a series of procedures to monitor the collection from drivers. Our business department has also set up a stable and close relationship with cooperated platform to ensure the timely collection of commissions. The accounts receivable and advance payments may increase our liquidity risk. We have used the majority of the proceeds from our equity offerings and plan to seek equity and/or debt financings to pay for the expenditure related to the automobile purchase. To pay for the expenditure in advance will enhance the stability of our daily operation and lower the liquidity risk, and attract more customers.

Ability to Manage Defaults and Potential Guarantee Liability Effectively

As of December 31, 2023, Jinkailong, the equity investee company and former VIE, is exposed to credit risk as Jinkailong is required by certain financial institutions to provide guarantee on the lease/loan payments (including principal and interests) of the automobile purchasers referred by it. If a default occurs, Jinkailong is required to make the monthly payments on behalf of the defaulted purchasers to the financial institution. As of December 31, 2023, Hunan Ruixi did not have any guarantee liabilities due to financial institutions.

We manage the credit risk arising from the default of automobile purchasers and lessees by performing credit checks on each automobile purchaser or lessee based on the credit reports from People’s Bank of China and third-party credit rating companies, and personal information including residence, ethnicity group, driving history and involvement in legal proceeding. Our risk department continuously monitors the payment by each purchaser and sends them payment reminders. We also keep monitoring the daily gross fare earned by the online ride-hailing drivers, who are our majority customers and run their business through our online ride-hailing platform during the nine months ended December 31, 2023. We do this so that we can evaluate their financial conditions and provide them with assistance including the transfer of automobile to a new driver if they are no longer interested in providing ride-hailing services or are unable to earn enough income to make monthly lease/loan payments.

In addition, automobiles are used as collateral to secure purchasers’ payment obligations under the financing arrangement. In the event of a default, Hunan Ruixi and Jinkailong can track the automobile through an installed GPS system and repossess and handover the automobile over to the financial institution so that they can be released from their guarantee liability. However, if a financial institution initiates a legal proceeding to collect payments due from a defaulted automobile purchaser, Jinkailong may be required to repay the defaulted amount as a guarantor. If it is unable to undertake the responsibility as a guarantor, its own assets, such as cash and cash equivalents, may be frozen by the court if the financial institution successfully requests for an order to freeze our assets or bank accounts, which may adversely affect our operations.

As of December 31, 2023, 108 online ride-hailing drivers we serviced rendered their automobiles to Hunan Ruixi for sublease or sale. In general, most of the defaulted automobile purchasers who want to remain in online ride-hailing business would pay the default amounts within one to three months. Our risk management department typically starts to interact with overdue purchasers if they have missed one monthly installment payment. However, if the balances are overdue for more than two months or the purchasers decide to exit the online ride-hailing business and sublease or sell their automobiles, we would fully record allowance for credit losses against receivables from those purchasers. As of December 31, 2023, we recognized an accumulated allowance for credit losses against receivables of $366,542 from these purchasers served by Hunan Ruixi. For the three and nine months ended December 31, 2023, we recognized approximately$0 and $500 respectively, expenses for the guarantee services as the drivers exited the online ride-hailing business and would no longer make the monthly repayments to us. During the three and nine months ended December 31, 2023, we sub-leased approximately 17 and 19 respectively, rendered automobiles in total to other customers. By subleasing automobiles from these drivers, we believe we can cope with the defaults and control associated risks.

Further, the automobiles subject to our financing leases are not collateralized by us. As of December 31, 2023, the total value of non-collateralized automobiles was approximately $285,000. We believe our risk exposure of financing leasing is immaterial as we have experienced limited default cases and we are able to re-lease those automobiles to drivers under financing leases.

Actual Impact of Coronavirus (COVID-19) in China on Our Business

Our Automobile Transactions and Related Services have been gradually recovering from the adverse impact of COVID-19 pandemic. As of December 31, 2023, 108 online ride-hailing drivers we serviced rendered their automobiles to Hunan Ruixi. As a result, we recorded accumulated allowance for credit losses of $366,542 for them. As most of the leasing term of the automobiles we delivered in Changsha in prior periods has come to the end, during the nine months ended December 31, 2023, the number of newly rendered automobiles decreased to 0 as compared with 7 during the nine months ended December 31, 2022. Meanwhile, over 1,200 online ride-hailing drivers rendered their automobiles to Jinkailong as of December 31, 2023. On the other hand, the number of the completed orders through our online ride-hailing platform had significant decrease in December 2022 due to the infection peak after China lifted the prevention and control of COVID-19.

Our cash flow had been adversely impacted by local resurgences of COVID-19 in Chengdu, Changsha and Guangzhou while the COVID-19 measures in China kept applying the current control and prevention measures especially from September to November 2022, which had negative impact on the online ride-hailing market accordingly due to travel restriction.

Any of these factors related to COVID-19 and other similar or currently unforeseen factors beyond our control could have an adverse effect on our overall business environment, causing uncertainties in the regions in China where we conduct business, and causing our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.

Ability to Manage and Maintain Ride-Hailing Business

Due to the fierce competition of online ride-hailing industry in Chengdu and Changsha, our ability to increase our revenue over time may be limited if we focus only on our current Automobile Transaction and Related Services business model. As part of our strategy to provide an all-encompassing solution for online ride-hailing drivers, we have expanded our services to drivers through the operation of Xixingtianxia, our own online ride-hailing platform. We generate revenue from commissions earned from each completed order, which represent the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider. As the aggregation platforms distribute the demand orders to different online ride-hailing platforms, the flow of drivers in our area of operations is enhanced, leading to a higher probability that more ride orders will be distributed to our platform, which in turn will increase the revenue of the drivers who use our platform (and our revenue). This also allows us to attract more drivers to engage their online ride-hailing business on our platform. Through a series of promotion and effective daily management and training services, we expect our own online ride-hailing platform will offer us a stable revenue source which can also help grow our automobile financing and leasing business. Besides, we are dealing with other trip platforms to attract more riders choosing their trip through our platform.

Pursuant to the cooperation agreement signed with Didi Chuxing Technology Co., Ltd. (“Didi”) for our Automobile Transaction and Related Services, we may be penalized by Didi, or our partnership with Didi may be terminated as we now operate a business competitive with Didi. However, the service fees we earned from Didi for automobile transaction and related services currently represent less than 0.1% of our total revenue. Therefore, we believe that the risk of termination of cooperation with Didi on automobile transaction and related services will not have a material influence on our business or results of operations.

