As filed with the U.S. Securities and Exchange Commission on December 31, 2020September 1, 2021
Registration No. 333-250044
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 16 to
FormFORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HUDSON CAPITAL MERGER SUB I INC.*
(Exact name of registrant as specified in its charter)
Delaware | 8742 | |
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) |
19 West 44th Street, Suite 1001
New York, New York 10036
(970) 528-9999
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Mr. Warren Wang
Chief Executive Officer
19 West 44th Street
New York, New York 10036
(970) 528-9999
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Loeb & Loeb Mitchell S. Nussbaum, Esq. Tahra T. Wright, Esq. (212) 407-4000 | Sichenzia Ross Ference LLP 1185 Avenue of America, 37th Floor New York, NY 10036 Benjamin Tan, Esq. (212) 930-9700 |
* Hudson Capital, Inc. (formerly known as “China Internet Nationwide Financial Services Inc.”), a BVI business company, is to be merged with and into its newly-formed Delaware wholly-owned subsidiary, Hudson Capital Merger Sub I Inc., under the BVI Business Companies Act and the Delaware General Corporation Law, and therefore be redomesticated in Delaware immediately before the issuance of the securities registered pursuant to this registration statement on Form S-4. In accordance with Rule 12g-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the shares of common stock of the registrant, Hudson Capital Merger Sub I Inc. a Delaware company (the “Registrant”) will be deemed to be registered under Section 12(b) of the Exchange Act as the successor to Hudson Capital, Inc.
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and the satisfaction or waiver of all other conditions under the Merger Agreement described herein.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [ ]☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
Large accelerated filer | Accelerated filer | ||||
Non-accelerated filer | Smaller reporting company | ||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [ ]☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) [ ]☐
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) [ ]☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | Amount to be Registered(1) | Proposed Maximum Offering Price Per Share | Proposed Maximum Aggregate Offering Price(2) | Amount of Registration Fee(3) | ||||||||||||
Common stock, par value $0.0001 per share | 15,725,374 | N/A | 32,237,016.70 | 3,517.06 | (4) |
Title of Each Class of Securities to be Registered | Amount to be Registered(1) | Proposed Maximum Offering Price Per Share | Proposed Maximum Aggregate Offering Price(2) | Amount of Registration Fee(3) | ||||||||||||
Common stock, par value $0.0001 per share | 15,330,729 | N/A | $ | 31,351,341 | (2) | $ | 3,420.40 | (4) | ||||||||
2,508,000 | (5) | $ | 3.69 | $ | 9,254,520 | (2) | $ | 1,009.67 | (4) |
(1) | |
(2) | Calculated pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities Act of 1933, as amended, solely for the purpose of calculating the registration fee based on the average of the high and low prices for ordinary shares of Hudson as reported on the Nasdaq Capital Market on November 5, 2020 ($2.045 per share), February 5, 2021 ($4.05 per share) and June 16, 2021 ($3.69 per share). In accordance with Rule 416, this Registration Statement also covers an indeterminate number of additional shares of |
(3) | Calculated pursuant to Rule 457 of the Securities Act by calculating the product of (i) the proposed maximum aggregate offering price and (ii) by 0.0001091. |
(4) | Previously paid. |
(5) | Represents shares held by an affiliate of Hudson BVI that were not previously registered. |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this proxy statement/prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 31, 2020SEPTEMBER 1, 2021
PROPOSED MERGER
YOUR VOTE IS VERY IMPORTANT
To the Shareholders of Hudson Capital, Inc.:
Hudson Capital, Inc. (formerly known as “China Internet Nationwide Financial Services Inc.”), a BVI business company, which we refer to as “Hudson,” “we,” or the “Company,” and FreightHub,Freight App, Inc. (formerly known as “FreightHub, Inc.”), a Delaware company, which we refer to as “Fr8Hub,“Fr8App,” have entered into a merger agreement, dated as of October 10, 2020, as it may be amended from time to time, which we refer to as the “Merger Agreement,” with Hudson Capital Merger Sub I Inc., a wholly-owned subsidiary of Hudson, referred to herein as “Purchaser,” and from time to time when referring to Purchaser post-closing as “the Combined Company,” Hudson Capital Merger Sub II Inc., a wholly-owned subsidiary of Purchaser, referred to herein as “Merger Sub” and ATW Master Fund II, L.P., referred to herein as “ATW” as the representative of stockholders of Fr8Hub.Fr8App. A copy of the Merger Agreement is attached as Annex A to this proxy statement/prospectus and incorporated herein by reference.
The Transactions
Subject to approval of the Nasdaq Stock Market LLC (“NASDAQ”), the following transactions will result in a publicly-traded company operating under the name “Freight Technologies, Inc.” and the proposed NASDAQ ticker symbol “FRGT” that will engage in the business of operating a cloud-based transportation logistics platform focused on U.S.-Mexico cross-border shipping, and offering a digital freight matching technology that connects shippers with a broad network of reliable carriers and drivers in Mexico, Canada and the U.S.
Under the Merger Agreement, the following will occur:
The Redomestication
Upon the terms and subject to the conditions set forth in the Merger Agreement, Hudson will be merged with and into Purchaser, its wholly-owned subsidiary, in accordance with the BVI Business Companies Act (as amended), which we refer to as “BVI Act,” and the Delaware General Corporation Law, which we refer to as the “DGCL.” As a result of this merger, which we refer to as the “Redomestication Merger,” the separate existence of Hudson shall cease, and Purchaser will continue as the surviving corporation incorporated in the State of Delaware.
Following the Redomestication Merger, Purchaser (i) shall possess all of Hudson’s and Purchaser’s assets, rights, powers and property as constituted immediately prior to the Redomestication Merger; (ii) shall continue to be subject to all of Hudson’s and Purchaser’s debts, liabilities and obligations as constituted immediately prior to the Redomestication Merger, and that shall include the assumption of all of Hudson’s obligations under the Merger Agreement; (iii) shall be subject to all actions previously taken by the Board of Directors of Hudson and Purchaser prior to the Redomestication Merger; and (iv) each issued and outstanding ordinary share of Hudson shall be deemed converted into one share of fully paid and non-assessable share of common stock, $0.0001 par value per share, of Purchaser (the “Purchaser Common Stock”). Hudson’s Amended and Restated Memorandum and Articles of Association shall cease and Purchaser’s Amended and Restated Certificate of Incorporation and By-Laws, as in effect immediately prior to the Redomestication Merger, shall continue as the Purchaser’s organizational documents after the Redomestication Merger. Purchaser’s Amended and Restated Certificate of Incorporation will authorize for issuance certain shares of common stock, as well as Series Seed Preferred Stock, and Series A Preferred Stock, consisting of (i) Series A1-A Preferred Stock, (ii) Series A1-B Preferred Stock, (iii) Series A2 Preferred Stock, (iv) Series A3 Preferred Stock, and (v) Series A4 Preferred Stock. Wewhich we refer to Purchaser Series Seed Preferred Stock and Purchaser Series A Preferred Stock, collectively as the “Purchaser Preferred Stock.” Hudson’s shareholders shall have dissenters’ rights under the BVI Act. Purchaser’s name will be changed to Freight Technologies, Inc. as part of the Redomestication Merger.
The Merger
Upon the terms and subject to the conditions of the Merger Agreement, and asAs promptly as practicable following the Redomestication Merger, Merger Sub shall be merged with and into Fr8HubFr8App in accordance with the DGCL. Upon this merger, which we refer to as the “Merger,” the separate corporate existence of Merger Sub shall cease and Fr8HubFr8App shall continue as the surviving corporation under the DGCL and as a wholly owned subsidiary of Purchaser.
At the effective time of the Merger which we refer to as the “Effective Time”, by virtue of the Merger without any further action on the part of the parties, the following shall occur:
● | each share of | |
● | each share of each series of | |
● | each warrant of | |
● | each option of |
Fr8HubFr8App stockholders who would be entitled to a fractional share after applying the Exchange Ratio will automatically be entitled to receive an additional fractional share of the corresponding class of Purchaser shares to round up to the next whole share.
After the closing of the Merger, which we refer to as the “Closing,” the Fr8HubFr8App stockholders shall be entitled to receive additional shares of Purchaser Common Stock based upon the achievement of certain revenue thresholds in the amount of at least $25 million, $50 million and $100 million commencing with each of the calendar years ending on December 31, 2021, December 31, 2022 and December 31, 2023, respectively. For each such period, if the revenue threshold is achieved, the Fr8HubFr8App stockholders shall receive (on a pro rata basis) 3.33% of the shares of Purchaser Common Stock on a fully-diluted basis as of the last day of the applicable calendar year-end (the “Contingent Merger Consideration Shares”). If, after the Closing and prior to December 31, 2023, a change of control occurs, then Purchaser shall issue on or promptly after the date of such change of control, to the stockholders an amount equal to 10% of the shares of Purchaser Common Stock on a fully diluted basis less the Contingent Merger Consideration Shares previously issued.
The Disposition
Immediately after the Redomestication Merger and prior to the Merger, Hudson will spin-off (the “Disposition”) its current financial advisory services, commercial payment advisory services, international corporate financing advisory services and intermediary bank loan advisory services, including all subsidiaries and all assets and liabilities, into a newly created entity (the “Spin-Off Entity”).
Subject to approvalEffect of the Nasdaq Stock Market LLC (“NASDAQ”), the Transactions (as defined below) will result in a publicly-traded company operating under the name “Freight Technologies, Inc.” and the proposed NASDAQ ticker symbol “FRGT” that will engage in the business of operating a cloud-based transportation logistics platform focused on U.S.-Mexico cross-border shipping, and offering a digital freight matching technology that connects shippers with a broad network of reliable carriers and drivers in Mexico, Canada and the U.S.
Bridge Financing
On October 7, 2020, Fr8Hub entered into a Note Purchase Agreement with certain existing shareholders and investors pursuant to which Fr8Hub issued Bridge Notes in the aggregate principal amount of $4,004,421 (the “Bridge Financing”). All Bridge Notes will mature on the date that is two years from the closing date of the Bridge Financing. Interest on the Bridge Notes will accrue at an annual rate of 5% over two-year term of the Bridge Notes and is payable by Fr8Hub (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the Bridge Notes by Fr8Hub or, (iv) in connection with any conversion of the Bridge Notes through the issuance of shares of the capital stock of Fr8Hub in exchange for accrued and unpaid interest owing at the time of conversion. Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the Bridge Notes will automatically convert into the Series A-3 Preferred Stock and Series A3 Warrants (defined below) issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 50% of the corresponding purchase price in the Pre-Merger Financing. As the lead investor in the Bridge Financing, ATW’s affiliate, ATW Opportunities Master Fund, L.P. (“ATW Opportunities”) was granted the right of first refusal to participate in up to 50% of the aggregate principal amount to be raised by Fr8Hub in any equity or equity-linked financing (except for the Pre-Merger Financing) occurring in the five years following the initial closing of the Bridge Financing pursuant to the Note Purchase Agreement.
Pre-Merger Financing
Concurrently with or prior to the Merger, Fr8Hub shall have raised gross proceeds totaling $12,013,262, which shall include the cancellation of the Bridge Notes, and which such cash portion of the proceeds shall be used by the Combined Company for working capital purposes following the Merger (the “Pre-Merger Financing”). As currently contemplated, ATW’s affiliate, ATW Opportunities, together with certain existing stockholders of Fr8Hub shall enter into a securities purchase agreement (the “SPA”) pursuant to which Fr8Hub shall agree to sell to these investors (the “Investors”) a newly designated series of preferred stock, the Series A3 preferred stock (the “Series A3 Preferred Stock”), in a private placement. Fr8Hub shall issue ____ shares of Series A3 Preferred Stock and, has a post-closing obligation to cause the Combined Company to, issue a Series A3 Warrant (the “Series A3 Warrant”) to purchase 7,272,561 shares of the Combined Company common stock for $8,008,841 in gross proceeds. The shares of Fr8Hub common stock underlying the Series A3 Preferred Stock are referred to as the “Conversion Shares” and underlying the Series A3 Warrant are referred to as the “Warrant Shares.” Each share of Series A3 Preferred Stock is convertible into a number of shares of Fr8Hub common stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $____.
Escrow Shares
The SPA will also provide for the issuance of up to 18,181,402 shares of Fr8Hub common stock into escrow upon the closing of the Pre-Merger Financing (the “Escrow Shares”) pursuant to the terms of an escrow agreement to be held by Transhare Corporation, as escrow agent, for the benefit of the Investors. In accordance with, and pursuant to the terms of the Merger Agreement, at the closing of the Merger, each Escrow Share shall be cancelled and automatically converted into the right to receive, without interest, the Applicable Per Share Merger Consideration of the Combined Company, which shall be referred to herein as the “Escrow Exchange Shares.”
The Escrow Exchange Shares are issuable to the Investors over time in two or more tranches upon the occurrence of the following events:
Notwithstanding the foregoing, in the event that the aggregate Subsequent Escrow Exchange Shares issuable to all of the Investors is greater than the balance of the Escrow Exchange Shares following the First Escrow Share Issuance Obligation and each prior Subsequent Escrow Share Issuance Obligation, if any, then each Investor shall receive its pro rata portion of the Escrow Exchange Shares then available for issuance. Upon full issuance of the Escrow Shares, ATW (and its affiliates) and Fr8Hub stockholders will hold approximately 43.6% and 28.6% of the Combined Company, respectively.
Right of Participation
Pursuant to the terms of the SPA, the Investors have a right, commencing on the date of the SPA until five years thereafter, to participate in any subsequent financing by Fr8Hub or the Combined Company, as applicable, of common stock or common stock equivalents for cash consideration, indebtedness or a combination of units thereof (a “Subsequent Financing”), in an amount equal to 50% of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing.
Series A3Warrants
The Series A3 Warrants are exercisable into Common Stock for a period of seven years through _____, 202_, at an exercise price equal to $____ per share, and are subject to customary adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $_____, the exercise price of the Series A3 Warrants shall be reduced to the lower price and the number of shares issuable upon exercise of the Series A3 Warrants shall be adjusted such that the aggregate exercise price of the Series A3 Warrants following such adjustment in the exercise price is equal to the aggregate exercise prior to such adjustment. The Series A3 Warrants will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of, the shares underlying the Series A3 Warrants.
The Series A3 Warrants have a “Beneficial Ownership Limitation” equal to 4.99% of the number of shares of the Combined Company Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of the Series A3 Warrants. An Investor, upon notice to the Combined Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Series A3 Warrants.
Registration Rights
It is also contemplated that Purchaser and Fr8Hub shall enter into two registration rights agreements, whereby Purchaser shall file a registration statement on Form S-1 to register for resale the Conversion Shares, along with at least 50% of the Escrow Shares and shares held by PX Global that shall be declared effective prior to the Closing Date (the “Pre-Merger Form S-1”). Purchaser and Fr8Hub have agreed to prepare and file the Pre-Merger Form S-1 no later than ten days after the completion of Fr8Hub’s financial statements for the September 30, 2020 quarterly period. The Pre-Merger Form S-1 must be declared effective by the 60th day following filing or, in the event the SEC notifies Purchaser that it will “review” the Pre-Merger Form S-1, 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.
The second registration statement on Form S-1 shall be filed by the Combined Company to register for resale the Warrant Shares, the balance of the Escrow Shares that were not registered on the Pre-Merger Form S-1, if any, and up to 21,644,056 shares of Merger Consideration that have not been registered on the Pre-Merger Form S-1, or on the registration statement for which this prospectus/proxy statement forms a part, consisting of (i) 1,150,755 shares of Combined Company Common Stock underlying the A2 Warrant, (ii) 1,252,134 shares of Combined Company Common Stock underlying the A2 Preferred Stock, (iii) 6,085,696 shares of Combined Company Common Stock underlying the A1-A Preferred Stock, (iv) 543,682 shares of Combined Company Common Stock underlying the A1-B Preferred Stock, (v) 5,339,228 shares of Combined Company Common Stock underlying the warrants issued in the Bridge Financing, and (vi) 7,272,561 shares of Combined Company Common Stock underlying the Series A3 Warrants (the “Post-Closing Form S-1”).
The Post-Closing Form S-1 must be filed no later than the 15th calendar day following the Closing Date and, with respect to any additional registration statements which may be required pursuant the Registration Rights Agreement, the earliest practical date on which the Combined Company is permitted by SEC guidance to file such additional registration statements related to the securities to be registered on the Post-Closing Form S-1. The Post-Closing Form S-1 must be declared effective by the 60th day following filing or, in the event the SEC notifies Purchaser that it will “review” the Post-Closing Form S-1, the 75th 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.
Failure to timely file or have the Pre-Closing Form S-1 or the Post-Closing Form S-1, be declared effective by the dates set forth above, including, without limitation failure to keep the Pre-Closing Form S-1 or the Post-Closing Form S-1 effective or, after the dates of effectiveness, such registration statements cease for any reason to remain continuously effective as to all securities included in such registration statements, or the Investors are otherwise not permitted to utilize the prospectus therein to resell, for more than ten (10) consecutive calendar days or more than an aggregate of fifteen (15) calendar days (which need not be consecutive calendar days) during any 12-month period, then, in addition to any other rights the Holder (as defined under the registration statement) may have under such registration statements or applicable law, on each such date and on each monthly anniversary of each such date (if not been cured by such date) until such event is cured, the Combined Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 2.0% multiplied by the aggregate purchase price paid by such Holder pursuant to the SPA. If the Combined Company fails to pay any partial liquidated damages pursuant to the applicable Registration Rights Agreement in full within seven days after the date payable, the Combined Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms thereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an event.
After giving effect to the Redomestication Merger the Merger and the DispositionMerger (collectively, the “Transactions”), the former Fr8HubFr8App shareholders will hold approximately 85.7% of the outstanding shares of Purchaser Common Stock (on a non-diluted basis), and the shareholders of Hudson will retain ownership of approximately 14.3% of the outstanding shares of Purchaser Common Stock (on a non-diluted basis). All outstanding Fr8HubFr8App stock options and warrants, if any, whether vested or unvested, that have not been exercised prior to the Effective Time will be converted into a stock option or warrant, as applicable, to purchase shares of Purchaser Common Stock or Purchaser Preferred Stock, as the case may be, proportionately adjusted based on the Applicable Per Share Merger Consideration. For a more complete description of the Common Stock Applicable Per Share Merger Consideration, see the section titled “The Merger Agreement — Applicable Per Share Merger Consideration” in this proxy statement/prospectus.
The Financings
Election2020 Bridge Financing
On October 7, 2020, Fr8App entered into a Note Purchase Agreement with certain existing shareholders and investors pursuant to which Fr8App issued bridge notes (“2020 Bridge Notes”) in the aggregate principal amount of Directors$4,004,421 (the “2020 Bridge Financing”). All 2020 Bridge Notes will mature on the date that is two years from the closing date of the 2020 Bridge Financing. Interest on the 2020 Bridge Notes will accrue at an annual rate of 5% over the two-year term of the 2020 Bridge Notes and is payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the 2020 Bridge Notes by Fr8App or, (iv) in connection with any conversion of the 2020 Bridge Notes through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the 2020 Bridge Notes will automatically convert into the Series A3 Preferred Stock and Series A3-1 Warrants issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 50% of the corresponding purchase price in the Pre-Merger Financing. As the lead investor in the 2020 Bridge Financing, ATW’s affiliate, ATW Opportunities Master Fund, L.P. (“ATW Opportunities”) was granted the right of first refusal to participate in up to 50% of the aggregate principal amount to be raised by Fr8App in any equity or equity-linked financing (except for the Pre-Merger Financing) occurring in the five years following the initial closing of the 2020 Bridge Financing pursuant to the Note Purchase Agreement.