If we could not maintain the scale of the online ride-hailing drivers who use our platform which may cause we could not generate sufficient revenue and we may have a larger cash outflow in our daily operations in the next twelve months. Our cash flow situation may worsen if the economy in China does not improve as expected.

Ability to Compete Effectively

Our business and results of operations depend on our ability to compete effectively. Overall, our competitive position may be affected by, among other things, our service quality and our ability to price our solutions and services competitively. We will set up and continuously optimize our own business system to improve our service quality and user experience. Our competitors may have more resources than we do, including financial, technological, marketing and others and may be able to devote greater resources to the development and promotion of their services. We will need to continue to introduce new or enhance existing solutions and services to continue to attract automobile dealers, financial institutions, car buyers, lessees, ride-hailing drivers and other industry participants. Whether and how quickly we can do so will have a significant impact on the growth of our business.

Market Opportunity and Government Regulations in China

The demand for our services depends on overall market conditions of the online ride-hailing industry in China. The continuous growth of the urban population places increasing pressure on the urban transportation and the improvement of living standards has increased the market demand for quality travel in China. Traditional taxi service is limited, and the emerging online platforms have created good opportunities for the development of the online ride-hailing service market. According to the 52th Statistical report on Internet Development in China published in August 2023 by the China Internet Network Information Center (the “CNNIC”), the number of online ride-hailing service users had reached 472 million by the end of June 2023, and took approximately 43.8% of the total number of Chinese internet users. The online ride-hailing industry is facing increasing competition in China and is attracting more capital investment. According to the Ministry of Transportation (the “MOT”) of the People’s Republic of China, as of December 31, 2023, approximately 337 online ride-hailing platforms have obtained booking taxi operating licenses and the total volume of online ride-hailing orders was approximately 894 million in December 2023 in China. Meanwhile, approximately 2.79 million online booking taxi transportation certificates and approximately 6.57 million online booking taxi driver’s licenses were issued nationwide in China. Since 2019, in addition to the traditional online ride-hailing platforms, automobile manufacturers, offline operation service companies, financial and map service providers, among others, have built cooperation relationships with each other to make the online ride-hailing industry a more aggregated industry.

The online ride-hailing industry may also be affected by, among other factors, the general economic conditions in China. The interest rates and unemployment rates may affect the demand of ride-hailing services and automobile purchasers’ willingness to seek credit from financial institutions. Adverse economic conditions could also reduce the number of qualified automobile purchasers and online ride-hailing drivers seeking credit from the financial institutions, as well as their ability to make payments. Should any of those negative situations occur, the volume and value of the automobile transactions we service will decline, and our revenue and financial condition will be negatively impacted.

In order to manage the rapidly growing ride-hailing service market and control relevant risks, on July 27, 2016, seven ministries and commissions in China, including the MOT, jointly promulgated the “Interim Measures for the Administration of Online Taxi Booking Business Operations and Services” (“Interim Measures”) and amended it on December 28, 2019 and November 30, 2022, which legalizes online ride-hailing services such as XXTX and requires the online ride-hailing services to meet the requirements set out by the measures and obtain taxi-booking service licenses and take full responsibility of the ride services to ensure the safety of riders.

On November 5, 2016, the Municipal Communications Commission of Chengdu City and a number of municipal departments jointly issued the “Implementation Rules for the Administration of Online Booking Taxi Management Services for Chengdu”, which was abolished and replaced by the updated version issued on July 26, 2021. On August 10, 2017, the Transportation Commission of Chengdu further issued the guidelines on compliance requirements for online ride-hailing businesses, including Working Process for the Online Appointment of Taxi Drivers Qualification Examination and Issuance and Online Appointment Taxi Transportation Certificate Issuance Process. On November 28, 2016, Guangzhou Municipal People’s Government promulgated Interim Measures for the Management of Online Ride Hailing Operation and Service in Guangzhou, as amended on November 14, 2019. According to these regulations and guidelines, three licenses /certificates are required for operating the online ride-hailing business in Chengdu and Guangzhou: (1) the ride-hailing service platform such as XXTX should obtain the online booking taxi operating license; (2) the automobiles used for online ride-hailing should obtain the online booking taxi transportation certificate (“automobile certificate”); (3) the drivers should obtain the online booking taxi driver’s license (“driver’s license”). Besides, all the new cars used for online ride-hailing in Chengdu should be NEVs since July 2021.

On July 23, 2018, the General Office of Changsha Municipal People’s Government issued the “Detailed Rules for the Administration of Online Booking Taxi Management Services for Changsha.” On June 12, 2019, the Municipal Communications Commission of Changsha City further issued “Transfer and Registration Procedures of Changsha Online Booking of Taxi.” According to the regulations and guidelines, to operate a ride-hailing business in Changsha requires similar licenses in Chengdu, except those automobiles used for online ride-hailing services are required to meet certain standards, including that the sales price (including taxes) is over RMB120,000 (approximately $17,000). In practice, Hunan Ruixi is also required to employ a safety administrator for every 50 automobiles used for online ride-hailing services and submit daily operation information of these automobiles such as traffic violation to the Transport Management Office of the Municipal Communications Commission of Changsha City every month. On November 28, 2016, Guangzhou Municipal People’s Government also promulgated Interim Measures for the Management of Online Ride Hailing Operation and Service in Guangzhou, as amended on November 14, 2019.

In addition to the national online reservation taxi operating license, XXTX and its subsidiaries also obtained the online reservation taxi operating license 33 cities, including Chengdu, Changsha, Guangzhou, Tianjin, Shenyang, Harbin, Changchun, Wenzhou, Nanchang, Haikou, Xining, two cities in Shandong, and Guangxi Province, respectively, three cities in Guizhou Province, seven cities in Jiangsu Province, other two cities in Hunan and Guangdong Province, respectively, and other four cities in Sichuan Province from June 2020 to July 2023, to operate the online ride-hailing platform services.

However, approximately 19% of our ride-hailing drivers have not obtained the driver’s license for online ride-hailing services as of December 31, 2023 while all of the cars used for online ride-hailing services which we provided management services have the automobile certificate. Without requisite automobile certificate or driver’s license, these drivers may be suspended from providing ride-hailing services, confiscated their illegal income and subject to fines of up to 10 times of their illegal income. Starting in December 2019, Didi began to enforce such limitation on drivers in Chengdu who have a driver’s license but operate automobiles without the automobile certificate.

Furthermore, according to the Interim Measures, no enterprise or individual is allowed to provide information for conducting online ride-hailing services to unqualified vehicles and drivers. Pursuant to the Interim Measures, XXTX and its subsidiaries may be fined between RMB5,000 to RMB30,000 (approximately $700 to $4,225) for violations of the Interim Measures, including providing online ride-hailing platform services to unqualified drivers or vehicles. During the three and nine months ended December 31, 2023, we have been fined by approximately $18,000 and $44,000 by Traffic Management Bureaus in Chengdu and Changsha, of which, approximately $14,000 and $30,000 respectively, was further compensated by drivers or cooperated third parties. If we are deemed in serious violation of the Interim Measures, our Online Ride-hailing Platform Services may be suspended and the relevant licenses may be revoked by certain government authorities.

We are in the process of assisting the drivers to obtain the required certificate and license both for our Automobile Transaction and Related Services and our Online Ride-hailing Platform Services. However, there is no guarantee that all of the drivers who run their online ride-hailing business through our platform would be able to obtain all the certificates and licenses. Our business and results of operations shall be materially and adversely affected if our affiliated drivers are suspended from providing ride-hailing services or imposed substantial fines or if we are found to be in serious violation of the Interim Measures due to the drivers’ failure to obtain requite licenses and/or automobile certificates in connection with providing services through our platform. For example, from September 2023 to December 2023, Gaode has performed a series of compliance check aiming at driver’s license in several cities, including Chengdu and Guangzhou, which caused the decrease in the number of completed orders through our platform and the decrease in our online ride-hailing platform services accordingly.

The Chinese government has exercised and continued to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. For example, the Chinese cybersecurity regulator announced on July 2, 2021 that it had begun an investigation of Didi and two days later ordered that the company’s app be removed from smartphone app stores. We believe that our current operations are in compliance with the laws and regulations of the Chinese cybersecurity regulator. However, the Company’s operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry.

Results of Operations for the three months ended December 31, 2023 Compared to the three months ended December 31, 2022

(unaudited)

(unaudited)

41

Revenues

We started generating revenue from Automobile Transaction and Related Services from our acquisition of Hunan Ruixi on November 22, 2018 and revenue from online ride-hailing platform services from our acquisition of XXTX on October 23, 2020, respectively.

Revenue for the three months ended December 31, 2023 decreased by 122,510, or approximately 7%, as compared with three months ended December 31, 2022. The decrease was mainly due to the decrease of revenues from online ride-hailing platform services resulted from the decrease in orders caused by the market competition, and partly offset by the increase of operating lease revenues from automobile rentals as a result of the expansion and our continuous “efficiency - improving” strategy of this business.

As we have focused on our automobile rental and Online Ride-hailing Platform Services business, we expect revenue from our online ride-hailing platform services and automobile rental to continuously account for a majority of our revenues. We plan to provide a series of product solutions to sustain and further increase the number of our automobiles for operating leases.

The following table sets forth the breakdown of revenues by revenue source for the three months ended December 31, 2023 and 2022:

(unaudited)

(unaudited)

Revenue from Automobile Transactions and Related Services

Revenue from our automobile transaction and related services mainly includes operating lease revenues from automobile rentals, service fees from automobile purchase services, financing revenues, service fees from NEVs leasing, service fees from automobile management and guarantee services and other services fees, which accounted for approximately 89.5%, 1.7%, 1.1%, 0.8%, 0.2% and 6.7%, respectively, of the total revenue from automobile transaction and related services during the three months ended December 31, 2023. Meanwhile, operating lease revenues from automobile rentals, financing revenues, service fees from NEVs leasing, service fees from automobile management and guarantee services and other services fees, which accounted for approximately 83.9%, 0.9%, 5.3%, 1.0% and 8.9%, respectively, of the total revenue from automobile transaction and related services during the three months ended December 31, 2022.

Operating lease revenues from automobile rentals

We generate revenues from leasing our own automobiles, sub-leasing automobiles leased from third-parties or rendered by online ride-hailing drivers with their authorization for a lease term of no more than twelve months. The increase of rental income of $210,861 during the three months ended December 31, 2023 was mainly due to the increased average utilization of the automobiles for operating lease increased from approximately 42.9% to 80.6%. We leased over 870 automobiles with an average monthly rental income of approximately $477 per automobile, resulting in a rental income of $992,071, including rental income of $7,133 from Jinkailong, for the three months ended December 31, 2023. While we leased over 800 automobiles with an average monthly rental income of approximately $474 per automobile, resulting in a rental income of $781,210, including rental income of $30,748 from Jinkailong, for the three months ended December 31, 2022.

Service fees from automobile purchase services and Service fees from automobile management and guarantee services

We generate revenues from providing a series of automobile purchase services throughout the automobile purchase transaction process, including sales-type lease. We had revenue from 14 automobiles purchase transaction during the three months ended December 31, 2023 while we had no revenue from automobile purchase services during the three months ended December 31, 2022. As a result, the related service fees generated increased $19,122 from the three months ended December 31, 2022 to the three months ended December 31, 2023.

The majority of our customers are online ride-hailing drivers. Some of them also entered into affiliation service agreements in prior periods with us pursuant to which we provide them post-transaction management services and guarantee services. The decrease of $7,144 was due to the decrease in the accumulated number of rendered automobiles which were subsequently rented to ride-hailing drivers whom we charge rent rather than charging management and guarantee services fee. We had management and guarantee services for over 12 and 91 automobiles during the three months ended December 31, 2023 and 2022, respectively.

Financing revenues

We started our financial leasing business in March 2019 and began to generate interest income from providing financial leasing services to ride-hailing drivers in April 2019. We also charge the customers of our automobile financing facilitation services interest on their monthly payments which cover purchase price of automobile and our services fees and facilitation fees for terms of 36 or 48 months. We recognized a total interest income of $12,195 from an average monthly number of 26 automobiles and $8,606 from an average monthly number of 37 automobiles during the three months ended December 31, 2023 and 2022, respectively. The increase was due to the monthly payment we charged to customers for financial leasing increased during the three months ended December 31, 2023.

Service fees from NEVs leasing

We generated revenues of $8,412 and $49,002 from leasing NEVs by charging leases service fees during the three months ended December 31, 2023 and 2022, respectively. The amount of services fees for NEVs leasing is based on its product solutions. The decrease of $40,590 was mainly due to that we adjusted our product solutions since January 2023, and more customers chose the solutions with no services fees for NEVs leasing.