January Bridge Financing
On January 29, 2021, Fr8App entered into a Convertible Note Purchase Agreement with ATW Opportunities (the “January Bridge Note Purchase Agreement”) pursuant to which Fr8App issued a bridge note (the “January Bridge Note”) in the principal amount of $1,000,000 (the “January Bridge Financing”). The January Bridge Note matures on October 7, 2022. Interest on the January Bridge Note will accrue at an annual rate of 5% over the maturity period and is payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the January Bridge Note by Fr8App or, (iv) in connection with any conversion of the January Bridge Note through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The January Bridge Note is convertible into Conversion Shares at the option of ATW Opportunities pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the January Bridge Note will automatically convert into the Series A3 Preferred Stock to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 20% discount to the corresponding purchase price in the Pre-Merger Financing. ATW Opportunities will also receive Series A3-2 Warrants at such time.
May Bridge Financing and July Bridge Financing
On May 24, 2021, Fr8App entered into a Convertible Note Purchase Agreement with ATW and ATW Opportunities (the “May Bridge Note Purchase Agreement”) pursuant to which Fr8App issued bridge notes in the aggregate principal amount of $1,608,842 (the “May Bridge Notes”) between May and June 2021 (the “May Bridge Financing”). Pursuant to an amendment to the May Bridge Note Purchase Agreement dated July 30, 2021 (the “July Note Purchase Amendment”), Fr8App issued to ATW Opportunities a bridge note in the principal amount of $1,000,000 (the “July Bridge Note”) on July 30, 2021 (the “July Bridge Financing”). The May Bridge Notes and the July Bridge Note will mature on October 7, 2022. Interest on the May Bridge Notes and the July Bridge Note will accrue at an annual rate of 5% over the maturity period and will be payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment by Fr8App or, (iv) in connection with any conversion through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The May Bridge Notes and the July Bridge Note will be convertible into Conversion Shares at the option of the holders pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the May Bridge Notes and the July Bridge Note will automatically convert into the Series A3 Preferred Stock to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 25% discount to the corresponding purchase price in the Pre-Merger Financing. ATW Opportunities will also receive Series A3-3 Warrants at such time.
Pre-Merger Financing
Upon completion
On February 9, 2021, Fr8App entered into a Securities Purchase Agreement (the “SPA”) with ATW Opportunities, together with certain existing stockholders of Fr8App (including ATW), pursuant to which Fr8App shall sell to the investors (the “Investors”) a newly designated series of preferred stock, the Series A3 preferred stock (the “Series A3 Preferred Stock”), in a private placement for $8,008,841 in aggregate gross proceeds, excluding principal and accrued and unpaid interest relating to 2020 Bridge Notes that convert at the closing of the Pre-Merger Financing. With respect to principal and accrued and unpaid interest relating to the January Bridge Note, the May Bridge Notes and the July Bridge Note, ATW and ATW Opportunities have the option to elect for all or a portion of such converting principal and accrued and unpaid interest to reduce amounts that ATW and ATW Opportunities are otherwise committed to fund in cash in respect of Series A3 Preferred Stock at the closing of the Pre-Merger Financing. If and to the extent ATW and/or ATW Opportunities exercise this option, the $8,008,841 in aggregate gross proceeds expected to be received by Fr8App would be correspondingly reduced on a dollar-for-dollar basis by the amount of converted principal and accrued and unpaid interest under the January Bridge Note, the May Bridge Notes and/or the July Bridge Note with respect to which such option is exercised (the “Opt Out Option”). Assuming full exercise of the Opt Out Option, ATW and/or ATW Opportunities’ commitment to fund in cash under the SPA at the closing of the Pre-Merger Financing will be reduced by $3,634,137, and the Exchange Ratio will be increased to approximately 1:1.40279. For additional details, see “Unaudited Pro Forma Condensed Combined Financial Information.”
The SPA, as amended, contemplates the conversion of the 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note into Series A3 Preferred Stock, and the subsequent cancellation of the notes. Immediately prior to the closing of the Merger, Fr8App shall issue an aggregate of 12,616,726 shares of Series A3 Preferred Stock to Investors, converting holders of 2020 Bridge Notes, the boardJanuary Bridge Note, the May Bridge Notes, and the July Bridge Note, and Chardan Capital Markets, LLC (“Chardan”). Such shares of directorsSeries A3 Preferred Stock shall initially be convertible into Fr8App common stock on a one-to-one basis, determined by calculating the quotient determined by dividing (x) the stated value of $3.00 per share, by (y) a conversion price of $3.00, which conversion price (the “Conversion Price”) is subject to adjustment as described elsewhere in this proxy statement/prospectus.
The 12,616,726 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 55,914,267 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 55,914,267 shares of Combined Company common stock. However, only 15,975,505 shares of Series A3 Preferred Stock of the Combined Company will be comprisedinitially convertible into common stock of Hon Man Yun (Hudson’s current Chief Financial Officer)the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining shares of Series A3 Preferred Stock of the Combined Company will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the volume weighted average price, or “VWAP”, of the Combined Company’s common stock during specified periods following the closing of the Merger. Pursuant to the Certificate of Designation of the Combined Company’s Series A3 Preferred Stock, for purposes of determining such price protection adjustments the VWAP will not be calculated to be less than $0.8571 per share. As a result, the maximum number of shares of Combined Company common stock issuable upon adjustment, if any, would be 55,914,267 shares.
The initial upward adjustment in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the four trading days immediately following the date of the closing of the Merger. Thereafter, such additional upward adjustments in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the ten trading days immediately preceding the Trigger Date. Following the 120th trading day immediately following the closing date of the Merger, the number of Conversion Shares issuable upon conversion of up to the 55,914,267 shares of Combined Company Series A3 Preferred Stock will no longer be subject of any further adjustment. For the purpose of calculating the number of shares of the Series A3 Preferred Stock to be issued in connection with the Pre-Merger Financing (and, accordingly, other values and amounts that relate to, or are calculated based upon, the number of shares of Series A3 Preferred Stock actually issued by Fr8App to Investors, converting note holders and Chardan), all such share numbers disclosed in this proxy statement/prospectus have been calculated based on the assumption that the Opt Out Option will not be exercised, and that therefore, there will be no reduction on the amounts that ATW or ATW Opportunities are committed to fund in cash under the SPA at the closing of the Pre-Merger Financing.
In addition, Hudson has a post-closing obligation to cause the Combined Company to issue four series of warrants (Series A3, Series A3-1, Series A3-2 and Series A3-3) to purchase an aggregate of 15,975,505 shares of the Combined Company common stock. The terms and conditions of each series depends upon which of the foregoing financings is the basis for the issuance of the warrant. For further details about the Pre-Merger Financing, please see “Agreements Related to the Merger—Pre-Merger Financing” in this proxy statement/prospectus.
Pursuant to the terms of the SPA, the Investors purchasing Series A3 Preferred Stock with a Stated Value of $4.0 million or greater have a right, commencing on the date of the SPA until five years thereafter, to participate in any subsequent financing by Fr8App or the Combined Company, as applicable, of common stock or common stock equivalents for cash consideration, indebtedness or a combination of units thereof (a “Subsequent Financing”), in an amount equal to 50% of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing.
Registration Rights
On February 9, 2021, the Purchaser and the current membersInvestors entered into a registration rights agreement, whereby Purchaser agreed to file a registration statement on Form S-1 to register for resale the Conversion Shares and shares held by Hudson’s affiliate, PX Global, that shall be declared on the Closing Date (the “Pre-Merger Form S-1”). Purchaser and Fr8App have agreed to prepare and file the Pre-Merger Form S-1 as soon as practicable after the execution of the boardSPA.
A second registration statement on Form S-1 shall be filed by the Combined Company to register for resale (A) up to 7,281,751 shares of directorsMerger Consideration that have not been registered on the Pre-Merger Form S-1, or on the registration statement for which this prospectus/proxy statement forms a part, consisting of Fr8Hub, Javier Selgas (Fr8Hub’s current Chief Executive Officer), Nicholas H. Adler, Juan Manuel Trujillo(i) 969,747 shares of Combined Company Common Stock underlying the A2 Warrant, (ii) 1,055,180 shares of Combined Company Common Stock underlying the A2 Preferred Stock, (iii) 4,798,660 shares of Combined Company Common Stock underlying the A1-A Preferred Stock, (iv) 458,164 shares of Combined Company Common Stock underlying the A1-B Preferred Stock, and Jerry L. Hutter.(B) 15,975,505 shares of Combined Company Common Stock underlying the warrants to be issued in Pre-Merger Financing (the “Post-Closing Form S-1”).
The Proposals
In connection with the proposed Transactions, Hudson will hold a meeting of shareholders which we refer to herein as the “Meeting” to vote on proposals to approve and adopt the Merger Agreement, and the Transactions contemplated therein. At the Meeting, Hudson’s shareholders will be asked to vote on:
Proposal 1: a proposal to approve and adopt the Merger Agreement (including the articles of merger and plan of merger);Agreement;
Proposal 2: a proposal to approve the Redomestication Merger;
Proposal 3: a proposal to approve and adopt the Purchaser’s amended and restated certificate of incorporation, to (i) change its name to “Freight Technologies, Inc.,” (ii) authorize 100,000,000300,150,000 shares of common stock, and 100,000,000 shares of preferred stock, and (iii) fixingfix the number of directors on the Combined Company’s board of directors to be five;four;
Proposal 4:a proposal to approve and authorize the Hudson Board of Directors and any committees it may appoint to consider, determine and effect the Disposition on terms to be determined, at its sole and absolute discretion;
Proposal 5: a proposal for the election of directors whothe following directors: Javier Selgas, Nicholas H. Adler, William Samuels, and Jerry L. Hutter, all of whom are currentlycurrent members of the board of directors of Fr8Hub;Fr8App;
Proposal 6: 5:a proposal to approve the issuance of more than 20% of the issued and outstanding Purchaser Common Stock pursuant to the terms of the Merger Agreement and the Pre-Merger Financing, and as required by and in accordance with NASDAQ Listing Rule 5635(a), (b) and (d);
Proposal 7: 6:a proposal to approve and adopt the Freight Technologies, Inc. 2021 Equity Incentive Plan (the “2021 Plan”); and
Proposal 8: 7:a proposal to adjourn the Meeting, if necessary or appropriate, to solicit additional proxies in favor of the proposals listed above.
The board of directors of Hudson has unanimously determined that the Merger Agreement and the Transactions contemplated thereby, including the Merger, are fair to, and in the best interests of, Hudson and its shareholders. The board of directors of Hudson has unanimously approved all the proposals described above, which we refer to as “Proposals” and recommends that the shareholders of Hudson vote “FOR” all these Proposals.
The board of directors of Fr8HubFr8App unanimously: (a) has determined that the Merger Agreement, the Merger, in accordance with the terms of the Merger Agreement, and the other Transactions contemplated thereby are advisable, fair to, and in the best interests of Fr8HubFr8App and its stockholders; (b) has approved and adopted the Merger Agreement and approved the Merger and the Transactions contemplated thereby; and (c) will solicit consents from its stockholders to approve and adopt the Merger Agreement.
Your vote is important. The Transactions cannot be completed unless Fr8HubFr8App stockholders approve and adopt the Merger Agreement, and Hudson shareholders approve and adopt Proposals 1 through 7 at the Meeting. The obligations of Hudson and Fr8HubFr8App to complete the Merger are also subject to the satisfaction or waiver of certain conditions.
Votes from the holders of a majority of shares of Hudson present and entitled to vote and voting at a meeting at which a quorum is present are required to approve and adopt the Proposals. Presently, the percentage of outstanding shares entitleof Hudson entitled to vote by directors, executive officers and theirits affiliates is 39.15%approximately 39%.
The post-Merger company, Freight Technologies, Inc., is not a Chinese operating company, but a Delaware company that will have operations in the United States, Mexico, Canada, Hong Kong and China. The post-Merger Chinese operations of our subsidiaries, including Hongkong Internet Financial Services Limited, will be through contractual arrangements with Sheng Ying Xin, a variable interest entity (“VIE”) based in China and this structure involves unique risks to investors. You are not investing in Sheng Ying Xin, our variable interest entities and may never hold interests in it. Neither we nor any of our subsidiaries own shares in Sheng Ying Xin. Instead, we control and receive the economic benefits of Sheng Ying Xin’s business operations through VIE Agreements dated April 26, 2016 and HKSQ VIE Agreements dated September 26, 2019. The VIE Agreements and the HKSQ VIE Agreements are designed to provide Beijing Yingxin Yijia Network Technology Co., Ltd and in turn, Hongkong Shengqi Technology Limited and Hongkong Internet Financial Services Limited, with the power, rights and obligations equivalent in all material respects to those they would possess as the equity holder of Sheng Ying Xin, including absolute control rights and the rights to the assets, property and revenue of Sheng Ying Xin. The variable interest entity structure is used to replicate foreign investment in Chinese-based companies where Chinese law prohibits direct foreign investment in the operating companies. The Chinese regulatory authorities could disallow this structure, which would likely result in a material change in our Hong Kong and/or Chinese-based operations and/or value of our ordinary shares including that it could cause the value of such securities to significantly decline or become worthless. See Risk Factors beginning on page 58.
Recently, the Chinese government announced that it would step up supervision of Chinese firms listed offshore. Under the new measures, China will improve regulation of cross-border data flows and security, crack down on illegal activity in the securities market and punish fraudulent securities issuance, market manipulation and insider trading, China will also check sources of funding for securities investment and control leverage ratios. The Cyberspace Administration of China (“CAC”) has also opened a cybersecurity probe into several U.S.-listed tech giants focusing on anti-monopoly, financial technology regulation and more recently, with the passage of the Data Security Law, how companies collect, store, process and transfer data. If we are subject to such a probe or if we are required to comply with stepped-up supervisory requirements, valuable time from our management and money may be expended in complying and/or responding to the probe and requirements, thus diverting valuable resources and attention away from our operations. This may, in turn, negatively impact our operations.
Further, given the Chinese government’s significant oversight and discretion over the conduct of our business operations in Hong Kong and China, the Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations in China and consequently, the value of our shares. The Chinese government could also significantly limit or completely hinder our use of variable interest entities, ability to list on an U.S. or other foreign exchange, and to offer future securities to investors and cause the value of such securities to significantly decline or be worthless.
More information about Hudson, Purchaser, Merger Sub and Fr8HubFr8App and the proposed Transactions are contained in this proxy statement/prospectus. Hudson and Fr8HubFr8App urge you to read this proxy statement/prospectus carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 39.58.
Hudson’s ordinary shares are listed on NASDAQ under the symbol “HUSN” and the closing price of Hudson’s ordinary shares on November 10, 2020August 30, 2021 was $2.33$2.60 per share. Upon completion of the Redomestication Merger and as a condition to the Merger, the shares of Purchaser Common Stock will be listed on NASDAQ, subject to official notice of issuance. Fr8HubFr8App is a privately-held company and there is no public market for its securities.
Hudson and Fr8HubFr8App are excited about the opportunities the Merger brings to both Hudson and Fr8HubFr8App stockholders, and thank you for your consideration and continued support.
Warren Wang | ||
Chief Executive Officer | ||
Hudson Capital, Inc. |
Neither the Securities and Exchange Commission, which we refer to as the “SEC,” nor any state securities commission has approved or disapproved of the redomestication, the merger or the securities to be issued under this proxy statement/prospectus or has passed upon the adequacy or accuracy of the disclosures in this proxy statement/prospectus. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated [●], 2021, and is first being mailed to Hudson shareholders on or about [●], 2021.
6 |
HUDSON CAPITAL, INC.
19 West 44th Street, Suite 1001
New York, New York 10036
(970) 528-9999
NOTICE OF
MEETING OF SHAREHOLDERS
To Be Held On __________,[●], 2021
Dear Stockholders of Hudson Capital, Inc.:
We are pleased to invite you to attend a meeting of shareholders (the “Meeting” of Hudson Capital, Inc., a BVI business company, which we refer to as “Hudson,” which will be held at [●], on [●], 2021 at [●] a.m., local time, for the following purposes:
1. | To consider and vote upon a proposal to approve and adopt the Merger Agreement, |
2. | To consider and vote upon a proposal to approve the redomestication of Hudson from the BVI to Delaware by means of a merger with and into a wholly-owned Delaware subsidiary, which will result in Hudson being governed by the laws of the State of Delaware, which we refer to as the “Redomestication Merger” (the “Redomestication Merger Proposal”); |
3. | To consider and vote upon the proposal to approve the amended and restated certificate of incorporation of Purchaser that will be in effect after completion of the Redomestication Merger (the “Amended and Restated COI Proposal”); |
4. | To consider and vote upon a proposal to |
To consider and vote upon a proposal to approve the issuance of more than 20% of the issued and outstanding shares of Purchaser Common Stock pursuant to the terms of the Merger Agreement and in connection with the Pre-Merger Financing, as required by and in accordance with NASDAQ Listing Rules 5635(a), (b) and (d) (the “NASDAQ Proposal”); |
To consider and vote upon a proposal to approve the Freight Technologies, Inc. 2021 Equity Incentive Plan, and to authorize for issuance of 5,000,000 shares of Purchaser Common Stock thereunder (the “Equity Incentive Plan Proposal”); and | |
To consider and vote on any proposal to authorize the Hudson Board of Directors, in its discretion, to adjourn the Meeting to a later date or dates, if necessary or appropriate, to solicit additional proxies in favor of the proposals listed above at the time of the Meeting (the “Adjournment Proposal”). |
The foregoing items of business are more fully described in the proxy statement/prospectus that accompanies this notice. We do not expect to transact any other business at the Meeting. The Hudson board of directors has fixed the close of business on [________][●], 2021 as the record date for the determination of shareholders entitled to notice of and to vote at this Meeting and at any adjournment or postponement thereof. Accordingly, only Hudson shareholders of record at the close of business on that date are entitled to notice of, and to vote at, the Meeting. At the close of business on the record date, Hudson had [__________][●] ordinary shares issued and outstanding and entitled to vote.
The Hudson board of directors recommends that Hudson shareholders vote “FOR” each of the Proposals to be voted on at the Meeting. Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
We cordially invite you to attend the meeting. However, to ensure your representation at the Meeting, please complete and promptly mail your proxy card in the return envelope enclosed, or authorize the individuals named on your proxy card to vote your shares by calling the toll-free telephone number or by using the Internet as described in the instructions included with your proxy card or voting instruction card. This will not prevent you from voting in person, but will help to secure a quorum and avoid added solicitation costs. If your shares are held in “street name” by your broker or other nominee, only that holder can vote your shares and the vote cannot be cast unless you provide instructions to your broker. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Your proxy may be revoked at any time before it is voted. Please review the proxy statement/prospectus accompanying this notice for more complete information regarding the matters to be voted on at the meeting.
FOR THE MEETING OF HUDSON CAPITAL, INC. TO BE HELD [_________][●], 2021. THIS PROXY STATEMENT AND THE ACCOMPANYING FORM OF PROXY CARD ARE AVAILABLE FROM WARREN WANG AT 19 W 44TH STREET, SUITE 1001, NEW YORK, NEW YORK 10036. Under Securities and Exchange Commission rules, we are providing access to our proxy materials both by sending you this full set of proxy materials, and by notifying you of the availability of our proxy materials on the Internet.
By Order of the Board of Directors, | |
/s/ Warren Wang | |
Warren Wang | |
Chairman of the Board | |
[●], 2021 |
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE ASK YOU TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED OR TO VOTE BY TELEPHONE OR ON THE INTERNET USING THE INSTRUCTIONS ON THE PROXY CARD.
WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus incorporates important business and financial information about Hudson that is filed with the SEC but not included or delivered herewith. Such information can be obtained from Hudson at no charge to Hudson shareholders upon written or oral request.
The registration statement to which this proxy statement/prospectus relates and the exhibits thereto, the information incorporated by reference herein and the other information filed by Hudson with the SEC are available. The SEC maintains a website that contains the documents that Hudson files electronically with the SEC. The address of the SEC’s website is http://www.sec.gov. In addition, Hudson will provide to each person to whom a proxy statement/prospectus is delivered, without charge upon written or oral request, a copy of any or all of the documents that Hudson files with the SEC. Requests should be directed to:
Hudson Capital, Inc.