Other service fees

We generate other revenues such as monthly services commissions from Partner Platforms and other companies, and other miscellaneous service fees charged to our customers, which accounted for approximately 68.9%, and 31.1% of revenues from other service fees during the three months ended December 31, 2023, respectively. The commissions from Partner Platforms and other companies, and other miscellaneous service fees charged to our customers, which accounted for approximately 65.6%, and 34.4% of revenues from other service fees during the three months ended December 31, 2022, respectively.

Revenue from online ride-hailing platform services

We generate revenue from providing services to online ride-hailing drivers to assist them in providing transportation service to the riders though our platform and earn commissions for each completed order equal to the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider since October 2020. During the three months ended December 31, 2023, approximately 1.2 million rides with gross fare of approximately $3.6 million were completed through our Xixingtianxia platform and we earned online ride-hailing platform service fees of $510,203, after netting off approximately $40,000 incentives paid to Active Drivers. The decrease was mainly due to fewer completed orders as a result of increased competition and compliance checks conducted by our platform partner Gaode in Chengdu, during the three months ended December 31, 2023.

During the three months ended December 31, 2022, approximately 1.4 million rides with gross fare of approximately $4.4 million were completed through our Xixingtianxia platform and we earned online ride-hailing platform service fees of $810,295, after netting off approximately $0.1 million incentives paid to Active Drivers.

Cost of Revenues

Cost of revenues represents (1) the amortization, daily maintenance and insurance expense related to our Auto Operating Leasing of $819,757; and (2) technical service charges, insurance and other expenses related to our Online Ride-Hailing Platform Services of $381,085. Cost of revenues decreased by $357,328 during the three months ended December 31, 2023 as compared with the same period in 2022, mainly due to the decrease of $235,346 in costs of automobiles under operating leases due to the decrease in the average daily maintenance and insurance expense of the automobiles for operating lease as we used more NEVs in the three months ended December 31, 2023, and $121,982 in direct expense and technical service fees of online ride-hailing platform services due to the decrease in the number of completed orders. During the three months ended December 31, 2023 and 2022, the costs of automobiles under operating leases with amount of $80,973 and $185,254, respectively, was from one of our related parties.

Gross Profit

We had gross profit of $417,568 and $182,750, respectively, during the three months ended December 31, 2023 and 2022. The increase of $234,818 was mainly due to the increase in profit in our operating lease, partially offset by the decrease in profit from online ride-hailing platform services and other services. The following table sets forth the breakdown of gross profit (loss) by major revenue source for the three months ended December 31, 2023 and 2022:

(unaudited)

(unaudited)

We had a gross profit of $172,314 in our automobile operating leasing during the three months ended December 31, 2023, which increased by $446,207 from a gross loss of $273,893 in the same period in 2022. The increase was mainly due to the increase in the average utilization of the automobiles for operating lease from approximately 42.9% to 80.6% and the decrease in the average daily maintenance and insurance expense of the automobiles for operating lease as we used more NEVs in three months ended December 31, 2023 as compared with the same period in 2022. We had a gross profit of $129,118 in our online ride-hailing platform services during the three months ended December 31, 2023, which decreased by $178,110 from a gross profit of $307,228 in the same period in 2022. The decrease was attributable to the gross fare of rides completed through our Xixingtianxia platform decreased from approximately $4.4 million to approximately $3.6 million for the three months ended December 31, 2022 and 2023, respectively, and the decrease in average rate of commission earned from Active Drivers from approximately 16.8% to approximately 10.7% for the three months ended December 31, 2022 and 2023, respectively. The decrease of $33,279 in profit of other services was mainly due to the decrease of services fees for NEVs leasing pursuant to our adjustment on product solutions.

Consequently, the overall gross profit margin increased to 25.8% during the three months ended December 31, 2023 as compared with 10.5% during the three months ended December 31, 2022. The increase was mainly due to the operating leasing had a gross profit margin of 17.4% during the three months ended December 31, 2023 as compared with a gross loss in the same period in 2022. It was partially offset by the decrease in the gross profit margin of online ride-hailing platform services from 37.9% during the three months ended December 31, 2022 to 25.3% during the three months ended December 31, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily consist of salary and employee benefits, office rental expense, travel expenses, and other costs. Selling, general and administrative expenses decreased from $1,385,580 for the three months ended December 31, 2022 to $1,052,975 for the three months ended December 31, 2023, representing a decrease of $332,605, or approximately 24.0%. The decrease was attributable to our continuous control on costs and streamline expenses during the three months ended December 31, 2023. The decrease mainly consists of (1) a decrease of $186,482 in salary and employee benefits as the average monthly number of our employees decreased from 174 to 106; and (2) a decrease of $156,092 in offices expenditure as a result of reducing office rental and insurance charges during the three months ended December 31, 2023.

Provision for credit losses

We re-evaluated the possibility of collection of unsettled balances from customers of our automobile transactions and related services, and did not provide additional provision for credit losses against receivables from Jinkailong during the three months ended December 31, 2023. While we provided provision for credit losses of $123,154 and $3,392 against receivables from Jinkailong and a customer we serviced who purchased our automobiles from Yicheng, respectively, during the three months ended December 31, 2022.

Stock-based compensation

In October 2023, we entered into three different consulting and services agreements (the “Consulting Agreements”) with three consultants (the “Consultants”), pursuant to which we engaged the Consultant to provide certain merger and acquisition consulting service, market research and business development advisory services, and financial consulting services, respectively. We issued an aggregate of 1,500,000 shares of our common stock in November 2023 to settle the compensation for the services and the recorded $444,300 service expense during the three months ended December 31, 2023.

Other income, net

For the three months ended December 31, 2023, we had other income, net of $154,234, which primarily consist of the income of approximately $5,000 from the disposal of our right-of-use assets and our own vehicles used for operating leases; and the miscellaneous income of approximately $149,000. For the three months ended December 31, 2022, we had other income, net of $320,151, which primarily consist of the income of approximately $240,000 from the disposal of our right-of-use assets and our own vehicles used for operating leases; and miscellaneous income of approximately $80,000.

Interest Expense and Interest Expense on Finance Leases

Interest expense for the three months ended December 31, 2023 resulted from the borrowings of XXTX from a financial institution for its working capital turnover.

Interest expense on finance leases for the three months ended December 31, 2023 and 2022 was $6,791 and $626, respectively, representing the interest expense accrued under financing leases for the leased automobiles Corenel leased from a third-party company, and the leased automobiles rendered to us for sublease or sale by the online ride-hailing drivers who exited the ride-hailing business.

Change in Fair Value of Derivative Liabilities

Warrants issued in our registered direct offerings that took place in September 2019, February 2021 and May 2021, and the August 2020 underwritten public offering, and November 2021 private placement were classified as liabilities under the caption “Derivative Liabilities” in the consolidated balance sheet and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation model. The change in fair value of derivative liabilities for the three months ended December 31, 2023 was a gain of $46,188 in total as our stock price as of December 31, 2023 was lower than the price as of March 31, 2023. The following table sets forth the breakdown of the gain in fair value of derivative liabilities for the three months ended December 31, 2023 and 2022:

(unaudited)

(unaudited)

Income Tax Expense

Generally, our subsidiaries are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. All subsidiaries in China incurred cumulative losses and no tax expense was recorded for the three months ended December 31, 2023 and 2022.

Net loss

As a result of the foregoing, net loss for the three months ended December 31, 2023 was $893,928, representing a decrease of $92,341 from net loss of $986,269 for the three months ended December 31, 2022.

Results of Operations for the nine months ended December 31, 2023 Compared to the nine months ended December 31, 2022

(unaudited)

(unaudited)

Revenues

Revenue for the nine months ended December 31, 2023 decreased by $783,843, or approximately 12.4%, as compared with nine months ended December 31, 2022. The decrease was mainly due to the decrease of revenues from online ride-hailing platform services due to the decrease in orders caused by the market competition, and partly offset by the increase of operating lease revenues from automobile rentals as a result of the expansion and our continuous “efficiency - improving” strategy of this business.

As we have focused on our automobile rental and Online Ride-hailing Platform Services business, we expect revenue from our online ride-hailing platform services and automobile rental to continuously account for a majority of our revenues. We plan to provide a series of product solutions to sustain and further increase the number of our automobiles for operating leases.

The following table sets forth the breakdown of revenues by revenue source for the nine months ended December 31, 2023 and 2022:

(unaudited)

(unaudited)

46

Revenue from Automobile Transactions and Related Services

Revenue from our automobile transaction and related services mainly includes operating lease revenues from automobile rentals, financing revenues, service fees from NEVs leasing, service fees from automobile purchase services, service fees from automobile management and guarantee services, sales revenue of automobiles and other services fees, which accounted for approximately 88.2%, 1.1%, 1.0%, 0.9%, 0.4%, 0.3% and 8.1%, respectively, of the total revenue from automobile transaction and related services during the nine months ended December 31, 2023. Meanwhile, operating lease revenues from automobile rentals, financing revenues, service fees from NEVs leasing, service fees from automobile purchase services, service fees from automobile management and guarantee services, sales revenue of automobiles and other services fees, which accounted for approximately 76.7%, 0.9%, 8.7%, 0.6%, 0.9%, 6.7% and 5.5%, respectively, of the total revenue from automobile transaction and related services during the nine months ended December 31, 2022.

Operating lease revenues from automobile rentals

We generate revenues from leasing our own automobiles, sub-leasing automobiles leased from third-parties or rendered by online ride-hailing drivers with their authorization for a lease term of no more than twelve months. The increase of rental income of $498,499 during the nine months ended December 31, 2023 was mainly due to the increased average utilization of the automobiles for operating lease increased from approximately 65.0% to 77.6%, and the increased average monthly rental income of the automobiles for operating lease. We leased over 1,400 automobiles with an average monthly rental income of approximately $485 per automobile, resulting in a rental income of $3,069,458, including rental income of $29,280 from Jinkailong, for the nine months ended December 31, 2023. While we leased over 1,600 automobiles with an average monthly rental income of approximately $389 per automobile, resulting in a rental income of $2,570,959, including rental income of $323,321 from Jinkailong, for the nine months ended December 31, 2022.

Financing revenues

We started our financial leasing business in March 2019 and began to generate interest income from providing financial leasing services to ride-hailing drivers in April 2019. We also charge the customers of our automobile financing facilitation services interest on their monthly payments which cover purchase price of automobile and our services fees and facilitation fees for terms of 36 or 48 months. We recognized a total interest income of $37,135 from an average monthly number of 34 automobiles and $30,965 from an average monthly number of 46 automobiles during the nine months ended December 31, 2023 and 2022, respectively. The increase was due to the monthly payment we charged to customers for financial leasing increased during the nine months ended December 31, 2023.

Service fees from NEVs leasing

We generated revenues of $33,309 and $291,675 from leasing NEVs by charging leases service fees during the nine months ended December 31, 2023 and 2022, respectively. The amount of services fees for NEVs leasing is based on its product solutions. The decrease of $258,366 was mainly due to that we adjusted our product solutions during the nine months ended December 31, 2023, and more customers chose the solutions with no services fees for NEVs leasing.

Service fees from automobile purchase services and Service fees from automobile management and guarantee services

We generate revenues from providing a series of automobile purchase services throughout the automobile purchase transaction process, including sales-type lease. We had revenue from 19 automobiles purchase transactions during the nine months ended December 31, 2023 while we had revenue from 10 automobile purchase services during the nine months ended December 31, 2022. As a result, the related service fees generated increased $10,162 from the nine months ended December 31, 2022 to the nine months ended December 31, 2023.

The majority of our customers are online ride-hailing drivers. Some of them also entered into affiliation service agreements in prior periods with us pursuant to which we provide them post-transaction management services and guarantee services. The decrease of $16,698 was due to the decrease in the accumulated number of rendered automobiles which were subsequently rented to ride-hailing drivers whom we charge rent rather than charging management and guarantee services fee. We had management and guarantee services for over 26 and 130 automobiles during the nine months ended December 31, 2023 and 2022, respectively.

Sales of automobiles

We sold two used-automobile with income of $8,822 during the nine months ended December 31, 2023. Meanwhile, we sold 41 used-automobiles with income of $225,900 during the nine months ended December 31, 2022.