19 West 44th Street, Suite 1001
New York, New York 10036
(970) 528-9999
Attention: Warren Wang, Chief Executive Officer
To obtain timely delivery of such information, you must request the information no later than five business days before the Meeting. Accordingly, if you would like to request any information, please do so no later than [________][●], 2021.2021 (five days prior to the Meeting).
ABOUT THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus which forms part of a registration statement on Form S-4 filed with the SEC by Purchaser (File No. 333-250044), constitutes a prospectus of Purchaser under Section 5 of the Securities Act of 1933, as amended, or the Securities Act, with respect to the shares of common stock, par value $0.0001, of Hudson Capital Merger Sub I, Inc., to be issued pursuant to the Merger Agreement. This document also constitutes a notice of meeting and a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to the Meeting, at which Hudson shareholders will be asked to consider and vote on, among other matters, a proposal to approve the issuance of shares of Purchaser Common Stock pursuant to the Merger Agreement.
No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this proxy statement/prospectus. This proxy statement/prospectus is dated [_________][●], 2021. The information contained in this proxy statement/prospectus is accurate only as of that date or, in the case of information in a document incorporated by reference, as of the date of such document, unless the information specifically indicates that another date applies.
This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.
The information concerning Hudson contained in this proxy statement/prospectus or incorporated by reference has been provided by Hudson and the information concerning Fr8HubFr8App contained in this proxy statement/prospectus has been provided by Fr8Hub.Fr8App.
TABLE OF CONTENTS
10 |
QUESTIONS AND ANSWERS ABOUT THE REDOMESTICATION MERGER, THE MERGER AND OTHER PROPOSALS
The following are brief answers to some questions that you may have regarding the Redomestication Merger, the Merger, the other Transactions and the Meeting. The questions and answers in this section may not address all questions that might be important to you as a shareholder. For more detailed information, and for a description of the legal terms governing the Transactions, Hudson urges you to read carefully and in its entirety this proxy statement/prospectus, including the Annexes hereto, as well as the registration statement to which this proxy statement/prospectus relates, including the exhibits to the registration statement. For more information, please see the section titled “Where You Can Find More Information.” Throughout this proxy statement/prospectus, references to Fr8App’s “Series A-1 Preferred Stock” and “Series A1 Preferred Stock” are used interchangeably; “Series A2 Preferred Stock” and “Series A-2 Preferred Stock” are used interchangeably; “Series A3 Preferred Stock” and “Series A-3 Preferred Stock” are used interchangeably; and “Series A-4 Preferred Stock” and “Series A4 Preferred Stock” are used interchangeably.
The following section provides answers to frequently asked questions about the Transactions contemplated by the Merger Agreement. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.
Q: What is the redomestication and who votes on it?
A: For the reasons set forth below in detail under the section titled “The Redomestication Merger,” beginning on page 101,113, the Hudson board of directors believes that it is in the best interests of Hudson and its shareholders to change the state of incorporation of Hudson from BVI to Delaware, which we refer to in this proxy statement/prospectus as the “redomestication.” Shareholders are urged to read carefully that section of this proxy statement/prospectus, including the related annexes attached hereto, before voting. Throughout this proxy statement/prospectus, we refer to Hudson, the existing BVI company, as “Hudson” and the term “Purchaser” refers to Hudson, but as redomesticated in Delaware.
As discussed below, the principal reasons for the redomestication are the greater flexibility of Delaware corporate law and the substantial body of case law interpreting that law. Hudson believes that its shareholders will benefit from the well-established principles of corporate governance that Delaware law affords. Also, Fr8HubFr8App requires the redomestication as a condition to the closing of the Merger. The amended and restated certificate of incorporation and the amended and restated bylaws of Purchaser are attached hereto as Annexes B and C, respectively.
Please read the section “Proposal 2 – The Redomestication Merger Proposal – Differences in Shareholder Rights,” beginning on page 136145 and the section “Amended and Restated Certificate of Incorporation of Purchaser Proposal” beginning on page 143151 for a description of the material differences between Hudson’s memorandum and articles of association and Purchaser’s amended and restated certificate of incorporation and amended and restated bylaws.
To effect the redomestication, Hudson will merge into, and its business will be continued by,continue under the Purchaser which will be renamed “Freight Technologies, Inc.”
If the Proposals are approved, it is anticipated that the redomestication will become effective as soon as practicable following the Meeting and immediately prior to the effectiveness of the Merger. Shareholders of Hudson who vote against the Redomestication Merger Proposal and duly and validly exercise their right of dissent in accordance with the provisions of Section 179 of the BVI Act will have dissenters’ rights.
Q: How will holders of Hudson ordinary shares be impacted by the Redomestication Merger?
A: Pursuant to the Merger Agreement, each ordinary share of Hudson will be converted into one share of Purchaser Common Stock as part of the Redomestication Merger.
Q: What are the material U.S. federal income tax consequences of the Redomestication Merger to Hudson shareholders?
A: The Redomestication Merger is expected to be a non-taxable event to Hudson shareholders. However, certain provisions of the tax law relating to exchanges of stock in foreign corporations may result in holders being required to include in income at the time of the Redomestication Merger some or all of their otherwise non-taxable gain, depending in part on the status of the holder and on the cumulative earnings and profits of Hudson. For further information see the discussion below in the section titled, “Material U.S. Federal Income Tax Consequences of the Redomestication the Disposition, and the Merger.” If the exchange is non-taxable then Hudson shareholders will carry over their adjusted basis in their Hudson shares as their basis in their Purchaser Common Stock and their holding period in their Purchaser Common Stock will include their holding period in their Hudson ordinary shares.
Q: What is the Merger?
A: Immediately after the Redomestication Merger, Merger Sub will merge with and into Fr8HubFr8App with Fr8HubFr8App as the surviving entity in the Merger and as aan indirect wholly-owned subsidiary of the Purchaser.
Q:Q. What is the Disposition?rationale for the Merger?
A: AsA. Hudson’s Board of Directors considered, among a conditionnumber of factors, the fact the Combined Company will be led by an experienced senior management from Fr8App and that existing Hudson shareholders will have an opportunity to participate in the closingpotential growth of the Combined Company. Fr8App’s board of directors considered, among a number of factors, the potential increased access to sources of capital at a lower cost of capital and a broader range of investors to support its business than it could otherwise obtain if it continued to operate as a stand-alone, privately-held company. For a more complete discussion of Hudson and Fr8App’s reasons for the Merger, Hudson will spin off its current operations, including all subsidiaries please see the sections titled “The Merger—Hudson’s Reasons for the Merger” and all assets and liabilities, into a newly created Spin-Off Entity.“The Merger—Fr8App’sReasons for the Merger.”
Q: What is the Pre-Merger Financing?
A: Concurrently with or prior to the Merger, Fr8HubFr8App shall have raised gross proceeds totaling $12,013,262,$15,622,104, which shall include the cancellation of the 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note, and which such cash portion of the proceeds shall be used by the Combined Company for working capital purposes following the Merger.We refer to this financing herein as “Pre-Merger Financing.” (see the section titled “Agreements Related to the Merger—Pre-Merger Financing” in this proxy statement/prospectus).
Q: What will happen to Hudson if, for any reason, the Transactions are not consummated?
A: If, for any reason, the Transactions do not close, the Hudson board of directors may elect to, among other things, attempt to complete another strategic transaction like the Merger, attempt to sell or otherwise dispose of the various assets of Hudson or continue to operate the business of Hudson. Hudson may be unable to identify and complete an alternative strategic transaction.
Q: Why are the companies proposing to merge?
A: Hudson and Fr8HubFr8App believe that the Transactions, together with the Disposition, will result in a publicly-traded company operating under the Freight Technologies Inc. name that will focus on operating a cloud-based mobile platform that offers digital freight matching technology connecting shippers with a broad network of carriers and drivers in Mexico, Canada and the U.S. At this time, the parties have not made any decisions as to the future of Hudson’s business after the Merger. For a more complete discussion of Hudson and Fr8Hub’sFr8App’s reasons for the merger, please see the sections titled “The Merger—Hudson’s Reasons for the Merger” and “The Merger—Fr8Hub’s Fr8App’sReasons for the Merger.”
Q: Why am I receiving this proxy statement/prospectus?
A: You are receiving this proxy statement/prospectus because you are a shareholder of Hudson as of the record date, and you are entitled to vote at the Meeting to approve the Proposals. This document serves as:
● | a proxy statement of Hudson used to solicit proxies for its Meeting; and | |
● | a prospectus of Purchaser used to issue shares of Purchaser Common Stock in exchange for (i) Hudson’s outstanding ordinary shares, (ii) shares of |
Q: What is required to consummate the Merger?
A: To consummate the Merger, among other things, Hudson shareholders must approve the Proposals. On November 6, 2020, a Hudson shareholder owningPX Global, which owns approximately 40% of the voting power in Hudson entered into a Support Agreement with Fr8HubFr8App and Hudson pursuant to which the shareholder agreed to vote in favor of the Transactions contemplated by the Merger Agreement at the Meeting. Fr8HubFr8App shareholders must adopt the Merger Agreement and approve the Merger and the Transactions contemplated by the Merger Agreement. Fr8HubFr8App must also consummate the Pre-Merger Financing prior to and as a condition to the consummation of the Merger.
The vote required for approval of the Proposals is as follows:
Proposal Number | Proposal Description | Vote Required for Approval | Effect of Abstentions | Effect of Broker Non-Votes | ||||
1 | Merger Proposal | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present | None | |||||
2. | Redomestication Merger Proposal | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present | None | |||||
3 | Amended and Restated COI Proposal | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present | None |
Proposal Number | Proposal Description | Vote Required for Approval | Effect of Abstentions | Effect of Broker Non-Votes | ||||
4. | ||||||||
Directors Proposal | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present | None | ||||||
NASDAQ Proposal | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present | None | ||||||
Equity Plan Proposal | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present | None | ||||||
Adjournment | FOR votes from the holders of a majority of shares present and entitled to vote and voting at a meeting at which a quorum is present |
For a more complete description of the closing conditions under the Merger Agreement, please see the section titled “The Merger Agreement—Conditions to the Closing of the Merger.”
Q: What will Fr8HubFr8App stockholders receive in the Merger?
A: Pursuant to the Merger Agreement, each share of Fr8HubFr8App common stock issued and outstanding immediately prior to the Effective Time shall be canceled and automatically converted into the right to receive, withoutincluding any interest 1.5025612through June 30, 2021, an estimated 1.26622 shares of Purchaser Common StockStock.
Upon the Closing and based on the number of Fr8HubFr8App shares, warrants and options outstanding December 29, 2020,as of the date of this prospectus, the stockholders of Fr8HubFr8App shall receive, in the aggregate, the following (i) 1,930,769850,658 shares of Purchaser Common Stock, (ii) 18,29415,416 shares of Purchaser Series Seed Preferred Stock, (iii) 11,657,3639,823,722 shares of Purchaser Series A1-A Preferred Stock, (iv) 4,473,9423,770,215 shares of Purchaser Series A1-B Preferred Stock, (v) 2,143,9701,806,734 shares of Purchaser Series A-2A2 Preferred Stock, (vi) the Purchaser Warrants to purchase 13,59811,459 shares of Purchaser Common Stock, 10,8559,147 shares of Purchaser Series Seed Preferred Stock and 1,150,755969,747 shares of Purchaser Series A2 Preferred Stock, (vii) 791,183 shares of Series A4 Preferred Stock, and (vii)(viii) options to purchase 1,009,4544,413,088 shares of Purchaser Common Stock (the “Merger Consideration”). If after the Closing, Purchaser achieves certain pre-determined revenue thresholds for any of the calendar years ending December 31, 2021, December 31, 2022, or December 31, 2023, or if a change of control occurs prior to December 31, 2023, Fr8HubFr8App stockholders shall be entitled to receive Contingent Merger Consideration Shares.
At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, Merger Sub, or Fr8Hub,Fr8App, the FreightHub, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), and any certificate, option agreement or instrument issued to evidence any options granted under the 2018 Plan (“Option Documents”) shall be terminated and all Fr8HubFr8App options not exercised prior to the Effective Time shall be cancelled and automatically converted into the right to receive an equivalent number of options, as adjusted in accordance with the Applicable Per Share Merger Consideration to take into effect the Merger, to purchase shares of Purchaser Common Stock.
Following the Transactions, the stockholders of Fr8HubFr8App will own approximately 85.7% of Purchaser upon the Closing of the Merger, and former shareholders of Hudson will own the remaining 14.3% (on a non-diluted basis, not including the securities to be issued in connection with the Pre-Merger Financing).
For a more complete description of what the Fr8HubFr8App stockholders will receive in the Merger, please see the section titled “The Merger Agreement—Merger Consideration.”
Q: What will Hudson shareholders receive in the Merger?
A: Hudson shareholders will not receive any new securities in the Merger and will instead retain ownership of their Purchaser Common Stock after redomestication, but their percentage ownership will decrease due to the number of shares being issued in the Merger.
Q: Who will be the directors of the Combined Company following the Merger?
A: Upon the Closing of the Merger, the Combined Company’s board of directors is expected to be composed of fivefour directors, fourall of whichwhom will be current directors of Fr8Hub or designeesFr8App; and Hudson shall have the right to designate an observer on the Combined Company’s board of Fr8Hub, and one of which will be designated by Purchaser.directors.
The table below provides the names and principal affiliation of the individuals currently identified to serve as directors of the Combined Company following the consummation of the Merger.
Name | Current Principal Affiliation | |
|
| |
Javier Selgas | Chief Executive Officer and Director of | |
Nicholas H. Adler | ||
Chairman of the Board of | ||
William Samuels | Director of | |
Jerry L. Hutter | Director of |
Q: Who will be the executive officers of Combined Company immediately following the Merger?
A: Upon the closing of the Merger, the executive management team of the Combined Company is expected to be composed of the following persons:
Name | Combined Company Position(s) | Current Position(s) | ||
Javier Selgas | Chief Executive Officer | Chief Executive Officer of | ||
Mike Flinker | President | President of | ||
Luisa Irene Lopez Reyes | Chief Operating Officer | Chief Operating Officer of Fr8App | ||
Paul Freudenthaler | Chief Financial Officer and Secretary | Chief Financial Officer and Secretary of |
Q: What are the material U.S. federal income tax consequences of the Merger to U.S. Holders of Fr8HubFr8App securities?
A: As discussed more fully under “Material“Material U.S. Federal Income Tax Consequences of the Redomestication Merger the Disposition and the Merger—Tax Consequences to U.S. Holders—Tax Consequences of the Merger,” it is intended that the Merger qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, U.S. Holders of Fr8HubFr8App common stock, Fr8HubFr8App preferred stock, Fr8HubFr8App warrants, and Fr8HubFr8App options should not recognize any gain or loss as a result of the Merger. U.S. Holders of Fr8HubFr8App securities should consult their own tax advisors to determine the tax consequences to them (including the application and effect of any state, local or other income and other tax laws) of the Merger.
Q: What are the material U.S. federal income tax consequences of the Disposition to holders of Purchaser Common Stock?
A: The Disposition is expected to be treated as a taxable dividend to holders of Purchaser Common Stock in an amount equal to the fair market value of the Spin-Off Entity common stock received, to the extent of such holder’s ratable share of Hudson’s current or accumulated earnings and profits. To the extent the Disposition exceeds such earnings and profits, the Disposition would constitute a return of capital and would first reduce the holder’s basis in its Purchaser Common Stock, but not below zero, and then will be treated as a gain from the sale of the Purchaser Common stock. Generally a U.S. Holder’s tax basis in the shares of the Spin-Off Entity common stock received in the Disposition would equal their fair market value as of the date of the Disposition, and such holder’s holding period with respect to such shares would begin on the day after the Disposition. For further information, see the section entitled “Material U.S. Federal Income Tax Consequences of the Redomestication Merger, the Disposition, and the Merger.”
Q: As a Hudson shareholder, how does the Hudson board of directors recommend that I vote?
A: After careful consideration, the Hudson board of directors unanimously recommends that the Hudson shareholders vote:
● | “FOR” the Merger Proposal; | |
● | “FOR” the Redomestication Proposal; | |
● | “FOR” the Amended and Restated COI Proposal; | |
● | “FOR” the | |
● | “FOR” the NASDAQ Proposal; | |
● | “FOR” the Equity Plan Proposal; and | |
● | “FOR” the Adjournment Proposal. |
If on the date of the Meeting, or a date preceding the date on which the Meeting is scheduled, Hudson reasonably believes that (i) it will not receive proxies sufficient to obtain the required vote to approve all the foregoing proposals, (the “Proposals”), whether or not a quorum would be present or (ii) it will not have sufficient ordinary shares of Hudson represented (whether in person or by proxy) to constitute a quorum necessary to conduct the business of the Meeting, Hudson may postpone or adjourn, or make one or more successive postponements or adjournments of, the Meeting as long as the date of the Meeting is not postponed or adjourned more than an aggregate of 30 calendar days in connection with any postponements or adjournments.
On November 6, 2020, a Hudson shareholder owning approximately 40% of the voting power in HudsonPX Global entered into a Support Agreement with Fr8HubFr8App and Hudson pursuant to which the shareholder agreed to vote in favor of the Transactions contemplated by the Merger Agreement at the Meeting.
Q: What risks should I consider in deciding whether to vote to approve the Merger Agreement and the Transactions contemplated thereby?
A: You should carefully review this proxy statement/prospectus, including the section titled “Risk Factors,” which sets forth certain risks and uncertainties related to the merger, risks and uncertainties to which the Combined Company’s business will be subject, and risks and uncertainties to which Hudson, as an independent company, is subject.
Q: When do you expect the Merger to be consummated?
A: The Merger is anticipated to close as soon as possible after the Meeting, is held on [ ], 2021, but Hudson cannot predict the exact timing. For more information, please see the section titled “The Merger Agreement—Conditions to the Closing of the Merger.”
Q: What do I need to do now?
A: Hudson and Fr8HubFr8App urge you to read this proxy statement/prospectus carefully, including its annexes, and to consider how the Merger affects you.
As a Hudson shareholder, you may provide your proxy instructions in one of two different ways. First, you can mail your signed proxy card in the enclosed return envelope. Second, you may also provide your proxy instructions via the Internet by following the instructions on your proxy card or voting instruction form. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your ordinary shares can be voted at the Meeting of Hudson shareholders.
Q: What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?
A: If you are a stockholder of record and you return a signed proxy card without marking any selections, your shares will be voted “FOR” each of the Proposals.
If you are a beneficial owner of ordinary shares of Hudson, and do not instruct your broker, bank, or other agent how to vote your shares, the question of whether your broker or nominee will still be able to vote your shares depends on whether the particular proposal is deemed to be a “routine” matter and how your broker or nominee exercises any discretion they may have in the voting of the shares that you beneficially own. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. “Non-routine” matters are matters that may substantially affect the rights or privileges of a stockholder, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation (including any advisory stockholder votes on executive compensation and on the frequency of stockholder votes on executive compensation), and certain corporate governance proposals, even if management-supported.
For any Proposal that is considered a “routine” matter, your broker or nominee may vote your shares in its discretion either for or against the Proposal even in the absence of your instruction. For any Proposal that is considered a “non-routine” matter for which you do not give your broker instructions, the Hudson shares will be treated as broker non-votes. Broker non-votes occur when a beneficial owner of shares held in street name does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.” Broker non-votes will not be considered to be shares “entitled to vote” at the meeting and will not be counted as having been voted on the applicable proposal.
Hudson believes that all of the Proposals will be considered “non-routine” matters. Therefore, if you are a beneficial owner and want to ensure that shares you beneficially own are voted in favor or against any or all of the Proposals, the only way you can do so is to give your broker or nominee specific instructions as to how the shares are to be voted.