Other service fees

We generate other revenues such as monthly services commissions from Partner Platforms and other companies, and other miscellaneous service fees charged to our customers, which accounted for approximately 58.9% and 41.1% of revenues from other service fees during the nine months ended December 31, 2023, respectively. The commissions from Partner Platforms and other companies, and other miscellaneous service fees charged to our customers, which accounted for approximately 60.2% and 39.8% of revenues from other service fees during the nine months ended December 31, 2022, respectively. The increase of $104,364 was due to the increase of commissions from Partner Platforms, which was a result of the increase in operating lease revenues from automobile rentals.

Revenue from online ride-hailing platform services

We generate revenue from providing services to online ride-hailing drivers to assist them in providing transportation service to the riders though our platform and earn commissions for each completed order equal to the difference between an upfront quoted fare and the amount earned by a driver based on actual time and distance for the ride charged to the rider since October 2020. During the nine months ended December 31, 2023, approximately 4.1 million rides with gross fare of approximately $12.5 million were completed through our Xixingtianxia platform and we earned online ride-hailing platform service fees of $2,059,622, after netting off approximately $0.2 million incentives paid to Active Drivers.

During the nine months ended December 31, 2022, approximately 4.8 million rides with gross fare of approximately $15.7 million were completed through our Xixingtianxia platform and we earned online ride-hailing platform service fees of $2,970,518, after netting off approximately $0.4 million incentives paid to Active Drivers.

Cost of Revenues

Cost of revenues represents (1) the amortization, daily maintenance and insurance expense related to our Auto Operating Leasing of $2,728,151; (2) technical service charges, insurance and other expenses related to our Online Ride-Hailing Platform Services of $1,427,766; and (3) costs of our Auto Sales of $10,539. Cost of revenues decreased by $1,205,914 during the nine months ended December 31, 2023 as compared with the same period in 2022, mainly due to (1) the decrease of $514,888 in costs of automobiles under operating leases due to and the decrease in the average daily maintenance and insurance expense of the automobiles for operating lease as we used more NEVs in the nine months ended December 31, 2023; (2) the decrease of $392,822 in direct expense and technical service fees of online ride-hailing platform services due to the decrease in the number of completed orders; and (3) $298,204 in costs of automobile sold as the number of automobiles sold decreased from 41 to 2. During the nine months ended December 31, 2023 and 2022, the costs of automobiles under operating leases with amount of $473,317 and $333,756, respectively, was from one of our related parties.

Gross Profit

We had gross profit of $1,373,619 and $951,548, respectively, during the nine months ended December 31, 2023 and 2022. The increase of $422,071 was mainly due to the increase in profit in our operating lease, partially offset by the decrease in profit from online ride-hailing platform services and other services. The following table sets forth the breakdown of gross profit (loss) by major revenue source for the nine months ended December 31, 2023 and 2022:

(unaudited)

(unaudited)

We had a gross profit of $341,307 in our automobile operating leasing during the nine months ended December 31, 2023, which increased by $1,013,387 from a gross loss of $672,080 in the same period in 2022. The increase was mainly due to the increase in the average utilization of the automobiles for operating lease from approximately 65.0% to 77.6% and the decrease in the average daily maintenance and insurance expense of the automobiles for operating lease as we used more NEVs in nine months ended December 31, 2023. We had a gross profit of $631,856 in our online ride-hailing platform services during the nine months ended December 31, 2023, which decreased by $518,074 from a gross profit of $1,149,930 in the same period in 2022. The decrease was attributable to the gross fare of rides completed through our Xixingtianxia platform decreased from approximately $15.7 million to approximately $12.5 million for the nine months ended December 31, 2022 and 2023, respectively, and the decrease in average rate of commission earned from Active Drivers from approximately 17.3% to approximately 13.9% for the nine months ended December 31, 2022 and 2023, respectively. The decrease of $153,563 in profit of other services was mainly due to the decrease of services fees for NEVs leasing pursuant to our adjustment on product solutions.

Consequently, the overall gross profit margin increased to 24.8% during the nine months ended December 31, 2023 as compared with 15.0% during the nine months ended December 31, 2022. The increase was mainly due to the operating leasing had a gross profit margin of 11.1% during the nine months ended December 31, 2023 as compared with a gross loss in the same period in 2022. It was partially offset by the decrease in the gross profit margin of online ride-hailing platform services from 38.7% during the nine months ended December 31, 2022 to 30.7% during the nine months ended December 31, 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily consist of salary and employee benefits, office rental expense, travel expenses, and other costs. Selling, general and administrative expenses decreased from $4,832,658 for the nine months ended December 31, 2022 to $3,398,997 for the nine months ended December 31, 2023, representing a decrease of $1,433,661, or approximately 29.7%. The decrease was attributable to our continuous control on costs and streamline expenses during the nine months ended December 31, 2023. The decrease mainly consists of (1) a decrease of $773,239 in salary and employee benefits as the average monthly number of our employees decreased from 186 to 111; (2) a decrease of $292,419 in offices expenditure as a result of reducing office rental and insurance charges; (3) a decrease of $158,869 in professional service fees such as financial, legal and market consulting; (4) a decrease of $204,661 in amortization of intangible assets and automobiles which were rendered to us but have not been sub-leased as our ROUs have been fully amortized; and (5) a liquidated damages compensation of $86,250 for investors in November 2021 Private Placement incurred during the nine months ended December 31, 2022 while no similar expenses during the nine months ended December 31, 2023.

Provision for credit losses

We re-evaluated the possibility of collection of unsettled balances from customers of our automobile transactions and related services, and provided provision for credit losses of $680,396 against receivables from Jinkailong during the nine months ended December 31, 2023. While we provided provision for credit losses of $467,590 and $3,392, respectively, against receivables from Jinkailong and a customer we serviced who purchased our automobiles from Yicheng, during the nine months ended December 31, 2022.

Impairments of inventories

For the nine months ended December 31, 2023 and 2022, we evaluated the net realizable value of our inventories and recognized an impairment loss of $0 and $3,085, respectively, for certain automobiles for sale based on their selling price in the market.

Stock-based compensation

In October 2023, we entered into three different consulting and services agreements (the “Consulting Agreements”) with three consultants (the “Consultants”), pursuant to which we engaged the Consultant to provide certain merger and acquisition consulting service, market research and business development advisory services, and financial consulting services, respectively. We issued an aggregate of 1,500,000 shares of our common stock in November 2023 to settle the compensation for the services.

Other income, net

For the nine months ended December 31, 2023, we had other income, net of $251,037, which primarily consist of the income of approximately $32,000 from the disposal of our right-of-use assets and our own vehicles used for operating leases; and the miscellaneous income of approximately $219,000. For the nine months ended December 31, 2022, we had other income, net of $807,276, which primarily consist of the income of approximately $597,000 from the disposal of our right-of-use assets and our own vehicles used for operating leases; and the miscellaneous income of approximately $210,000.

Interest Expense and Interest Expense on Finance Leases

Interest expense for the nine months ended December 31, 2023 resulted from the borrowings of Corenel from a financial institution for its automobile commercial insurance by installment and XXTX from a financial institution for its working capital turnover.

Interest expense on finance leases for the nine months ended December 31, 2023 and 2022 was $23,107 and $8,927, respectively, representing the interest expense accrued under financing leases for the leased automobiles leased by Corenel automobiles from a third-party company, and the leased automobiles rendered to us for sublease or sale by the online ride-hailing drivers who exited the ride-hailing business.

Change in Fair Value of Derivative Liabilities

Warrants issued in our registered direct offerings that took place in June 2019, February 2021 and May 2021, and the August 2020 underwritten public offering, and November 2021 private placement were classified as liabilities under the caption “Derivative Liabilities” in the consolidated balance sheet and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation model. The change in fair value of derivative liabilities for the nine months ended December 31, 2023 was a gain of $410,027 in total as our stock price as of December 31, 2023 was lower than the price as of March 31, 2023. The following table sets forth the breakdown of the gain in fair value of derivative liabilities for the nine months ended December 31, 2023 and 2022:

(unaudited)

(unaudited)

Income Tax Expense

Generally, our subsidiaries are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. All subsidiaries in China incurred cumulative losses and no tax expense was recorded for the nine months ended December 31, 2023 and 2022.

Net loss

As a result of the foregoing, net loss for the nine months ended December 31, 2023 was $2,522,727, representing an increase of $600,574 from net loss of $1,922,153 for the nine months ended December 31, 2022.

Liquidity and Going Concern

We have financed our operations primarily through proceeds from our equity offerings, stockholder loans, commercial debt and cash flow from operations.

We had cash and cash equivalents of $1,064,822 as of December 31, 2023 as compared to $1,610,090 as of March 31, 2023. We primarily hold our excess unrestricted cash in short-term interest-bearing bank accounts at financial institutions.

Our business is capital intensive. We have considered whether there is substantial doubt about our ability to continue as a going concern due to (1) the net loss of approximately $2.5 million for the nine months ended December 31, 2023; (2) accumulated deficit of approximately $40.0 million as of December 31, 2023; (3) the working capital deficit of approximately $0.4 million as of December 31, 2023; and (4) a purchase commitment of approximately $0.8 million for 100 automobiles. As of the filing date of this Report, we have entered into a purchase contract with an automobile dealer to purchase a total of 100 automobiles in the amount of approximately $1.5 million, of which, approximately $0.7 million has been remitted as purchase prepayments. The remaining purchase commitment of approximately $0.8 million shall be remitted in installment to be completed before December 31, 2024.

We do not believe that the proceeds from our public offerings and our anticipated cash flows would be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months from the date of this Report. We have determined there is substantial doubt about our ability to continue as a going concern. If we are unable to generate significant revenue, we may be required to cease or curtail our operations. We are trying to alleviate the going concern risk through the following sources

• equity financing to support our working capital;
• other available sources of financing (including debt) from PRC banks and other financial institutions; and
• financial support and credit guarantee commitments from our related parties.

Based on the above considerations, we are of the opinion that we will probably not have sufficient funds to meet our working capital requirements and debt obligations as they become due one year from the filing date of this Report, if we are unable to obtain additional financing. However, there is no assurance that we will be successful in implementing the foregoing plans or that additional financial will be available to us on commercially reasonable terms, or at all. There are a number of factors that could potentially arise that could undermine our plans, such as (i) changes in the demand for our services, (ii) PRC government policies, (iii) economic conditions in China and worldwide, (iv) competitive pricing in the automobile transaction and related service and ride-hailing industries, (v) changes in our relationships with key business partners, (vi) that financial institutions in China may not able to provide continued financial support to our customers, and (vii) the perception of PRC-based companies in the U.S. capital markets. Our inability to secure needed financing when required could require material changes to our business plans and could have a material adverse effect on our viability and results of operations.

(unaudited)

(unaudited)

Cash Flow in Operating Activities

For the nine months ended December 31, 2023 and 2022, net cash provided by operating activities was $254,749 and $249,287, respectively. The slight increase of $5,462 in net cash provided by operating activities for the nine months ended December 31, 2023 as compared with the period of last year was primarily attributable to (1) increase of $1,231,623 in change in fair value of derivative liabilities; (2) increase of $564,859 in the gain on disposal of our right-of-use assets and our own vehicles used for operating leases in the nine months ended December 31, 2023; (3) increase of $444,300 in stock-based compensation; (4) increase of $209,414 in provision for the credit losses, and partially offset by (5) decrease of $1,098,515 in the change of prepayments, other receivables and other assets; (6) increase of $600,574 in net loss; (7) decrease of $427,230 in depreciation of property and equipment and amortization of right-of-use assets; (8) decrease of $258,432 in the change of inventories; and (9) decrease of $53,707 in the change of finance lease receivables .

Cash Flow in Investing Activities

For the nine months ended December 31, 2023, we had net cash used in investing activities of $541,204. The majority of net cash used in investing activities was for purchase of automobiles for operating lease purpose of $643,376, which was partially offset by the proceeds from sales of the used-automobiles and rendered automobiles of $102,172.

For the nine months ended December 31, 2022, we had net cash provided by investing activities of $287,146. The majority net cash provided by investing was for the proceeds from sales of the used-automobiles and rendered automobiles and offset by the expenditures on the licenses of online ride-hailing platforms in different cities in China and purchase of automobiles for operating lease purpose.

Cash Flow in Financing Activities

For the nine months ended December 31, 2023, we had net cash used in financing activities of $194,523, which primarily consisted of: (1) loans to related parties and affiliates of $587,307, (2) principal payments made for finance lease liabilities of $171,388, partially offset by (3) borrowings from a financial institution of $242,943; and (4) repayment from a related party of $321,229.

For the nine months ended December 31, 2022, we had net cash used in financing activities of $101,372, which primarily consisted of: (1) principal payments made for finance lease liabilities of $349,140, (2) repayments of current borrowings from a financial institution of $111,615, partially offset by (3) repayment from related parties and affiliates of $359,383.