Q: May I vote in person at the Meeting?
A: If your Hudson ordinary shares are registered directly in your name with the Hudson transfer agent, you are considered to be the shareholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Hudson. If you are a Hudson shareholder of record, you may attend the Meeting and vote your shares in person. Even if you plan to attend the Meeting in person, Hudson requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Meeting if you are unable to attend. If your Hudson ordinary shares are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the Meeting. Because a beneficial owner is not the shareholder of record, you may not vote these shares in person at the Meeting unless you obtain a proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the Meeting.
Q: When and where is the Meeting being held?
A: Hudson’s Meeting of shareholders will be held [ ], 2021.on [●], 2021 at [●].
Q: If my Hudson shares are held in “street name” by my broker, will my broker vote my shares for me?
A: Unless your broker has discretionary authority to vote on certain “routine” matters, your broker will not be able to vote your Hudson ordinary shares on matters requiring discretionary authority without instructions from you.
Hudson believes that brokers will not have discretionary authority to vote for any of the Proposals, as Hudson believes such matters to be “non-routine” under the applicable rules of NASDAQ. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.
Q: May I change my vote after I have submitted a proxy or provided proxy instructions?
A: Hudson shareholders of record may change their vote at any time before their proxy is voted at the Meeting in one of three ways. First, a Hudson shareholder of record can send a written notice to Warren Wang of Hudson, at 19 W 44th Street, Suite 1001, New York, NY 10036, stating that it would like to revoke its proxy. Second, a Hudson shareholder of record can submit new proxy instructions either on a new proxy card or via the Internet. Third, a Hudson shareholder of record can attend the Meeting and vote in person. Attendance alone will not revoke a proxy. If a Hudson shareholder of record or a shareholder who owns Hudson ordinary shares in “street name” has instructed a broker to vote its Hudson ordinary shares, the shareholder must follow directions received from its broker to change those instructions.
Q: Who is paying for this proxy solicitation?
A: Hudson will pay the costs of printing and filing this proxy statement/prospectus and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Hudson ordinary shares for the forwarding of solicitation materials to the beneficial owners of ordinary shares of Hudson. Hudson will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.
Q: Who can help answer my questions?
A: If you are a Hudson shareholder and would like additional copies, without charge, of this proxy statement/prospectus or if you have questions about the Transactions, including the procedures for voting your shares, you should contact:
Hudson Capital, Inc.
19 West 44th Street, Suite 1001
New York, New York 10036
(970) 528-9999
Attention: Warren Wang, Chief Executive Officer
19 |
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the Transactions and the Proposals being considered at the Meeting, you should read this entire proxy statement/prospectus carefully, including the Merger Agreement and the other annexes to which you are referred to herein. For more information, please see the section titled “Where You Can Find More Information.”
In this proxy statement/prospectus, except where the context otherwise requires and for purposes of this proxy statement/prospectus 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 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 newly-incorporated U.S. subsidiary, Hudson Capital USA Inc. | |
● | “2020 Bridge Financing” refers to the sale of Fr8App’s 2020 Bridge Notes in connection with the Note Purchase Agreement, raising gross proceeds of $4,004,421. | |
● | “2020 Bridge Notes” refers to the Convertible Promissory Notes in the aggregate principal amount of $4,004,421 issued by Fr8App in connection with the Note Purchase Agreement. | |
● | “Applicable Per Share Merger Consideration” refers to the amount per share to be received by | |
● | “ATW” refers to ATW Master Fund II, L.P. | |
● | “ATW Partners” refers to ATW Partners, LLC. | |
● | “ATW Opportunities” refers to ATW Opportunities Master Fund, L.P. | |
● | “ATW Opportunities Manager” refers to ATW Partners Opportunities Management, LLC which is the investment manager of ATW Opportunities. | |
● | “Amended and Restated Certificate of Incorporation” refers to the proposed certificate of incorporation of the Combined Company after the Merger. | |
● | “ | |
● | “Exchange Ratio” refers to an estimated 1.26622. | |
● | “Initial Trigger Date “ refers to the fourth Trading Day following the date of the first issuance of any shares of the Series A3 Preferred Stock of the Combined Company, regardless of the number of transfers of any particular shares of Series A3 Preferred Stock thereafter, and regardless of the number of certificates which may be issued to evidence such Series A3 Preferred Stock. | |
● | “Initial Trigger Date Conversion Price” refers to the average of the three VWAPs (as defined below) immediately prior to the Initial Trigger Date, which is less than the Conversion Price. | |
● | “January Bridge | |
● | “January Bridge Note” refers to the Convertible Promissory | |
● | “January Note Purchase Agreement” refers to the Convertible Note Purchase Agreement, dated January 26, 2021 pursuant to which the January Bridge Note was issued to ATW Opportunities. | |
● | “BVI Act” refers to BVI Business Companies Act (as amended). | |
● | “Chardan” refers to Chardan Capital Markets, LLC. | |
● | “China” or “PRC” refers to the People’s Republic of China, and solely for the purpose of this proxy statement/prospectus, excluding Taiwan, Hong Kong and Macau. | |
● | “Closing Date” refers to the date on which the closing of the Merger actually occurs. | |
● | “Combined Company” refers to Freight Technologies, Inc. | |
● | “DGCL” refers to Delaware General Corporation Law. | |
● | “Effective Time” refers to the time at which the Merger becomes effective. | |
● | “July Bridge Financing” refers to the sale of Fr8App’s July Bridge Note in connection with the July Note Purchase Amendment, raising gross proceeds of $1,000,000. | |
● | “July Bridge Note” refers to the Convertible Promissory Note in the aggregate principal amount of $1,000,000 issued by Fr8App in connection with the July Note Purchase Amendment. | |
● | “July Note Purchase Amendment” refers to the amendment to the May Note Purchase Agreement, dated July 30, 2021 pursuant to which the July Bridge Note was issued to ATW Opportunities on July 30, 2021. | |
● | “Loeb & Loeb” refers to Loeb & Loeb LLP. | |
● | “May Bridge Financing” refers to the sale of Fr8App’s May Bridge Notes in connection with the May Note Purchase Agreement, raising gross proceeds of $1,608,842 between May and June 2021. | |
● | “May Bridge Notes” refers to the Convertible Promissory Notes in the aggregate principal amount of $1,608,842 issued by Fr8App in connection with the May Note Purchase Agreement. | |
● | “May Note Purchase Agreement” refers to the Convertible Note Purchase Agreement, dated May 24, 2021 pursuant to which the May Bridge Notes were issued to ATW and ATW Opportunities between May and June 2021. | |
● | “Merger Agreement” refers to the merger agreement, dated as of October 10, 2020, as it may be amended from time to time, by and among Hudson, | |
● | “Note Purchase Agreement” refers to the Convertible Note Purchase Agreement, dated October 7, 2020 pursuant to which the 2020 Bridge Notes were issued to certain of | |
● | “ordinary shares” refers to our ordinary shares, par value $0.001 per share. | |
● | “Pre-Merger Financing” refers to the financing which shall have raised gross proceeds totaling | |
● | “PX Global” refers to PX Global Advisors LLC, which is a Delaware limited liability corporation, currently holding approximately
| |
● | “RPCK” refers to RPCK Rastegar Panchal LLP. | |
● | “SRF” refers to Sichenzia Ross Ference LLP. | |
● | “Trading Day” refers to a day on which any of the following markets or exchanges on which the Combined Company Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange (or any successors to any of the foregoing). | |
● | “Trigger Date” refers to each of the 10th, 20th, 30th, 40th, 50th, 60th, 70th, 80th, 90th, 100th, 110th, and 120th Trading Day immediately following the date of the first issuance of any shares of Series A3 Preferred Stock regardless of the number of transfers of any particular shares of Series A3 Preferred Stock thereafter, and regardless of the number of certificates which may be issued to evidence such Series A3 Preferred Stock. | |
● | “Trigger Date Conversion Price” refers to the average of the three lowest VWAPs during the ten Trading Days immediately prior to each Trigger Date, which is less than the Conversion Price. | |
● | “U.S. GAAP” refers to generally accepted accounting principles in the United States. | |
● | “VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Combined Company Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Combined Company Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the Combined Company Common Stock is then quoted on OTCQB or OTCQX and neither are a Trading Market at such time, the volume weighted average price of the Combined Company Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Combined Company Common Stock is not then quoted for trading on OTCQB or OTCQX and if prices for the Combined Company Common Stock are then reported in the “Pink Sheets” published by OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Combined Company Common Stock so reported, or (d) in all other cases, the fair market value of a share of Combined Company Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Series A3 Preferred Stock then outstanding and reasonably acceptable to the Combined Company, the fees and expenses of which shall be paid by Combined Company. | |
● | “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. | |
● | all discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding. |
Summary of the Merger
The Parties
Hudson Capital
Hudson is in the business of providing financial advisory services 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 (“HKIFS”) and Beijing Yingxin Yijia Network Technology Co., Ltd (“WFOE”) and our contractually controlled and managed company, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“Sheng Ying Xin” or “SYX”) and its wholly owned subsidiary, Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”), we offer commercial payment advisory services, international corporate financing advisory services and intermediary bank loan advisory services. Historically, we have also made direct loans to certain qualified borrowers. We do not anticipate making any more direct loans but instead, we will be depositing our funds in trust accounts with certain bank lenders, who will, in turn, make loans to borrowers. Be that as it may, we had made the “direct loans” to better utilize our excess cash on hand at that time. In view of the slowing economy, we anticipate that future “entrusted loans” will be infrequent, if at all.
Fr8HubFr8App
FreightHub,Freight App, Inc. (formerly known as “FreightHub, Inc.”)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 Mexico S.A De C.V. (“FreightHub Mexico)Mexico”), a wholly-owned subsidiary of FreightHub, Inc., was formed. FreightHub,Freight App, Inc. along with its wholly-owned subsidiary, FreightHub Mexico, are hereinafter referred to as “Fr8Hub”“Fr8App”.
Fr8HubFr8App is a transportation logistics platform company whose digital freight matching technology not only streamlines and simplifies domestic and cross-border shipping by connecting shippers with a broad network of reliable carriers and drivers in Mexico, Canada and the United States, but also provides transparency on shipment characteristics to identify available freight capacity on both sides of any border.
The Merger
Upon the Closing of the Transactions contemplated in the Merger Agreement, Hudson will be merged with and into Purchaser, its wholly-owned subsidiary, in accordance with the BVI Act and the DGCL (the “Redomestication Merger”). As a result of the Redomestication Merger, the separate existence of Hudson shall cease, and Purchaser will continue as the surviving corporation incorporated in the State of Delaware. Immediately following the effective time of the Redomestication Merger, Merger Sub will merge with and into Fr8Hub, resulting in Fr8Hub becoming a wholly-owned subsidiary of Purchaser.
Reasons for the Merger
Hudson’s Board of Directors considered, among a number of factors, the fact the Combined Company will be led by an experienced senior management from Fr8HubFr8App and that existing Hudson shareholders will have an opportunity to participate in the potential growth of the Combined Company while still participating in the continuing business of Hudson through the Spin-Off Entity. Fr8Hub’sCompany. Fr8App’s board of directors considered, among a number of factors, the potential increased access to sources of capital at a lower cost of capital and a broader range of investors to support its business than it could otherwise obtain if it continued to operate as a stand-alone, privately-held company. For a more complete discussion of Hudson and Fr8Hub’sFr8App’s reasons for the Merger, please see the sections titled “The Merger—Hudson’s Reasons for the Merger” and “The Merger—Fr8Hub’sFr8App’s Reasons for the Merger.”
Overview of the Merger
Pre-Merger Structure Chart
Step 1 – Redomestication Merger
1 - Hudson merges with and into Merger Sub I to redomesticate as a Delaware entity with Merger Sub I as the surviving entity (the “Redomestication Merger”).
2 – Hudson Holding sits between redomesticated Hudson and Fr8App post-closing.
Step 2 – Merger
3 – Merger Sub I (the redomesticated entity) will change its name to “Freight Technologies.”
4 – Merger Sub II will merge with and into Fr8App with Fr8App as the surviving corporation.
Post-Merger Structure Chart
Post-Merger, our shareholders will hold shares of common stock of Freight Technologies, Inc. a Delaware corporation and not shares in any of our Hong Kong or China variable interest entities and subsidiaries. The “new” transportation logistics business shall primarily be conducted through Fr8App while the legacy PRC financial advisory business will continue to be conducted through VIE and its subsidiaries.
The following is a summary of the VIE Agreements and HKSQ 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 WFOE (the “SYX Exclusive Business Cooperation Agreement”), WFOE is the exclusive technology services and consultancy service provider to Sheng Ying Xin. Sheng Ying Xin agreed to pay WFOE all fees payable for technology services and consultancy service, the amount of which equals 100% of the net profit of Sheng Ying Xin. Any payment from Sheng Ying Xin to WFOE must comply with applicable Chinese laws. WFOE is also obligated to bears all losses of Sheng Ying Xin. Further, the parties agreed that WFOE shall retain sole ownership of all intellectual property developed in connection with providing technology services to Sheng Ying Xin. The SYX Exclusive Business Cooperation Agreement has a ten-year term and may be extended if confirmed in writing by WFOE, prior to the expiration of the term. The extended term shall be determined by WFOE, and Sheng Ying Xin shall accept such extended term unconditionally.
Pursuant to the terms of the certain exclusive business cooperation agreement dated September 26, 2019, between HKIFS and HKSQ (the “HKSQ 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 HKSQ Exclusive Business Cooperation Agreement has a ten-year term and 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.
Power of Attorney
Pursuant to the terms of a certain power of attorney agreement dated April 26, 2016, among WFOE and the shareholders of Sheng Ying Xin (the “SYX Power of Attorney”), each of the shareholders of Sheng Ying Xin irrevocably appointed WFOE 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 SYX 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 “HKSQ 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 HKSQ 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 VIE and HKSQ VIE Agreements.
Exclusive Option Agreement
Pursuant to the terms of a certain exclusive option agreement dated April 26, 2016, among WFOE, Sheng Ying Xin and the shareholders of Sheng Ying Xin (the “SYX Exclusive Option Agreement”), the shareholders of Sheng Ying Xin granted WFOE an irrevocable and exclusive purchase option (the “SYX 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 SYX Option is exercisable at any time at WFOE’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 SYX Option is RMB 1 in total. To the extent Sheng Ying Xin shareholders receive any of such consideration, the SYX Option requires Sheng Ying Xin shareholders to transfer (and not retain) the same to Sheng Ying Xin or WFOE. The SYX Exclusive Option Agreement has a ten-year term and may be extended if confirmed in writing by WFOE, and if no written confirmation was obtained from WFOE, the SYX Exclusive Option Agreement will be automatically renewed, the term of the renewed agreement will be determined by WFOE’s written confirmation.
Pursuant to the terms of a certain Exclusive Option Agreement dated September 26, 2019, among HKIFS, HKSQ and the shareholders of HKSQ (the “HKSQ Exclusive Option Agreement”), the shareholders of HKSQ granted HKIFS an irrevocable and exclusive purchase option (the “HKSQ 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 HKSQ 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 HKSQ Option is RMB 1 in total. To the extent HKSQ shareholders receive any of such consideration, the HKSQ Option requires HKSQ shareholders to transfer (and not retain) the same to HKSQ or HKIFS. The HKSQ Exclusive Option Agreement has a ten-year term and may be extended if confirmed in writing by HKIFS, and if no written confirmation was obtained from HKIFS, the HKSQ Exclusive Option Agreement will be automatically renewed, the term of the renewed agreement will be determined by HKIFS’s written confirmation.
Share Pledge Agreement
Pursuant to the terms of a certain share pledge agreement dated April 26, 2016 among WFOE and the shareholders of Sheng Ying Xin (the “SYX 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 WFOE’s rights and benefits under the SYX Exclusive Business Cooperation agreement, SYX the Power of Attorney and the SYX Exclusive Option Agreement. Prior to termination of the SYX Share Pledge Agreement, the pledged equity interests cannot be transferred without WFOE’s prior written consent. All of the equity interest pledges with respect to the equity interests of Sheng Ying Xin according to the SYX Share Pledge Agreement have been registered with the relevant office of the Administration for Industry and Commerce in China. The SYX Share Pledge Agreement will be valid until all the payments related to the services provided by WFOE to Sheng Ying Xin due under the SYX Exclusive Business Cooperation Agreements have been fulfilled. Therefore, the SYX Share Pledge Agreement shall only be terminated when the payments related to the ten-year SYX Exclusive Business Cooperation Agreement are paid in full and WFOE does not intend to extend the term of the SYX Exclusive Business Cooperation Agreement.
Foreign ownership of certain types of internet businesses, such as internet information services, is subject to restrictions under applicable PRC laws, rules and regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity interests in a value-added telecommunication service provider. Any such foreign investor must also have experience and a good track record in providing value-added telecommunications services overseas. Accordingly, under current and applicable PRC laws, it is possible that we acquire up to 50% equity interests in Sheng Ying Xin. However, if we were to acquire more than 50% of the equity interests in Sheng Ying Xin, Sheng Ying Xin will lose its ICP License. Under current PRC laws, any foreign-invested entity providing value-added telecommunication services is required to demonstrate to the relevant branch of the Ministry of Industry and Information Technology (the “MIIT”), namely in our case, the Beijing Communication Administration, that its foreign investors have a positive track of, and operation experience in operating value-added telecommunication services outside the PRC. In practice, the Beijing Communication Administration makes a determination after sixty (60) days after receiving the complete set of application documents. We believe that we presently do not have the necessary experience and track record in providing value- added telecommunications services overseas and intend to take steps to build a track record and accumulate the requisite experience in anticipation that we may acquire the equity interests in Sheng Ying Xin when the restrictions on percentage of foreign ownership are eased or lifted. There is however no guarantee that we will be successful in this endeavor and if we are unsuccessful, we will not be able to acquire the equity interests in Sheng Ying Xin.
All our revenue is generated by contractually controlled and managed entity, Sheng Ying Xin and its wholly-owned subsidiaries. Sheng Ying Xin is 99% directly owned by our former Chief Executive Officer, Mr. Jianxin Lin and 1% indirectly owned by Mr. Lin through his nominee, Mr. Shaoyong Huang. The contractual arrangements give us effective control over Sheng Ying Xin and enable us to obtain substantially all of the economic benefits arising from it as well as consolidate the financial results of it in our results of operations. Although the structure we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
Our PRC counsel has advised that the ownership structures of WFOE and VIE in China, do not and will not violate any applicable PRC law, regulation or rule currently in effect based on the current interpretation of those law, regulation or rule; and the contractual arrangements between WFOE, VIE and their respective equity holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect based on the current interpretation of those law, regulation or rule. However, we have also been advised that there are substantial uncertainties regarding the interpretation and application of current PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the opinion of our PRC legal counsel.
It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or VIE are found to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including revoking the business and operating licenses of VIE or any of its subsidiaries, requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our variable interest entity in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of VIE or otherwise separate from it and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our variable interest entity in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results of operations.
We rely on the aforesaid HKSQ VIE and VIE contractual arrangements to operate our electronic platform in China and other businesses in which foreign investment is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing us with control over variable interest entities. If we had direct ownership of the variable interest entities, we would be able to exercise our rights as an equity holder directly to effect changes in the boards of directors of the entity, which could effect changes at the management and operational level. Under our contractual arrangements, we may not be able to directly change the members of the boards of directors of the entity and would have to rely on the variable interest entities and the variable interest entities’ entity equity holders to perform their obligations in order to exercise our control over the variable interest entities. The variable interest entities equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our Company or may not perform their obligations under these contracts. For example, VIE and its equity holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using our domain names and trademarks which the relevant variable interest entity has exclusive rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of our variable interest entities at any time pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved, we will have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. In the event that we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our variable interest entities for an extended period of time or we may be permanently unable to exert control over our variable interest entities. If we were to lose effective control over our variable interest entities, certain negative consequences would result, including our being unable to consolidate the financial results of our variable interest entities with our financial results, our financial position would be materially and adversely affected. In addition, losing effective control over our variable interest entities may negatively affect our operational efficiency and brand image and may impair our access to their cash flow from operations, which may reduce our liquidity.