Off-Balance Sheet Arrangements

As of the filing date of this Report, we have the following off-balance sheet arrangements that are likely to have a future effect on our financial condition, revenues or expenses, results of operations and liquidity:

• Purchase Commitments

On September 23, 2022, we entered into a purchase contract with an automobile dealer to purchase a total of 100 automobiles for the amount of approximately $1.5 million, of which approximately $0.7 million has been remitted as purchase prepayments, and we expect to fulfill the purchase commitment before December 31, 2024.

• Contingent Liabilities

We are exposed to credit risk as we are required by certain financial institutions to provide guarantee on the lease/loan payments (including principal and interests) of the automobile purchasers referred by us. As of December 31, 2023, we had no contingent liabilities for the automobile purchasers. Besides, the maximum contingent liabilities our former VIE, Jinkailong, would be exposed to was approximately $3.1 million, assuming all the automobile purchasers were in default, which may cause an increase in guarantee expense and cash outflow in its own financing activities. As Hunan Ruixi holds 35% of equity interest of Jinkailong and has not made any consideration towards to the investment, Hunan Ruixi will subject to the maximum amount of RMB3.5 million (approximately $493,000) of which is equivalent to 35% of liabilities in case Jinkailong is liquidated in accordance with PRC’s company registry compliance.

Inflation

We do not believe our business and operations have been materially affected by inflation.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain accounting estimates that are significant to the preparation of our financial statements. These estimates are important for an understanding of our financial condition and results of operation. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting estimates involve the most significant estimates and judgments used in the preparation of our financial statements.

In presenting the unaudited condensed consolidated financial statements in accordance with U.S. GAAP, management make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgement and available information. Accordingly, actual results could differ from those estimates. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause us to revise our estimates. we base our estimates on past experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used when accounting for items and matters including, but not limited to the critical accounting estimates as follows.

When reading our unaudited condensed consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. Our critical accounting policies and practices include the following: (i) fair values of financial instruments, including derivative liabilities; (ii) accounts receivable; (iii) property and equipment, net; (iv) intangible assets, net; (v) revenue recognition; and (vi) leases - lessee. See Note 3—Summary of Significant Accounting Policies to our consolidated financial statements in our 2023 Form 10-K for the disclosure of these accounting policies. We believe the following accounting estimates involve the most significant judgments used in the preparation of our financial statements.

(a) Derivative liabilities

A contract is designated as an asset or a liability and is carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. We then determine which options, warrants and embedded features require liability accounting and records the fair value as a derivative liability by using Black-Scholes model. The changes in the values of these instruments are shown in the accompanying consolidated statements of operations and comprehensive loss as “change in fair value of derivative liabilities”.

(b) Revenue recognition

Leases - Lessor

We recognized revenue as lessor in accordance with ASC 842. We recognized sales from sales-type leases equal to the present value of the minimum lease payments discounted using the implicit interest rate in the lease and cost of sales equal to carrying amount of the asset being leased and any initial direct costs incurred, less the present value of the unguaranteed residual. Interest income from the lease is recognized in financing revenues over the lease term. Operating leases and revenue is recognized over the term of the lease. The basis of the amount of revenue that is recognized since it isn’t straight-line basis

We exclude from the measurement of our lease revenues any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer.

We consider the economic life of most of automobile to be three to five years, since this represents the most common long-term lease term for our automobile and the automobile will be used for online ride-hailing services. We believe three to five years is representative of the period during which the automobile is expected to be economically usable, with normal service, for the purpose for which it is intended.

Our lease pricing interest rates, which are used in determining customer payments in a bundled lease arrangement, are developed based upon the local prevailing rates in the marketplace where its customer will be able to obtain an automobile loan under similar terms from the bank. We reassess our pricing interest rates quarterly based on changes in the local prevailing rates in the marketplace. As of December 31, 2023, our pricing interest rate is 6.0% per annum.

(c) Allowances for credit losses

An allowance for credit losses is recorded in the period when a loss is probable based on an assessment of specific evidence indicating collection is unlikely, historical bad debt rates, accounts aging, financial conditions of the customer and industry trends. Starting from April 1, 2023, we adopted ASU No.2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”). We used a modified retrospective approach, and the adoption does not have an impact on our unaudited condensed consolidated financial statements. We also periodically evaluate individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Our management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary.

(d) Leases - Lessee

Finance and operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the implicit rate for our leases is not readily determinable, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that we would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.

Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as we do not have reasonable certainty at lease inception that these options will be exercised. We generally consider the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. We have elected the short-term lease exception; therefore, operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. The leases generally do not provide a residual guarantee. The finance or operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term for operating lease. Meanwhile, we recognize the finance leases ROU assets and interest on an amortized cost basis. The amortization of finance ROU assets is recognized on a straight-line basis as amortization expense, while the lease liability is increased to reflect interest on the liability and decreased to reflect the lease payments made during the period. Interest expense on the lease liability is determined each period during the lease term as the amount that results in a constant periodic interest rate of the automobile loans on the remaining balance of the liability.

We review the impairment of our ROU assets consistent with the approach applied for our other long-lived assets. We review the recoverability of its long-lived assets when events or changes in circumstances occur, indicating that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. We have elected to include the carrying amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash flows.

(e) Impairment of long-lived assets

Long-lived assets, including property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, we would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of December 31, 2023, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective due to the following material weaknesses in our internal control over financial reporting:

• We did not have sufficient personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP. Specifically, our control did not operate effectively to ensure the appropriate and timely analysis of and accounting for unusual and non-routine transactions and certain financial statement accounts;
• We are lacking adequate policies and procedures in internal audit function to ensure that our policies and procedures have been carried out as planned; and
• We had deficiencies in our IT general controls, regarding to the Logical Access Security, Change Management, IT Operations and Cybersecurity of our financial system and key application system, etc.

We are improving our IT environment and daily management to ensure network and information security. In addition, we plan to address the weaknesses identified above by implementing the following measures:

(i) Continuously seeking and hiring additional accounting staff with comprehensive knowledge of U.S. GAAP and SEC reporting requirements;

(ii) Ameliorating our internal audit to assist with assessment of Sarbanes-Oxley compliance requirements and improvement of internal controls related to financial reporting; and

(iii) improving our system security environment and conducting regular backup plan and penetration testing to ensure the network and information security.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.