In addition to the enforcement costs, during the course of disputes regarding such enforcement action, we may temporarily lose effective control over our variable interest entities, which may lead to loss of revenue or potentially lead to our having to incur additional costs and expend substantial resources to operate our business in the absence of effective enforcement of these contractual arrangements. If this were to occur, our business, financial condition and results of operations may be materially and adversely affected and the value of our shareholders’ investments in our Company may therefore decrease.
Our contractual arrangements provide for the resolution of disputes through arbitration in accordance with the arbitration rules of the China International Economic and Trade Arbitration Commission in Beijing. PRC laws allow an arbitral body to award the transfer of assets of or an equity interest in China in favor of an aggrieved party. In the event of non-compliance with such award, enforcement measures may be sought from the court. However, the court may or may not support the award of an arbitral body when deciding whether to take enforcement measures. Under PRC laws, courts of judicial authorities in the PRC generally would not grant injunctive relief or the winding-up order against an entity as interim remedies to preserve the assets or shares in favor of any aggrieved party. As a result, in the event that our variable interest entities or any of its shareholders breaches any of the contractual arrangements, we may not be able to obtain sufficient remedies in a timely manner, and our ability to exert effective control over our variable interest entities and conduct our financial services business could be materially and adversely affected.
Consequently, the contractual arrangements may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership. Further, our shares may also decline in value or become worthless if we are unable to assert our contractual control rights over the assets of our PRC variable interest entity and subsidiaries that conduct our operations.
The Transactions
Subject to approval of the Nasdaq Stock Market LLC (“NASDAQ”), the following transactions will result in a publicly-traded company operating under the name “Freight Technologies, Inc.” and the proposed NASDAQ ticker symbol “FRGT” that will engage in the business of operating a cloud-based transportation logistics platform focused on U.S.-Mexico cross-border shipping, and offering a digital freight matching technology that connects shippers with a broad network of reliable carriers and drivers in Mexico, Canada and the U.S.
Under the Merger Agreement, the following will occur:
The Redomestication
Upon the terms and subject to the conditions set forth in the Merger Agreement, Hudson will be merged with and into Purchaser, its wholly-owned subsidiary, in accordance with the BVI Act and the DGCL. As a result of the Redomestication Merger, the separate existence of Hudson shall cease, and Purchaser will continue as the surviving corporation incorporated in the State of Delaware.
Following the Redomestication Merger, Purchaser (i) shall possess all of Hudson’s and Purchaser’s assets, rights, powers and property as constituted immediately prior to the Redomestication Merger; (ii) shall continue to be subject to all of Hudson’s and Purchaser’s debts, liabilities and obligations as constituted immediately prior to the Redomestication Merger, and that shall include the assumption of all of Hudson’s obligations under the Merger Agreement; (iii) shall be subject to all actions previously taken by the Board of Directors of Hudson and Purchaser prior to the Redomestication Merger; and (iv) each issued and outstanding ordinary share of Hudson shall be deemed converted into one share of fully paid and non-assessable share of Purchaser Common Stock. Hudson’s Amended and Restated Memorandum and Articles of Association shall cease and Purchaser’s Amended and Restated Certificate of Incorporation and By-Laws, as in effect immediately prior to the Redomestication Merger, shall continue as the Purchaser’s organizational documents after the Redomestication Merger. Purchaser’s Amended and Restated Certificate of Incorporation will authorize for issuance certain shares of common stock, as well as the Purchaser Preferred Stock. Hudson’s shareholders shall have dissenters’ rights under the BVI Act.
The Merger
Upon the terms and subject to the conditions of the Merger Agreement, and as promptly as practicable following the Redomestication Merger, Merger Sub shall be merged with and into Fr8App in accordance with the DGCL. Upon the Merger the separate corporate existence of Merger Sub shall cease and Fr8App shall continue as the surviving corporation under the DGCL and as a wholly owned subsidiary of Purchaser.
Merger Consideration
At the Effective Time, by virtue of the Merger without any further action on the part of the parties to the Merger Agreement, the following shall occur:
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No certificates or scrip representing fractional shares of Purchaser Common Stock will be issued pursuant to the Merger. Fr8App stockholders who would be entitled to a fractional share after applying the Exchange Ratio will automatically be entitled to receive an additional fractional share of the corresponding class of Purchaser shares to round up to the next whole share. Immediately after the Effective Time, the Fr8HubFr8App stockholders will own approximately 85.7% of Purchaser (on a non-diluted basis) and the shareholders of Hudson will own approximately 14.3% of Purchaser (on a non-diluted basis).
Contingent Merger Consideration
After the Closing, the Fr8HubFr8App stockholders shall be entitled to receive additional shares of Purchaser based upon the achievement of certain revenue thresholds in the amount of at least $25 million, $50 million and $100 million commencing with each of the calendar years ending on December 31, 2021, December 31, 2022 and December 31, 2023, respectively. For each period if the revenue threshold is achieved, the Fr8HubFr8App stockholders shall receive (on a pro rata basis) 3.33% of the shares of Purchaser Common Stock on a fully-diluted basis as of the last day of the applicable calendar year-end (the “Contingent Merger Consideration Shares”). If, after the Closing and prior to December 31, 2023, a change of control occurs, then Purchaser shall issue on or promptly after the date of such change of control, to the Fr8HubFr8App stockholders an amount equal to 10% of the shares of Purchaser Common Stock on a fully diluted basis less the Contingent Merger Consideration Shares previously issued.
Purchaser’s Post-Closing Board of Directors
In connection with the Merger, all directors of Purchaser shall resign, and the post-closing board of directors of Purchaser shall consist of fivethe following four directors – Javier Selgas, Nicholas H. Adler, William Samuels and Jerry L. Hutter, all of which one shall be designated by Purchaser andwhom are current members of Fr8App’s Board of Directors. Pursuant to the remaining directors shall be designated by Fr8Hub.Merger Agreement, Hudson has the option to designate a board observer.
Representations and Warranties
In the Merger Agreement, Fr8HubFr8App makes certain representations and warranties (with certain exceptions set forth in the disclosure schedule to the Merger Agreement) relating to, among other things: (a) proper corporate organization of Fr8HubFr8App and its subsidiaries and similar corporate matters; (b) authorization, execution, delivery and enforceability of the Merger Agreement and other transaction documents; (c) absence of conflicts; (d) capital structure; (e) accuracy of charter and governing documents; (f) affiliate transactions; (g) required consents and approvals; (h) financial information; (i) absence of certain changes or events; (j) title to assets and properties; (k) material contracts; (l) insurance; (m) licenses and permits; (n) compliance with laws, including those relating to foreign corrupt practices and money laundering; (o) ownership of intellectual property; (p) employment and labor matters; (q) taxes and audits; (r) environmental matters; (s) brokers and finders; and (t) other customary representations and warranties.
In the Merger Agreement, Hudson makes certain representations and warranties with respect to itself and its subsidiaries relating to, among other things: (a) proper corporate organization and similar corporate matters; (b) authorization, execution, delivery and enforceability of the Merger Agreement and other transaction documents; (c) brokers and finders; (d) capital structure; (e) validity of share issuance; (f) Nasdaq listing; and (h) SEC filing requirements.requirements; (i) subsidiaries; (j) related parties and affiliate agreements; (k) absence of certain changes; (l) properties and title to assets; (m) no undisclosed liability; (n) litigation; (o) contracts; (p) license and permits; (q) compliance with laws; (r) accounts receivable, payables and loans; (s) employees; (t) tax matters; (u) powers of attorney and suretyships; (v) other information; (w) certain business practices; and (x) money laundering laws.
Conduct Prior to Closing; Covenants
The Merger Agreement contains certain customary covenants of Fr8HubFr8App and Hudson, including, among others, the following:
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Conditions to Closing
The obligation of Hudson and Fr8HubFr8App to consummate the Merger is conditioned on, among other things, (a) the absence of the provisions of any applicable law or order shall prohibiting or imposing any condition on the consummation of the Closing; (b) the absence of action by a third-party non-Affiliate seeking to enjoin or otherwise restrict the consummation of the Closing; (c) the consummation of Redomestication Merger and filing of the applicable certificates in the appropriate jurisdictions; (d) declaration by the SEC of the effectiveness of the registration statement; (e) no stop order suspending the effectiveness of the registration statement or any part thereof shall have been issued; (f) the appointment of the post-Closing board of directors and (f) the Merger and the other transaction contemplated by the Merger Agreement shall have been approved by NASDAQ and Hudson’s stockholders. For more details on parties’ conditions to Closing, please see sections titled “The Merger Agreement – Hudson’s Conditions to Closing” and “The Merger Agreement – Fr8Hub’sFr8App’s Conditions to Closing.”
Indemnification
From and after the Closing, Purchaser has agreed to indemnify and hold harmless the Fr8HubFr8App Indemnitees against and in respect of any and all Losses incurred by Fr8HubFr8App as a result of or in connection with any breach, inaccuracy or nonfulfillment of any of the representations, warranties and covenants of Hudson, Purchaser and Merger Sub set forth in the Merger or any certificate or other document delivered pursuant to the terms of the Merger Agreement.
From and after the Closing, Fr8HubFr8App has agreed to indemnify and hold harmless Hudson, Purchaser, Merger Sub, each of its Affiliates and each of its and their respective members, managers, partners, directors, officers, employees, stockholders, attorneys and agents and permitted assignees (the “Purchaser Indemnitees”), against and in respect of any and all Losses incurred or sustained by any Purchaser Indemnitee as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties and covenants of Fr8HubFr8App contained in the Merger Agreement or any certificate or other document delivered pursuant to the terms of the Merger Agreement.
Twenty percent of Hudson shares of capital stock issued and outstanding immediately after the effective time of the Merger (“Reserved Shares”), will be reserved to serve as the Company Indemnitees’ and the Purchaser Indemnitees’ sole and exclusive remedies for such parties’ obligation to indemnify each other under the Merger Agreement.
Termination
The Merger Agreement may be terminated and/or abandoned at any time prior to the closing by:
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● | the Company, if Hudson shall have breached any representation, warranty, agreement or covenant contained in the Merger Agreement to be performed on or within fifteen (15) days following receipt by |
In connection with the termination of the Merger Agreement, Hudson and Purchaser or Fr8HubFr8App may be required to pay a $500,000 breakup fee (a “Breakup Fee”). under certain circumstances pursuant to which they terminated the agreement.
Fr8Hub Fr8App would be required to pay a Breakup Fee to Hudson in the event that Hudson or Purchaser terminates the Merger Agreement as result of an uncured material breach by Fr8HubFr8App or the Stockholders of any representation, warranty, agreement or covenant contained in the Merger Agreement or as a result of Fr8Hub’sFr8App’s refusal to consummate the transactions contemplated by the Merger Agreement.
Hudson would be required to pay a Breakup Fee to Fr8HubFr8App in the event that Fr8HubFr8App terminates the Merger Agreement as result of an uncured material breach by Hudson or Purchaser of any representation, warranty, agreement or covenant contained in the Merger Agreement.
Either Hudson or Fr8HubFr8App can terminate the Merger Agreement under certain circumstances, which would prevent the Merger from being consummated. In the event that the Merger Agreement is terminated by either party, the party terminating the Merger Agreement may be required to pay the other party a breakup fee of $500,000 under certain circumstances.
Merger-Related Transactions and Agreements
2020 Bridge Financing
On October 7, 2020, Fr8HubFr8App entered into a Note Purchase Agreement with certain existing shareholders and investors pursuant to which Fr8HubFr8App issued 2020 Bridge Notes in the aggregate principal amount of $4,004,421 in a 2020 Bridge Financing. All 2020 Bridge Notes will mature on the date that is two years from the closing date of the 2020 Bridge Financing. Interest on the 2020 Bridge Notes will accrue at an annual rate of 5% over the two-year term of the 2020 Bridge Notes and is payable by Fr8HubFr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the 2020 Bridge Notes by Fr8HubFr8App or, (iv) in connection with any conversion of the 2020 Bridge Notes through the issuance of shares of the capital stock of Fr8HubFr8App in exchange for accrued and unpaid interest owing at the time of conversion. Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the 2020 Bridge Notes will automatically convert into the Series A-3A3 Preferred Stock and Series A3A3-1 Warrants issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 50% of the corresponding purchase price in the Pre-Merger Financing. As the lead investor in the 2020 Bridge Financing, ATW’s affiliate, ATW Opportunities was granted the right of first refusal to participate in up to 50% of the aggregate principal amount to be raised by Fr8HubFr8App in any equity or equity-linked financing (except for the Pre-Merger Financing) occurring in the five years following the initial closing of the 2020 Bridge Financing pursuant to the Note Purchase Agreement.
January Bridge Financing
On January 29, 2021, Fr8App entered into the January Bridge Note Purchase Agreement with ATW Opportunities pursuant to which Fr8App issued the January Bridge Note. The January Bridge Note matures on October 7, 2022. Interest on the January Bridge Note accrues at an annual rate of 5% over the term and is payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the January Bridge Note by Fr8App, or, (iv) in connection with any conversion of the January Bridge Note through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The January Bridge Note is convertible into Conversion Shares at the option of ATW Opportunities pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the January Bridge Note will automatically convert into Series A3 Preferred Stock and Series A3-2 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 20% discount to the corresponding purchase price in the Pre-Merger Financing.
May Bridge Financing and July Bridge Financing
On May 24, 2021, Fr8App entered into a May Bridge Note Purchase Agreement with ATW and ATW Opportunities pursuant to which Fr8App issued May Bridge Notes in the aggregate principal amount of $1,608,842 between May and June 2021. Pursuant to the July Note Purchase Amendment, Fr8App issued to ATW Opportunities the July Bridge Note in the principal amount of $1,000,000 on July 30, 2021. The May Bridge Notes and July Bridge Note will mature on October 7, 2022. Interest on the May Bridge Notes and the July Bridge Note will accrue at an annual rate of 5% over the maturity period and will be payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment by Fr8App or, (iv) in connection with any conversion through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The May Bridge Notes and the July Bridge Note will be convertible into Conversion Shares at the option of the holders pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the May Bridge Notes and the July Bridge Note will automatically convert into the Series A3 Preferred Stock and Series A3-3 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 25% discount to the corresponding purchase price in the Pre-Merger Financing.
Pre-Merger Financing
Concurrently with or prior to the Merger, Fr8Hub shall have raised inOn February 9, 2021, Fr8App entered into a Pre-Financing Merger gross proceeds totaling $12,013,262, which shall include the cancellation of the Bridge Notes, and which such cash portion of the proceeds shall be used by the Combined Company for working capital purposes following the Merger. As currently contemplated, ATW’s affiliate,Securities Purchase Agreement (the “SPA”) with ATW Opportunities, together with certain existing stockholders of Fr8Hub shall enter into a securities purchase agreement (the “SPA”)Fr8App (including ATW), pursuant to which Fr8HubFr8App shall agree to sell to the Investorsinvestors (the “Investors”) a newly designated series of preferred stock, the Series A3 preferred stock (the “Series A3 Preferred Stock”), in a private placement for $8,008,841 in aggregate gross proceeds, excluding principal and accrued and unpaid interest relating to 2020 Bridge Notes that convert at the closing of the Pre-Merger Financing. With respect to principal and accrued and unpaid interest relating to the January Bridge Note, the May Bridge Notes and the July Bridge Note, ATW and ATW Opportunities have the option to elect for all or a portion of such converting principal and accrued and unpaid interest to reduce amounts that ATW and ATW Opportunities are otherwise committed to fund in cash in respect of Series A3 Preferred Stock at the closing of the Pre-Merger Financing. If and to the extent ATW and/or ATW Opportunities exercise this option, the $8,008,841 in aggregate gross proceeds expected to be received by Fr8App would be correspondingly reduced on a private placement. Fr8Hubdollar-for-dollar basis by the amount of converted principal and accrued and unpaid interest under the January Bridge Note and/or May Bridge Notes with respect to which such option is exercised (the “Opt Out Option”). Assuming full exercise of the Opt Out Option, ATW and/or ATW Opportunities’ commitment to fund in cash under the SPA at the closing of the Pre-Merger Financing will be reduced by $3,634,137, and the Exchange Ratio will be increased to approximately 1:1.40279. For additional details, see “Unaudited Pro Forma Condensed Combined Financial Information.”
The SPA, as amended, contemplates the conversion of the 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note into Series A3 Preferred Stock, and the subsequent cancellation of the notes. Immediately prior to the closing of the Merger, Fr8App shall issue ____12,616,726 shares of Series A3 Preferred Stock to Investors, Chardan and converting holders of 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note. Such shares of Series A3 Preferred Stock shall initially be convertible into Fr8App common stock on a one-to-one basis, determined by calculating the quotient determined by dividing (x) the stated value of $3.00 per share, by (y) a conversion price of $3.00, which conversion price (the “Conversion Price”) is subject to adjustment as described elsewhere in this proxy statement/prospectus. The 12,616,726 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 55,914,267 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 55,914,267 shares of Combined Company common stock. However, only 15,975,505 shares of Series A3 Preferred Stock of the Combined Company will be initially convertible into common stock of the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining shares of Series A3 Preferred Stock of the Combined Company will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the volume weighted average price, or “VWAP”, of the Combined Company’s common stock during specified periods following the closing of the Merger. Pursuant to the Certificate of Designation of the Combined Company’s Series A3 Preferred Stock, for purposes of determining such price protection adjustments the VWAP will not be calculated to be less than $0.8571 per share. As a result, the maximum number of shares of Combined Company common stock issuable upon adjustment, if any, would be 55,914,267 shares.
The initial such upward adjustment in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the four trading days immediately following the date of the closing of the Merger. Thereafter, such additional upward adjustments in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the ten trading days immediately preceding the Trigger Date. Following the 120th trading day immediately following the closing date of the Merger, the number of Conversion Shares issuable upon conversion of the 55,914,267 shares of Combined Company Series A3 Preferred Stock will no longer be subject of any further adjustment. For the purpose of calculating the number of shares of the Series A3 Preferred Stock to be issued in connection with the Pre-Merger Financing (and, accordingly, other values and amounts that relate to, or are calculated based upon, the number of shares of Series A3 Preferred Stock actually issued by Fr8App to Investors and converting note holders under the SPA), all such share numbers disclosed in this proxy statement/prospectus have been calculated based on the assumption that the Opt Out Option will not be exercised, and that therefore, there will be no reduction on the amounts that ATW or ATW Opportunities are committed to fund in cash under the SPA at the closing of the Pre-Merger Financing.
In addition, Hudson has a post-closing obligation to cause the Combined Company to issue afour series of warrants (Series A3, Series A3 WarrantA3-1, Series A3-2 and Series A3-3) to purchase 7,272,561an aggregate of 15,975,505 shares of the Combined Company common stock for $8,008,841 in gross proceeds.stock. The sharesterms and conditions of Fr8Hub common stock underlyingeach series depends upon which of the Series A3 Preferred Stock are referred to asforegoing financings is the “Conversion Shares” and underlying the Series A3 Warrant are referred to as the “Warrant Shares.” Each share of Series A3 Preferred Stock is convertible into a number of shares of Fr8Hub common stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $____.
Escrow Shares
The SPA will also providebasis for the issuance of up to 18,181,402 shares of Fr8Hub common stock into escrow upon the closing ofwarrant. For further details about the Pre-Merger Financing, (the “Escrow Shares”) pursuantplease see “Agreements Related to the terms of an escrow agreement to be held by Transhare Corporation, as escrow agent, for the benefit of the Investors. In accordance with, and pursuant to the terms of the Merger Agreement, at the closing of the Merger, each Escrow Share shall be cancelled and automatically converted into the right to receive, without interest, the Applicable Per Share Merger Consideration of the Combined Company, which shall be referred to herein as the “Escrow Exchange Shares.Merger—Pre-Merger Financing”
The Escrow Exchange Shares are issuable to the Investors over time in two or more tranches upon the occurrence of the following events:
Notwithstanding the foregoing, in the event that the aggregate Subsequent Escrow Exchange Shares issuable to all of the Investors is greater than the balance of the Escrow Exchange Shares following the First Escrow Share Issuance Obligation and each prior Subsequent Escrow Share Issuance Obligation, if any, then each Investor shall receive its pro rata portion of the Escrow Exchange Shares then available for issuance. Upon full issuance of the Escrow Shares, ATW (and its affiliates) and Fr8Hub stockholders will hold approximately 43.6% and 28.6% of the Combined Company, respectively.
Right of Participationthis proxy statement/prospectus.
Pursuant to the terms of the SPA, the Investors purchasing Series A3 Preferred Stock with a Stated Value of $4.0 million or greater have a right, commencing on the date of the SPA until five years thereafter, to participate in any subsequent financing by the Company or the Combined Company, as applicable, of common stock or common stock equivalents for cash consideration, indebtedness or a combination of units thereof (a “Subsequent Financing”),Subsequent Financing in an amount equal to 50% of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing.
Series A3The Warrants
Four series of Warrants (Series A3, Series A3-1, Series A3-2 and Series A3-3) will be issued after the closing of the Merger, the terms and conditions of each series depends upon which of the foregoing financings is the basis for the issuance of the warrant.
The Series A3 Warrants will be delivered in connection with the purchase of securities for cash under the SPA. The Series A3 Warrants are exercisable intofor 7,272,561 shares of Combined Company Common Stock for a period of seven years through _____, 202_after issuance, at an exercise price equal to $____$1.50 per share, and are subject to customary adjustments for stock splits, dividend,dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Combined Company undertakes a subsequent equity financing or financingsSubsequent Financing at an effective price per share that is less than $_____,$1.50, the exercise price of the Series A3 Warrants shall be reduced to the lower priceprice.
The Series A3-1 Warrants will be delivered in connection with the conversion and the number of shares issuable upon exercisecancellation of the 2020 Bridge Notes in the Pre-Merger Financing. The Series A3A3-1 Warrants shall be adjusted suchare exercisable for 5,529,252 shares of Combined Company Common Stock for a period of seven years after issuance, at an exercise price equal to $0.75 per share, and are subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Combined Company undertakes a Subsequent Financing at an effective price per share that is less than $0.75, the aggregate exercise price of the Series A3A3-1 Warrants following such adjustment in the exercise price is equalshall be reduced to the aggregate exercise prior to such adjustment. The Series A3 Warrants will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of, the shares underlying the Series A3 Warrants.lower price.
The Series A3A3-2 Warrants have a “Beneficial Ownership Limitation” equal to 4.99%will be delivered in connection with the conversion and cancellation of the number ofJanuary Bridge Note in the Pre-Merger Financing. The Series A3-2 Warrants are initially exercisable for 849,772 shares of the Combined Company Common Stock outstanding immediatelyfor a period of seven years after giving effectissuance, at an exercise price equal to $1.20 per share, and are subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the issuance of shares of Common Stock issuable uponevent the Combined Company undertakes a Subsequent Financing at an effective price per share that is less than $1.20, the exercise price of the Series A3 Warrants. An Investor, upon noticeA3-2 Warrants shall be reduced to the lower price.
The Series A3-3 Warrants will be delivered in connection with the conversion and cancellation of the May Bridge Notes and July Bridge Note in the Pre-Merger Financing. The Series A3-3 Warrants are initially exercisable for 2,323,921 shares of Combined Company Common Stock for a period of seven years after issuance, at an exercise price equal to $1.125 per share, and are subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Combined Company may increase or decreaseundertakes a Subsequent Financing at an effective price per share that is less than $1.125, the Beneficial Ownership Limitation, as provided for inexercise price of the Series A3A3-3 Warrants shall be reduced to the lower price.
In the event of an Adjustment Date, the Exercise Price shall be reduced, and only reduced, on each Adjustment Date to the lesser of (a) the then Exercise Price, as adjusted, and (b) the Initial Trigger Date Conversion Price, with respect to the Initial Trigger Date, or the applicable Trigger Date Conversion Price, with respect to each applicable Trigger Date.
Each series of Warrants:
● | has a “Beneficial Ownership Limitation” equal to 4.99% of the number of shares of the Combined Company Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of the applicable Warrant. An Investor, upon notice to the Combined Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Warrants; and | |
● | will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of, the shares underlying the Warrants. |
Registration Rights
It is also contemplated thatOn February 9, 2021, the Purchaser and Fr8Hub shall enterthe Investors entered into twoa registration rights agreements,agreement, whereby Purchaser shallagreed to file a registration statement onthe Pre-Merger Form S-1 to register for resale the Conversion Shares along with at least 50% of the Escrow Shares and shares held by Hudson’s affiliate, PX Global, that shall be declared effective prior toon the Closing Date (the “Pre-Merger Form S-1”).Date. Purchaser and Fr8HubFr8App have agreed to prepare and file the Pre-Merger Form S-1 no later than ten daysas soon as practicable after the completionexecution of Fr8Hub’s financial statements for the September 30, 2020 quarterly period.SPA. The Pre-Merger Form S-1 must be declared effective by the 60th day following filing or, in the event the SEC notifies Purchaser that it will “review” the Pre-Merger Form S-1, 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 60thcalendar day following the date on which an additional registration statement is required to be filed thereunder.
The second registration statement onA Post-Closing Form S-1 shall be filed by the Combined Company to register for resale the Warrant Shares, the balance of the Escrow Shares that were not registered on the Pre-Merger Form S-1, if any, and(A) up to 21,644,0567,281,751 shares of Merger Consideration that have not been registered on the Pre-Merger Form S-1, or on the registration statement for which this prospectus/proxy statement forms a part, consisting of (i) 1,150,755969,747 shares of Combined Company Common Stock underlying the A2 Warrant, (ii) 1,252,1341,055,180 shares of Combined Company Common Stock underlying the A2 Preferred Stock, (iii) 6,085,6964,798,660 shares of Combined Company Common Stock underlying the A1-A Preferred Stock, (iv) 543,682458,164 shares of Combined Company Common Stock underlying the A1-B Preferred Stock, (v) 5,339,228and (B) 15,975,505 shares of Combined Company Common Stock underlying the warrants to be issued in the Bridge Financing, and (vi) 7,272,561 shares of Combined Company Common Stock underlying the Series A3 Warrants (the “Post-Closing Form S-1”).Pre-Merger Financing.
The Post-Closing Form S-1 must be filed no later than the 15th calendar day following the Closing Date and, with respect to any additional registration statements which may be required pursuant the Registration Rights Agreement, the earliest practical date on which the Combined Company is permitted by SEC guidance to file such additional registration statements related to the securities to be registered on the Post-Closing Form S-1. The Post-Closing Form S-1 must be declared effective by the 60th day following filing or, in the event the SEC notifies Purchaser that it will “review” the Post-Closing Form S-1, the 75th 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.
Failure to timely file or have the Pre-Closing Form S-1 or the Post-Closing Form S-1, be declared effective by the dates set forth above, including, without limitation failure to keep the Pre-Closing Form S-1 or the Post-Closing Form S-1 effective or, after the dates of effectiveness, such registration statements cease for any reason to remain continuously effective as to all securities included in such registration statements, or the Investors are otherwise not permitted to utilize the prospectus therein to resell, for more than ten (10) consecutive calendar days or more than an aggregate of fifteen (15) calendar days (which need not be consecutive calendar days) during any 12-month period, then, in addition to any other rights the Holder (as defined under the registration statement) may have under such registration statements or applicable law, on each such date and on each monthly anniversary of each such date (if not been cured by such date) until such event is cured, the Combined Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 2.0% multiplied by the aggregate purchase price paid by such Holder pursuant to the SPA. If the Combined Company fails to pay any partial liquidated damages pursuant to the applicable Registration Rights Agreement in full within seven days after the date payable, the Combined Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms thereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an event.
Lock-up and Leak-Out Agreements
In connection with the Transactions, Hudson is expected to enter into Lock-Up and Leak-Out Agreements with all Fr8HubFr8App stockholders ,owning 3% or greater of the capital stock on a fully diluted basis, pursuant to which Fr8Hubthese Fr8App stockholders, for up to 180 daysone year after the closing of the Transactions and, subject to certain exceptions, will agree not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of the Purchaser Common Stock issued in connection with the Merger, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of such shares, whether any of these transactions are to be settled by delivery of any such shares, in cash, or otherwise. However, notwithstanding the foregoing, Fr8Hubthese Fr8App stockholders will be able to sell anyunder the Leak-Out Agreement for 180 days after the closing of the Merger, shares of Purchaser Common Stock issued in exchange for the shares obtained from the Bridge Financing or the Pre-Merger Financing for up to 22% of the average daily trading volume of Purchaser Common Stock on the NASDAQ stock exchange.
Support Agreement
On November 6, 2020, PX Global, a Hudson shareholder owning approximately 40% of the voting power in Hudson entered into a Support Agreement with Fr8HubFr8App and Hudson pursuant to which the shareholder agreed to vote in favor of the Transactions contemplated by the Merger Agreement at the Meeting.
Risk Factors
Both Hudson and Fr8HubFr8App are subject to various risks associated with their businesses and their industries. In addition, the Merger poses a number of risks to each company and its respective stockholders, including the following risks:
● | the Applicable Per Share Merger Consideration is not adjustable based on the market price of ordinary shares of Hudson so the Merger Consideration at the Closing may have a greater or lesser value than at the time the Merger Agreement was signed; | |
● | the Merger may not be completed, and failure to complete the Merger may result in paying a breakup fee or expenses to the other party and could harm the common stock price of Hudson and future business and operations of each company; | |
● | the Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes; |
● | the market price of the Combined Company’s common stock may decline; | |
● | Hudson shareholders may not realize a benefit from the Merger | |
● | certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement; | |
● | the lack of a public market for | |
● | it may be difficult to evaluate Hudson’s financial advisory services following the Merger; and | |
● | if the conditions of the Merger are not either met or waived, the Merger will not occur. |
Risks Related to Hudson’s Business and Industry
● | We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects. | |
● | Our historical financial results may not be indicative of our future performance. | |
● | If we are unable to maintain or increase the volume of loan transactions facilitated through us or if we are unable to retain existing clients or attract new clients, our business and results of operations will be adversely affected. | |
● | If we are unable to maintain low default rates for loans facilitated by us, our business and results of operations may be materially and adversely affected. | |
● | Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted. | |
● | Our business is dependent on the continued efforts of our senior management, some of whom have interests and responsibilities outside of our business. Apart from the possibility of a conflict of interest, if one or more of them is/are unable to devote sufficient time and effort to our business, our business may be adversely impacted. | |
● | Successful strategic relationships with the banks are important for our future success. | |
● | We may not be familiar with new regions or markets we enter and may not be successful in offering new products and services. | |
● | Our business model could be negatively affected by changes and fluctuation in the banking industry. |
● | Fraudulent activity associated with borrowers referred by us could negatively impact our operating results, brand and reputation and cause the use of our financing products and services to decrease. | |
● | Misconduct, errors and failure to function by our management and employees could harm our business and reputation. | |
● | The laws and regulations governing the financial advisory service industry in China are developing and evolving and subject to changes. If our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected. | |
● | We had previously made several direct loans to selected corporate clients in contravention of the PRC Lending General Provisions and may be subject to fines by the People’s Bank of China (“PBOC”). | |
● | If our financial advisory services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed. | |
● | If we do not compete effectively, our results of operations could be harmed. | |
● | Our direct lending/entrusted loan activities are subject to greater credit risks than larger lenders, which could adversely affect our results of operations. | |
● | Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business. | |
● | We may be involved in legal proceedings arising from our operations. | |
● | If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed. | |
● | A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition. | |
● | We may need additional capital, and financing may not be available on terms acceptable to us, or at all. | |
● | From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results. | |
● | The future development and implementation of anti-money laundering laws in China may increase our obligation to supervise and report transactions with our customers, thereby increasing our compliance efforts and costs and exposing us to criminal measures or administrative sanctions for non-compliance. | |
● | Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business. | |
● | Increases in labor costs in the PRC may adversely affect our business and results of operations. | |
● | We do not have any business insurance coverage. | |
● | Our ability to protect the confidential information of our borrowers may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. | |
● | Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China. | |
● | Any significant disruption in service on our computer systems, including events beyond our control, could prevent us from processing loans, reviewing borrowers’ applications and materials, reduce the attractiveness of our services and result in a loss of borrowers. |
● | We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position. | |
● | We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations. | |
● | If we cannot maintain our corporate culture as we attempt to grow, we could lose the innovation, collaboration and focus that contribute to our business. | |
● | We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations. | |
● | War, terrorism, other acts of violence or natural or man-made disasters, including a global pandemic, may affect the markets in which the Company operates, the Company’s customers, the Company’s delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial conditions. | |
● | We are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition and results of operations. |
Risks Related to Hudson’s Corporate Structure
● | If the PRC government deems that the contractual arrangements in relation to our variable interest entity do not comply with PRC governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties or be forced to relinquish our interests in those operations. Further, your shares may decline in value or become worthless if you are unable to assert your contractual control rights over the assets of our PRC VIE and subsidiaries that conduct our operations. | |
● | Substantial uncertainties exist with respect to the interpretation of the PRC Foreign Investment Law (“FIL”) and how it may impact the viability of our current corporate structure, corporate governance and business operations. | |
● | Our contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership. | |
● | Any failure by our variable interest entities or their equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations. | |
● | We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our variable interest entities, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth. | |
● | The equity holders, directors and executive officers of our variable interest entities, as well as our employees who execute other strategic initiatives may have potential conflicts of interest with our Company. | |
● | The contractual arrangements with our variable interest entities may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment. |
Risks Related to Doing Business in the People’s Republic of China
● | Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies. | |
● | There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations, which can change quickly with little advance notice. | |
● | PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions. | |
● | PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits. | |
● | Any failure to comply with PRC regulations regarding our employee equity incentive plans, should we have one, may subject the PRC plan participants or us to fines and other legal or administrative sanctions. | |
● | We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China to fund offshore cash and financing requirements. | |
● | PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using proceeds from any offering and/or future financing activities to make loans or additional capital contributions to our PRC operating subsidiaries. | |
● | We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income. | |
● | We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company. | |
● | Restrictions on currency exchange may limit our ability to utilize our revenue effectively. | |
● | Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment. | |
● | The recent spate of government interference by the PRC government into business activities of U.S. listed Chinese companies may negatively impact our operations, value of our securities and/or significantly limit or completely hinder our ability to offer future securities to investors and cause the value of such securities to significantly decline or be worthless. | |
● | If our public accounting firm does not permit the Public Company Accounting Oversight Board (“PCAOB”) to inspect it within three years pursuant to the Holding Foreign Companies Accountable Act, we may be delisted. | |
● | It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China. | |
● | Failure to comply with laws and regulations applicable to our business in China could subject us to fines and | |
● | penalties and could also cause us to lose customers or otherwise harm our business. |
Risks Related to Hudson Ordinary Shares
● | The trading price of our ordinary shares and is likely to be volatile, which could result in substantial losses to our shareholders. | |
● | We are vulnerable to predatory short selling practices. |
● | You must rely on the judgment of our management as to the use of its cash and assets, and such use may not produce income or increase our ordinary shares price. | |
● | Substantial future sales or perceived potential sales of our ordinary shares, or other equity or equity-linked securities in the public market could cause the price of our ordinary shares to decline significantly. | |
● | 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. | |
● | 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. | |
● | 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. | |
● | If and when permitted by law, we may conduct a public offering and listing of our shares in China, which may result in increased regulatory scrutiny and compliance costs as well as increased fluctuations in the prices of our ordinary shares and ordinary shares listed in overseas markets. | |
● | 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 substantially all of our operations in China and most of our directors and substantially all of our executive officers reside outside 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. | |
● | British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue to protect their interests. | |
● | The requirements of being a public company may strain our resources and distract our management. | |
● | 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. | |
● | 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. The delisting of our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. | |
● | The recent joint statement by the SEC, proposed rule changes submitted by NASDAQ, and an act passed by the U.S. Senate and the U.S. House of Representatives, all call for additional and more stringent criteria to be applied to emerging market companies. These developments could add uncertainties to our future offerings, business operations share price and reputation. | |
● | NASDAQ may apply additional and more stringent criteria for our continued listing. |
These risks and other risks are discussed in greater detail under the section titled “Risk Factors” and in the documents incorporated by reference in this proxy statement/prospectus. Hudson and Fr8HubFr8App both encourage you to read and consider all of these risks carefully.
Regulatory Approvals
In the U.S., Hudson and Purchaser must comply with applicable federal and state securities laws and the rules and regulations of NASDAQ in connection with the issuance of shares of Purchaser Common Stock pursuant to the Merger Agreement and the filing of this proxy statement/prospectus with the SEC.
On August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission of the State Council, the State Taxation Administration, the State Administration for Industry and Commerce, the State Administration for Foreign Exchange, and the China Securities Regulatory Commission, or CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and amended on June 22, 2009. The M&A Rules which, requires, among other things, offshore special purpose vehicles, or SPVs, formed for the listing purpose through acquiring PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
Based on the current PRC laws and regulations, we will not be required to obtain the approval from CSRC for the proposed Redomestication and Merger. We are currently not required to obtain permission from any of the PRC authorities to operate and issue our ordinary shares to foreign investors. In addition, we, our subsidiaries, or VIE are not required to obtain permission or approval from the PRC authorities including CSRC or CAC for the VIE’s operation, nor have we, our subsidiaries, or VIE received any denial for the VIE’s operation.
However, there remains some uncertainty as to how the M&A Rules and these opinions will be interpreted, implemented or enforced particularly in the context of a future offering to foreign investors, which may take place quickly with little advance notice. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may take certain actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our stock.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. However, these opinions did not explicitly mention the measures to be taken against overseas listed companies that apply the variable interest entity structure. As these opinions are recently issued, official guidance and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. We cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us.
If it is determined in the future that approval from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the enacted version of the revised Measures for Cybersecurity Review are required for future offerings of securities to foreign investors, it is uncertain whether we can or how long it will take us to obtain such approval or complete such procedures and any such approval could be rescinded. Any failure to obtain or delay in obtaining such approval or completing such procedures for our offerings, or a rescission of any such approval if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC approval or other government authorization for our offerings. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offering before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior offerings, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver.
Any uncertainties or negative publicity regarding such approval requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of the shares.
NASDAQ Stock Market Listing
The approval by NASDAQ of (i) the continued listing of the Purchaser Common Stock on the NASDAQ Capital Market following the Effective Time and (ii) the listing of the shares of Purchaser Common Stock being issued in connection with the Merger on The NASDAQ Capital Market at or prior to the Effective Time are conditions to the closing of the Merger. Fr8HubFr8App has agreed to cooperate with Purchaser to furnish to Purchaser all information concerning Fr8HubFr8App and its stockholders that may be required or reasonably requested in connection with NASDAQ listing. If such approvals are obtained, Hudson anticipates that the Combined Company’s common stock will be listed on NASDAQ under the trading symbol “FRGT” following the Closing of the Merger.
Trading in our securities may however be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or fully investigate our auditor, and that as a result an exchange may determine to delist your securities. We are not aware that the PCAOB has been or currently is unable to inspect our auditor. See Risk Factor titled “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. The delisting of our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
Dividend Policy and the Flow of Cash To/From Our PRC VIE and Subsidiaries
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 plans and have never paid any cash dividends on our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. As of December 31, 2020, there are no dividends or distributions made and thus no tax consequences can be quantified. We had net losses for 2018, 2019 and 2020 and accordingly, no service fee was paid by our variable interest entities to WFOE.
Capital Transfer
(i) | Distribution from VIE to the U.S. Investors |
VIE, Sheng Ying Xin and its subsidiaries may distribute funds to the WFOE through the SYX Exclusive Business Cooperation Agreement by paying service fees to the WFOE and deducting all costs, expenses, taxes, losses (if required by the PRC laws) and other costs and funds that shall be retained in accordance with applicable PRC laws. According to the SYX Exclusive Business Cooperation Agreement, 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 WFOE may pay dividends to its foreign shareholders according to the equity interests it holds after completing the relevant foreign exchange registration progress.
(ii) | Distribution from U.S. investors to WFOE and VIE |
In general, subject to the requirements and limitations outlined below, we may allocate the net proceeds of any raise into China through (a) capital contributions to our PRC subsidiaries, and (b) loans to our PRC subsidiaries and VIE.
Under the first approach, we may transfer the proceeds into WFOE and other PRC subsidiaries we establish in the future to contribute the initially subscribed registered capital of them. If the registered capital is not sufficient to cover the intended capital contribution, under the current PRC laws and regulations, we may increase the registered capital and apply for the registration changing procedures with the local SAIC and submit the changing report to local MOFCOM at the meantime.
Under the second approach, we may provide loans to WFOE, our variable interest entities and other PRC subsidiaries we establish in the future. According to the current PRC laws and regulations, the borrowers shall file the information of its cross-border financing with the SAFE after signing the contract and no later than 3 working days before the withdrawal of money, and the maximum amount of the aggregate loan is equals 1-2 times of the borrowers’
Tax Consequences
(i) | Distribution from VIE to WFOE |
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the variable interest entities agreements entered into, among others, VIE and WFOE do not represent an arm’s-length price and adjust any of those entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could increase our tax liabilities. In addition, PRC tax authorities may form the view that our subsidiaries or VIE have improperly minimized their tax obligations and we may not be able to rectify any such incident within the limited timeline required by PRC tax authorities. As a result, PRC tax authorities may impose late payment fees and other penalties on us for under-paid taxes, which may materially and adversely affect our business, financial condition and results of operations.
(ii) | Distribution from WFOE to U.S. Investors |
Under the PRC Enterprise Income Tax Law and its implementing regulations, an enterprise established outside China with its “de facto management body” within China is considered a “resident enterprise” in China and will be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. The tax authority will normally review factors such as the routine operation of the organizational body that effectively manages the enterprise’s production and business operations, locations of personnel holding decision-making power, location of finance and accounting functions and properties of the enterprise. The Enterprise Income Tax Law’s implementation regulations define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Taxation Administration issued the Notice of the State Taxation Administration on Issues about the Determination of Chinese-Controlled Enterprises Registered Abroad as Resident Enterprises on the Basis of Their Body of Actual Management, or the SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located inside China, stating that only a company meeting all the criteria would be deemed having its de factor management body inside China.
One of the criteria is that a company’s major assets, accounting books and minutes and files of its board and shareholders’ meetings are located or kept in the PRC. In addition, the SAT issued a bulletin on July 27, 2011, effective September 1, 2011, providing more guidance on the implementation of SAT Circular 82. This bulletin clarifies matters including residence status determination, post determination administration and competent tax authorities. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises and there are currently no further detailed rules or precedents applicable to us governing the procedures and specific criteria for determining “de facto management body” for companies like ours, the determination criteria set forth in SAT Circular 82 and the bulletin may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and how the administration measures should be implemented with respect to such enterprises, regardless of whether they are controlled by PRC enterprises or PRC individuals.
As none of our management members are based in mainland China, it remains unclear how the tax residency rule will apply to our case. We do not believe that our Company, or any of our offshore subsidiaries, should be qualified as a “resident enterprise” as each of our offshore holding entities is a company incorporated outside the PRC and we are not an offshore enterprise controlled by PRC domestic enterprises. As holding companies, each of these entities’ corporate documents, minutes and files of the board and shareholders’ meetings are located and kept outside of the PRC. Therefore, we believe that none of our offshore holding entities should be treated as a “resident enterprise” with its “de facto management bodies” located within China as defined by the relevant regulations for PRC EIT purposes. However, as the tax resident status of an enterprise is subject to determination by the PRC tax authorities, there are uncertainties and risks associated with this issue.
Under the Enterprise Income Tax Law and the Regulation on the Implementation of the Enterprise Income Tax Law, the non-resident enterprise as the shareholder of the PRC resident enterprise will be subject to a 10% (or 20% for an individual shareholder pursuant to the Individual Income Tax Law) withholding tax upon dividends received from the PRC resident enterprise and on gain recognized with respect to the sale of shares of the resident enterprise. Accordingly, if we are treated as a PRC resident enterprise, our shareholders that are non-resident enterprises, including the holders of our stock, may be subject to a 10% withholding tax upon dividends received from us and on gain recognized with respect to the sale of our shares, unless such withholding tax is reduced by an applicable income tax treaty between China and the jurisdiction of the shareholder. Any such tax may reduce the returns on your investment in our shares.
(iii) | Ability and Limitations of Allocating Business Income |
Pursuant to the Foreign Investment Law of the PRC, which took effect as on January 1, 2020, foreign investors’ capital contribution, profits, capital gains, assets disposal income, intellectual property license fees, legally obtained damages or compensation, liquidation proceeds, etc., may be freely remitted to overseas in RMB or foreign exchange according to PRC laws. Accordingly, the Company has the ability to repatriate revenues generated by the VIE businesses.
However, there are restrictions under PRC laws for the payment of dividends to us by WFOE. Our Company is a holding company and our ability to pay dividends and other cash distributions to our shareholders, service any debt we may incur and meet our other cash requirements depends significantly on our ability to receive dividends and other distributions from WFOE. The amount of dividends paid to us by WFOE depends solely on the service fees paid to WFOE from VIE. However, there are restrictions under PRC laws for the payment of dividends to us by WFOE. For example, relevant PRC laws and regulations permit payments of dividends by WFOE only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, WFOE is required to set aside at least 10% of its after-tax profits based on the PRC accounting standards each year to fund a statutory reserve, until the accumulated amount of such reserve has exceeded 50% of its registered capital. Consequently, WFOE is restricted in its ability to transfer a portion of its net assets to us or any of our other subsidiaries in the form of dividends, loans or advances. The foregoing restrictions on the ability of WFOE to pay dividends to us and the limitations on the ability of VIE to pay service fees to WFOE could materially and adversely limit our ability to borrow money outside of China or pay dividends to holders of our shares.
In addition, the PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive our revenue in Renminbi. Under our current corporate structure, our income is primarily derived from dividend payments from WFOE. Shortages in the availability of foreign currency may restrict the ability of WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, conversion of Renminbi is permitted, without prior approval from the SAFE, for current account transactions, including profit distributions, interest payments and expenditures from trade-related transactions, as long as certain procedural requirements are complied with. However, any existing and future restrictions on currency exchange in China may limit our ability to convert cash derived from our operating activities into foreign currencies to fund expenditures denominated in foreign currencies. If the foreign exchange restrictions in China prevent us from obtaining U.S. dollars or other foreign currencies as required, we may not be able to pay dividends in U.S. dollars or other foreign currencies to our shareholders.
Anticipated Accounting Treatment
The Merger is expected to be treated by Hudson as a reverse merger and accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). For accounting purposes, Fr8HubFr8App is considered to be acquiring Hudson in the Merger.
Appraisal Rights and Dissenters’ Rights
The BVI Act provides that any shareholder of Hudson is entitled to payment of the fair value of his shares upon dissenting from a merger, unless Hudson is the surviving company of the merger and the shareholder continues to hold the same or similar shares. The following is a summary of the position in respect of dissenters rights in the event of a merger under the BVI Act.
A dissenter is in most circumstances required to give to Hudson written objection to the merger, which must include a statement that the dissenter proposes to demand payment for his shares if the merger takes place. This written objection must be given before the meeting of shareholders at which the merger is submitted to a vote, or at the meeting but before the vote. However, no objection is required from a shareholder to whom Hudson did not give notice of the meeting of shareholders or where the proposed merger is authorized by written consent of the shareholders without a meeting.
Within 20 days immediately following the written consent, or the meeting at which the merger was approved, Hudson shall give written notice of the consent or resolution to each shareholder who gave written objection or from whom written objection was not required, except those shareholders who voted for, or consented in writing to, the proposed merger.
A shareholder to whom Hudson was required to give notice who elects to dissent shall, within 20 days immediately following the date on which the copy of the plan of merger or an outline of the merger is given to him, give to Hudson a written notice of his decision to elect to dissent, stating:
(a) | His name and address; | |
(b) | the number and classes of shares in respect of which he dissents (which must be all shares that he holds in Hudson); and | |
(c) | a demand for payment of the fair value of his shares. |
Upon the giving of a notice of election to dissent, the dissenter ceases to have any of the rights of a shareholder except the right to be paid the fair value of his shares, and the right to institute proceedings to obtain relief on the ground that the action is illegal.
Hudson shall make a written offer to each dissenter to purchase his shares at a specified price that Hudson determines to be their fair value. Such offer must be given within 7 days immediately following the date of the expiration of the period within which shareholders may give their notices of election to dissent, or within 7 days immediately following the date on which the merger is put into effect, whichever is later.
If Hudson and the dissenter fail, within 30 days immediately following the date on which the offer is made, to agree on the price to be paid for the shares owned by the dissenter, then within 20 days:
(a) | Hudson and the dissenter shall each designate an appraiser; | |
(b) | the two designated appraisers together shall designate an appraiser; | |
(c) | the three appraisers shall fix the fair value of the shares owned by the dissenter as of the close of business on the day prior to the date of the meeting or the date on which the resolution was passed, excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal, and that value is binding on Hudson and the dissenter for all purposes; and | |
(d) | Hudson shall pay to the dissenter the amount in money upon the surrender by him of the certificates representing his shares, and such shares shall be cancelled. |
Fr8HubFr8App stockholders are entitled to appraisal rights in connection with the Merger under the DGCL.
Comparison of Stockholder Rights
Hudson is incorporated under the laws of the BVI, and Purchaser is incorporated under the laws of the State of Delaware. If the Redomestication Merger is completed, Hudson shareholders will become stockholders of Purchaser, and their rights will be governed by the DGCL, the bylaws of Purchaser and, the Amended and Restated COI of Purchaser. The rights of Hudson shareholders contained in the memorandum and articles of association of Hudson differ from the rights under the DGCL as more fully described under the section titled “Proposal 2 – The Redomestication Merger Proposal – Significant Differences between the Corporation Laws of the BVI and Delaware.in Shareholder Rights.”
SUMMARY SELECTED FINANCIAL DATA of Hudson
The following table summarizes Hudson’s financial data. Hudson has derived the following statements of operations data and balance sheets data for the years ended December 31, 20192020 and 20182019 from its audited financial statements, and six months period ended June 30, 20202021 and 20192020 from its unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus. Hudson’s historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Hudson’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and its audited and unaudited financial statements and related notes included elsewhere in this proxy statement/prospectus. Numbers in the following tables are in U.S. dollars.
STATEMENTS OF OPERATIONS DATA:
Year Ended December 31, | For the Six Months Ended June 30, | Year Ended December 31, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||
(Audited) | (Audited) | (Unaudited) | (Unaudited) | (Audited) | (Audited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Net revenue | $ | 1,366,417 | $ | 14,402,329 | 605 | 1,229,981 | $ | 618 | $ | 1,366,417 | $ | - | $ | 605 | ||||||||||||||||||
Cost of revenue | (123 | ) | (654,979 | ) | - | (126 | ) | - | 123 | - | - | |||||||||||||||||||||
Selling and marketing expenses | (100,460 | ) | (576,526 | ) | (10,534 | ) | (43,290 | ) | 10,748 | 100,460 | - | 10,534 | ||||||||||||||||||||
General and administrative expenses | (1,893,499 | ) | (11,664,394 | ) | (862,015 | ) | (1,159,696 | ) | 4,123,108 | 1,893,499 | 395,665 | 862,015 | ||||||||||||||||||||
Research and development expenses | - | (3,512,512 | ) | - | - | |||||||||||||||||||||||||||
Other income (expenses) | (61,360,850 | ) | (3,514,782 | ) | 231,701 | (54,073,250 | ) | (4,942,115 | ) | (61,360,850 | ) | 3,635 | 231,701 | |||||||||||||||||||
Income (loss) from operations | (61,988,515 | ) | (5,520,864 | ) | (640,243 | ) | (54,046,381 | ) | ||||||||||||||||||||||||
Loss from operations | (9,075,353 | ) | (61,988,515 | ) | (392,030 | ) | (640,243 | ) | ||||||||||||||||||||||||
Income tax provision | (7,243 | ) | 1,702,127 | - | (1,834,911 | ) | - | 7,243 | - | - | ||||||||||||||||||||||
Other comprehensive loss | (365,258 | ) | (2,415,919 | ) | 25,125 | 490,485 | ||||||||||||||||||||||||||
Other comprehensive gain (loss) | 2,686,394 | (365,258 | ) | (48,812 | ) | 25,125 | ||||||||||||||||||||||||||
Net income (loss) | $ | (62,361,016 | ) | $ | (6,234,656 | ) | (615,118 | ) | (55,390,807 | ) | $ | (6,388,959 | ) | $ | (62,361,016 | ) | $ | (440,842 | ) | $ | (615,118 | ) | ||||||||||
Income (loss) per ordinary share attributable to the Company | ||||||||||||||||||||||||||||||||
Basic and diluted | $ | (14.02 | )* | $ | (0.85 | )* | $ | (0.137 | )* | $ | (12.634 | )* | $ | (1.42 | )* | $ | (14.02 | )* | $ | (0.061 | ) | $ | (0.137 | )* | ||||||||
Weighted average ordinary share outstanding | ||||||||||||||||||||||||||||||||
Basic and diluted | 4,422,837 | * | 4,422,837 | * | 4,662,656 | * | 4,422,837 | * | 6,406,146 | * | 4,422,837 | * | 6,406,146 | 4,662,657 | * |
* - The computation of basic and diluted share and EPS data was adjusted retroactively for all period presented to reflect the 5 to 1 reverse stock split change which was effective on October 29, 2020.
BALANCE SHEET DATA:
As of December 31, | As of June 30, | As of December 31, | As of June 30, | |||||||||||||||||||||
2019 | 2018 | 2020 | 2020 | 2019 | 2021 | |||||||||||||||||||
(Audited) | (Audited) | (Unaudited) | (Audited) | (Audited) | (Unaudited) | |||||||||||||||||||
Current assets | $ | 5,561,034 | $ | 64,784,005 | 9,460,109 | $ | 3,470,662 | $ | 5,561,034 | $ | 932,076 | |||||||||||||
Total assets | 5,569,057 | 66,845,092 | 9,464,905 | 3,582,966 | 5,569,057 | 947,241 | ||||||||||||||||||
Current liabilities | 2,089,072 | 1,963,972 | 2,114,046 | 1,823,876 | 2,089,072 | 756,938 | ||||||||||||||||||
Long term liabilities | 959,881 | - | 945,873 | 1,127,945 | 959,881 | - | ||||||||||||||||||
Ordinary shares | 22,114 | 22,114 | 28,467 | 32,031 | 22,114 | 32,031 | ||||||||||||||||||
Total equity (deficit) | $ | 2,520,104 | $ | 64,881,120 | 6,404,986 | $ | 631,145 | $ | 2,520,104 | $ | 190,303 |
SUMMARY SELECTED FINANCIAL DATA of fr8hubFr8App
The following table summarizes Fr8Hub’sFr8App’s financial data. Fr8HubFr8App has derived the following statements of operations data and balance sheets data for the years ended December 31, 20192020 and 20182019 from its audited financial statements, and ninesix months period ended SeptemberJune 30, 20202021 and 20192020 from its unaudited condensed consolidated financial statements included elsewhere in this proxy statement/prospectus. Fr8Hub’sFr8App’s historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Fr8Hub’s“Fr8App’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and its audited and unaudited financial statements and related notes included elsewhere in this proxy statement/prospectus. Numbers in the following tables are in U.S. dollars.
STATEMENTS OF OPERATIONS DATA:
Year Ended December 31, | For the Nine Months Ended September 30, | Year Ended December 31, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||
(Audited) | (Audited) | (Unaudited) | (Unaudited) | (Audited) | (Audited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
Net revenue | $ | 4,179,845 | $ | 3,245,517 | $ | 5,415,877 | $ | 2,945,194 | $ | 9,205,941 | $ | 4,179,845 | $ | 10,666,316 | $ | 2,709,522 | ||||||||||||||||
Cost of revenue | 3,848,776 | 2,927,536 | 4,921,266 | 2,691,934 | 8,411,570 | 3,848,776 | 9,698,511 | 2,439,005 | ||||||||||||||||||||||||
Compensation and employee benefits | 1,559,278 | 1,002,902 | 1,387,980 | 1,060,939 | 2,212,407 | 1,559,278 | 2,034,999 | 730,368 | ||||||||||||||||||||||||
Sales and marketing | 130,641 | 20,234 | 18,940 | 87,355 | 23,622 | 130,641 | 163,929 | 16,381 | ||||||||||||||||||||||||
General and administrative | 1,047,551 | 827,784 | 2,052,936 | 836,208 | 2,737,184 | 1,047,551 | 1,134,840 | 621,824 | ||||||||||||||||||||||||
Depreciation and amortization | 659,961 | 534,543 | 440,470 | 482,082 | 531,027 | 659,961 | 158,141 | 343,504 | ||||||||||||||||||||||||
Other income (expenses) | (428,683 | ) | (340,481 | ) | (1,009,776 | ) | (309,226 | ) | ||||||||||||||||||||||||
Income (loss) from operations | (3,495,045 | ) | (2,407,963 | ) | (4,415,491 | ) | (2,522,550 | ) | ||||||||||||||||||||||||
Other expenses | (1,119,056 | ) | (428,683 | ) | (171,764 | ) | (986,532 | ) | ||||||||||||||||||||||||
Loss from operations | (5,828,925 | ) | (3,495,045 | ) | (2,695,868 | ) | (2,428,092 | ) | ||||||||||||||||||||||||
Income tax provision | 9,981 | - | 13,451 | 5,700 | 23,051 | 9,981 | 17,095 | 7,651 | ||||||||||||||||||||||||
Change in redemption value of preferred stock | - | - | (912,687 | ) | - | (912,687 | ) | - | - | (912,687 | ) | |||||||||||||||||||||
Net loss attributable to common stockholders | (3,505,026 | ) | (2,407,963 | ) | (5,341,629 | ) | (2,528,250 | ) | (6,764,663 | ) | (3,505,026 | ) | (2,712,963 | ) | (3,348,430 | ) | ||||||||||||||||
Other comprehensive loss | (1,529 | ) | - | 1,357 | (2,206 | ) | ||||||||||||||||||||||||||
Other comprehensive gain (loss) | 2,159 | (1,529 | ) | 20,025 | (1,045 | ) | ||||||||||||||||||||||||||
Comprehensive loss | $ | (3,506,555 | ) | $ | (2,407,963 | ) | $ | (4,427,585 | ) | $ | (2,530,456 | ) | $ | (5,849,817 | ) | $ | (3,506,555 | ) | $ | (2,692,938 | ) | $ | (2,436,788 | ) | ||||||||
Income (loss) per ordinary share attributable to the Company | ||||||||||||||||||||||||||||||||
Basic and diluted | $ | (37.28 | ) | $ | (29.00 | ) | $ | (0.87 | ) | $ | (27.00 | ) | $ | (0.85 | ) | $ | (37.28 | ) | $ | (0.20 | ) | $ | (1.09 | ) | ||||||||
Weighted average ordinary share outstanding | ||||||||||||||||||||||||||||||||
Basic and diluted | 94,055 | 83,025 | 6,127,358 | 93,632 | 7,953,545 | 94,055 | 13,463,481 | 3,107,231 |
BALANCE SHEET DATA:
As of December 31, | As of September 30, | |||||||||||
2019 | 2018 | 2020 | ||||||||||
(Audited) | (Audited) | (Unaudited) | ||||||||||
Current assets | $ | 1,438,918 | $ | 1,488,509 | $ | 3,109,256 | ||||||
Total assets | 2,239,071 | 2,530,280 | 3,619,305 | |||||||||
Current liabilities | 1,452,720 | 679,969 | 3,599,650 | |||||||||
Long term liabilities | 8,119,704 | 5,736,269 | 114,700 | |||||||||
Ordinary shares | 11 | 10 | 12 | |||||||||
Total equity (deficit) | $ | (7,333,353 | ) | $ | (3,885,958 | ) | $ | (95,045 | ) |
As of December 31, | As of June 30, | |||||||||||
2020 | 2019 | 2021 | ||||||||||
(Audited) | (Audited) | (Unaudited) | ||||||||||
Current assets | $ | 6,112,335 | $ | 1,438,918 | $ | 8,651,475 | ||||||
Total assets | 6,604,957 | 2,239,071 | 9,178,154 | |||||||||
Current liabilities | 3,847,061 | 1,452,720 | 6,310,127 | |||||||||
Long term liabilities | 3,904,912 | 8,119,704 | 6,596,687 | |||||||||
Share capital | 144 | 11 | 144 | |||||||||
Total stockholder’s deficit | $ | (1,147,016 | ) | $ | (7,333,353 | ) | $ | (3,728,660 | ) |
Unaudited Pro Forma Condensed Combined Statements of Operations Data
For the Nine Months Ended September 30, 2020 | For the Year Ended December 31, 2019 | Six Months Ended June 30, 2021 | Year Ended December 31, 2020 | |||||||||||||
Revenue | $ | 5,415,877 | $ | 4,179,845 | $ | 10,666,316 | $ | 9,206,559 | ||||||||
Cost of revenues | 9,698,511 | 8,411,570 | ||||||||||||||
Compensation and employee benefits | 1,387,980 | 1,559,278 | 2,034,999 | 2,212,407 | ||||||||||||
Sales and Marketing | 18,940 | 130,641 | 163,929 | 34,370 | ||||||||||||
General and administrative | 2,052,936 | 1,047,551 | 1,530,505 | 6,860,292 | ||||||||||||
Depreciation and amortization | 440,470 | 659,961 | 158,141 | 531,027 | ||||||||||||
Loss from operations | (3,405,715 | ) | (3,066,362 | ) | (2,919,769 | ) | (8,843,107 | ) | ||||||||
Net loss attributable to common stockholders | (5,341,629 | ) | (3,505,026 | ) | (3,104,993 | ) | (15,840,016 | ) | ||||||||
Net loss per share, basic and diluted | (0.14 | ) | (0.09 | ) | (0.08 | ) | (0.40 | ) |
Unaudited Pro Forma Condensed Combined Balance Sheet Data
As of September 30, 2020 | As of June 30, 2021 | |||||||
Cash and cash equivalents | $ | 10,255,861 | $ | 10,126,690 | ||||
Working capital, net | 8,897,868 | 8,821,084 | ||||||
Total assets | 12,707,567 | 16,429,993 | ||||||
Accumulated deficit | (12,176,924 | ) | (16,312,921 | ) | ||||
Total stockholders’ equity | 9,293,217 | 9,362,928 |
Comparative Historical and Unaudited Pro Forma Per Share Data
The information below reflects the historical net loss and book value per share of Fr8HubFr8App common stock and the historical net loss and book value per share of Hudson common stock in comparison with the unaudited pro forma net loss and book value per share after giving effect to the Pro Forma Events.pro forma events.
You should read the tables below in conjunction with the audited and unaudited consolidated financial statements of Fr8HubFr8App included in this proxy statement/prospectus and the audited and unaudited financial statements of Hudson included in this proxy statement/prospectus and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus.
Fr8App
Fr8Hub
Six months Ended June 30, 2021 | Year Ended December 31, 2020 | |||||||
Historical Per Common Share Data: | ||||||||
Basic and diluted net loss per share | $ | (0.20 | ) | $ | (0.85 | ) | ||
Book value per share (1) | $ | (0.28 | ) | $ | (0.09 | ) |
Nine Months Ended September 30, 2020 | Year Ended December 31, 2019 | |||||||
Historical Per Common Share Data: | ||||||||
Basic and diluted net loss per share | $ | (0.87 | ) | $ | (37.28 | ) | ||
Book value per share | $ | (0.01 | ) | $ | (41.95 | ) |
Hudson
Six Months Ended June 30, 2020 | Year Ended December 31, 2019 | Six Months Ended June 30, 2021 | Year Ended December 31, 2020 | |||||||||||||
Historical Per Common Share Data: | ||||||||||||||||
Basic and diluted net loss per share | $ | (0.14 | )* | $ | (14.02 | )* | $ | (0.06 | ) | $ | (1.42 | ) | ||||
Book value per share | $ | 1.12 | * | $ | 0.57 | * | $ | 0.03 | $ | (0.10 | ) |
* - The computation of basic and diluted share and EPS data was adjusted retroactively for all period presented to reflect the 5 to 1 reverse stock split change which was effective on October 29, 2020.
Combined company
Six Months Ended June 30, 2021 | Year Ended December 31, 2020 | |||||||
Pro Forma Per Common Share Data: | ||||||||
Basic and diluted net loss per share | $ | (0.08 | ) | $ | (0.40 | ) | ||
Book value per share (2) | $ | 0.24 | N/A |
Fr8App
Nine Months Ended September 30, 2020 | Year Ended December 31, 2019 | |||||||
Pro Forma Per Common Share Data: | ||||||||
Basic and diluted net loss per share | $ | (0.14 | ) | $ | (0.09 | ) | ||
Book value per share | $ | 0.22 | N/A |
Six Months Ended June 30, 2021 | Year Ended December 31, 2020 | |||||||
Pro Forma Per Common Share Data: (3) | ||||||||
Basic and diluted net loss per share | $ | (0.10 | ) | $ | (0.51 | ) | ||
Book value per share | $ | 0.30 | N/A |
(1) | Historical book value per share is calculated by dividing total shareholders’ equity by total outstanding shares. | |
(2) | Combined pro forma book value per share is calculated by dividing pro forma combined total shareholders’ equity by pro forma combined total outstanding shares. | |
(3) | Fr8App pro forma equivalent data per share is calculated by applying the estimated Exchange Ratio of 1.26622 to the unaudited pro forma combined per share data. |
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 10, 2020, FreightHubFreight App, Inc. (“Fr8Hub”Fr8App,” formerly known as “FreightHub Inc.”) entered into an agreement and plan of merger with Hudson Capital, Inc., a BVI company (“Hudson”), (the “Merger Agreement”). The terms and conditions set forth in the Merger Agreement and amendments thereto, contemplate the following transactions: (i) the redomestication of Hudson Capitalinto a Delaware corporation through a merger with Merger Sub I Inc., a Delaware corporation and wholly-owned subsidiary of Hudson (“whereby Merger Sub I”I survives (the “Redomestication”); and Hudson Capital(ii) the merger of Fr8App with and into Merger Sub II, Inc. (“Merger Sub II”), awhereby Fr8App will survive and it will become the indirect wholly-owned subsidiary of Merger Sub I (“Merger”(the “Merger”). Pursuant to the termsAs a result of the merger agreement,Merger, the separate existence of Hudson shall cease, and Fr8App will merge with Merger Sub I to redomesticate to Delaware and Merger Sub I shall becontinue as the surviving corporation incorporated in the redomestication merger. Immediately thereafter,State of Delaware.
Fr8App has entered into a series of financing transactions through the issuance of notes. The first issuance for $4,004,421 was funded in October and November 2020 (the “2020 Bridge Notes”), the second issuance for $1,000,000 was funded in January 2021 (the “January Bridge Note”), the third issuance of an aggregate of $1,608,842 was funded in May and June 2021 (the “May Bridge Notes”), the fourth issuance for $1,000,000 was funded in July 2021 (the “July Bridge Note”) and an additional issuance of approximately $8,008,841 is expected to be funded at the closing of the Merger Sub I shall spin-off its existing business(“Pre-Merger Financing”) (all of which it acquired from Hudsonare described in the redomestication merger. Afternotes to the spin-off, Merger Sub IIUnaudited Pro Forma Condensed Combined Financial Information). The 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes, the July Bridge Note and the Pre-Merger Financing will mergeconvert into shares of Series A3 Preferred Stock at the Merger.
The holders of the January Bridge Note, the May Bridge Notes and the July Bridge Note have the option to elect for all or a portion of such converting principal to reduce amounts that the holders are otherwise committed to fund in cash in respect of Series A3 Preferred Stock at the closing of the Pre-Merger Financing. If and to the extent the holders exercise this option, the $8,008,841 in aggregate gross proceeds expected to be received by Fr8App would be correspondingly reduced on a dollar-for-dollar basis by the amount of converted principal and accrued and unpaid interest under the January Bridge Note, the May Bridge Notes and the July Bridge Note with Fr8Hub and Fr8Hubrespect to which such option is exercised (the “Opt Out Option”).
Since the exercise of the Opt Out Option is not probable, the Pro Forma Financial Information is presented under the assumption that the Pre-Merger Financing will be funded in the surviving entityfull amount of $8,008,841 and wholly-owned subsidiary of Merger Sub I. the Exchange Ratio is 1:1.26622. The notes to the Pro Forma Financial Information disclose the impact on the pro forma financial information should this Opt Out Option exercise occur and funding as a result be otherwise reduced by $3,634,137 (including accrued interest through June 30, 2021), and the Exchange Ratio increased to approximately 1:1.40279.
All shares of common stock, preferred stock, series seed, warrants and options of Fr8HubFr8App issued and outstanding immediately prior to the mergerMerger shall be cancelled and converted into an equivalent class of securities or the right to receive equivalent class of securities in Merger Sub Iof the Combined Company, at an exchange ratio ofExchange Ratio assuming the Opt Out is not exercised, estimated at 1 to 1.5025612.1.26622. Said Exchange Ratio shall be updated on the actual closing date of the Merger itself. The closing is subject to customary closing conditions and pre-closing covenants, including the approval by the Hudson shareholders of the transactions and other proposals to be voted upon at a special meeting of the Hudson shareholders. UponFollowing the closing of the transaction,transactions contemplated in the Fr8HubMerger Agreement, Fr8App stockholders will own 85.7% of Merger Sub I (“the Combined Company”)Company on a non-diluted basis.
The following unaudited pro forma condensed combined balance sheet of the Combined Company as of SeptemberJune 30, 20202021 and the unaudited pro forma condensed combined statements of operations of the Combined Company for the six months ended June 30, 2021 and year ended December 31, 2019 and for the nine months ended September 30, 2020 present the combination of the financial information of Fr8HubFr8App and Hudson after giving effect to the Merger.Merger and to the 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes, the July Bridge Note and the Pre-Merger Financing, as further described in the Notes to the Unaudited Pro Forma Condensed Combined Financial Information. The unaudited pro forma condensed combined statements of operations for the ninesix months ended SeptemberJune 30, 20202021 and the year ended December 31, 2019 gives2020 give effect to the Merger as if it occurred on January 1, 2019.2020. The unaudited pro forma condensed combined balance sheet as of SeptemberJune 30, 20202021 gives effect to the Merger as if it had occurred on September 30, 2020.
Hudson’s unaudited pro forma condensed combined balance sheet as of September 30, 2020 and unaudited pro forma condensed statements of operations for the nine months ended September 30, 2020 are not available and as such the unaudited pro forma condensed combined financial information of the Combined Company includes Hudson’s unaudited pro forma condensed combined balance sheet as of June 30, 2020 and the unaudited pro forma condensed statements of operations for the six months ended June 30, 2020.2021.
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements (“Pro Forma Statements”) are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.
The Pro Forma Statements should be read together with the Fr8HubFr8App’s and Hudson’s historical consolidated financial statements, which are included in this proxy statement/prospectus, and Hudson’s latest semi-annual report on Form 6-K as filed on July 29, 2021 and on its annual report on Form 20-F filed with SEC on June 15, 2020 and quarterly report on Form 6-K filed with SEC on September 29, 2020.
May 5, 2021.
The Pro Forma Statements and accompaniedaccompanying notes contained herein assumes that Hudson’s shareholders approve the Merger. The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. The pro forma adjustments reflected in the unaudited pro forma condensed combined financial information are preliminary and based on estimates, subject to further revision as additional information becomes available and additional analyses are performed and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary adjustments reflected in the Pro Forma Statements and the final application of the accounting for the Merger, which is expected to be completed as soon as practicable after the closing of the Merger, may occur and those differences could have a material impact on the accompanying Pro Forma Statements and supplementary financial information and the combined company’s future results of operations and financial position. In addition, differences between the preliminary and final adjustments will likely occur as a result of the amount of cash used in operations from the date of the unaudited pro forma condensed combined balance sheet through the consummation of the Merger, as well as other changes in assets and liabilities between SeptemberJune 30, 20202021 and the closing of the Merger. In addition, differences between the preliminary and final estimated purchase price may occur prior to the closing of the Merger due to changes in Hudson’s stock price or other unforeseen considerations. Finally, differences between the preliminary and final exchange ratio will likely occur between the filing date and the closing of the Merger as result of changes to Fr8Hub’sFr8App’s and Hudson’s capitalization during such period.
The Pro Forma Statements and accompanied notes have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Fr8HubFr8App and Hudson been a combined company during the specified periods.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBERJUNE 30, 20202021
Hudson (1) (Historical) | Fr8Hub (2) (Historical) | Elimination (3) | Pro Forma Adjustments | Notes | Pro Forma Combined | Hudson (1) (Historical) | Fr8App (2) (Historical) | Elimination (3) | Pro Forma Adjustments | Notes | Pro Forma Combined | |||||||||||||||||||||||||||||||||||
ASSETS: | ||||||||||||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 3,779,082 | $ | 890,449 | $ | (3,779,082 | ) | $ | 11,713,262 | (a) | $ | 10,255,861 | $ | 699,000 | $ | 2,514,240 | $ | - | $ | 9,008,841 | (a) | $ | 10,126,690 | |||||||||||||||||||||||
(2,347,850 | ) | (b) | (2,095,391 | ) | (b) | |||||||||||||||||||||||||||||||||||||||||
Accounts receivable | - | 1,558,858 | - | - | 1,558,858 | - | 3,378,767 | - | - | 3,378,767 | ||||||||||||||||||||||||||||||||||||
Accounts receivable – related party | - | 15,900 | - | - | 15,900 | - | 5,850 | - | - | 5,850 | ||||||||||||||||||||||||||||||||||||
Unbilled receivables | - | 274,071 | - | - | 274,071 | |||||||||||||||||||||||||||||||||||||||||
Unbilled receivable | - | 1,683,594 | - | - | 1,683,594 | |||||||||||||||||||||||||||||||||||||||||
Restricted cash in escrow | 175,000 | (175,000) | (c) | - | 175,000 | (175,000 | ) | (c) | - | |||||||||||||||||||||||||||||||||||||
Other receivables | 796,948 | - | (796,948 | ) | - | - | 140,935 | - | - | - | 140,935 | |||||||||||||||||||||||||||||||||||
Loan to third parties | 4,800,000 | - | (4,800,000 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||
Due from related parties | 75,351 | - | (75,351 | ) | - | - | 82,576 | - | - | - | 82,276 | |||||||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | 8,728 | 194,978 | (8,728 | ) | (102,150) | (d) | 92,828 | 9,565 | 894,024 | - | (433,852 | ) | (d) | 469,737 | ||||||||||||||||||||||||||||||||
Total current assets | 9,460,109 | 3,109,256 | (9,460,109 | ) | 9,088,262 | 12,197,518 | 932,076 | 8,651,475 | - | 6,304,598 | 15,888,149 | |||||||||||||||||||||||||||||||||||
Intangible assets, net | 1,206 | 9,000 | (1,206 | ) | - | 9,000 | 814 | 8,391 | - | - | 9,205 | |||||||||||||||||||||||||||||||||||
Capitalized software, net | - | 455,862 | - | - | 455,862 | - | 452,831 | - | - | 452,831 | ||||||||||||||||||||||||||||||||||||
Property and equipment, net | 797 | 37,369 | (797 | ) | - | 37,369 | 11,290 | 57,639 | - | - | 68,929 | |||||||||||||||||||||||||||||||||||
Security deposits | - | 7,818 | - | - | 7,818 | - | 7,818 | - | - | 7,818 | ||||||||||||||||||||||||||||||||||||
Long-term prepayment | 2,793 | - | (2,793 | ) | - | - | 3,061 | - | - | - | 3,061 | |||||||||||||||||||||||||||||||||||
Total assets | $ | 9,464,905 | $ | 3,619,305 | $ | (9,464,905 | ) | $ | 9,088,262 | $ | 12,707,567 | $ | 947,241 | $ | 9,178,154 | $ | - | $ | 6,304,598 | $ | 16,429,993 | |||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT: | ||||||||||||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | - | $ | 1,451,035 | $ | - | $ | - | $ | 1,451,035 | $ | - | $ | 2,405,468 | $ | - | $ | - | $ | 2,405,468 | ||||||||||||||||||||||||||
Accrued expenses | 832,466 | 528,485 | (832,466 | ) | - | 528,485 | 252,293 | 1,289,634 | - | - | 1,541,927 | |||||||||||||||||||||||||||||||||||
Short-term borrowings | - | 1,522,300 | - | (300,000) | (e) | 1,222,300 | - | 2,363,260 | - | - | 2,363,260 | |||||||||||||||||||||||||||||||||||
Due to related party | 334,650 | 74,398 | (334,650 | ) | - | 74,398 | ||||||||||||||||||||||||||||||||||||||||
Accounts payable- related party | 361,339 | 177,279 | - | - | 538,618 | |||||||||||||||||||||||||||||||||||||||||
Insurance financing payable | 24,359 | 24,359 | ||||||||||||||||||||||||||||||||||||||||||||
Income tax payable | 946,930 | 23,432 | (946,930 | ) | - | 23,432 | 143,306 | 50,127 | - | - | 193,433 | |||||||||||||||||||||||||||||||||||
Total current liabilities | 2,114,046 | 3,599,650 | (2,114,046 | ) | (300,000) | 3,299,650 | 756,938 | 6,310,127 | - | - | 7,067,065 | |||||||||||||||||||||||||||||||||||
Paycheck protection program – long term | - | 114,700 | - | - | 114,700 | |||||||||||||||||||||||||||||||||||||||||
Provision of other liabilities | 945,873 | - | (945,873 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||
Convertible notes payable, net | - | 6,596,687 | (6,596,687 | ) | (f) | - | ||||||||||||||||||||||||||||||||||||||||
Total liabilities | 3,059,919 | 3,714,350 | (3,059,919 | ) | (300,000) | 3,414,350 | 756,938 | 12,906,814 | - | (6,596,687 | ) | 7,067,065 | ||||||||||||||||||||||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | - | 122 | - | 3,061 | (f) | 3,183 | - | 122 | - | 1,420 | (e) | 1,542 | ||||||||||||||||||||||||||||||||||
Common stock | 28,467 | 12 | (28,467 | ) | 730 | (f) | 742 | 32,031 | 22 | (32,031 | ) | 2,380 | (e) | 2,402 | ||||||||||||||||||||||||||||||||
Additional paid-in capital | 32,934,692 | 12,081,917 | (32,934,692 | ) | 12,013,262 | (a)(e) | 21,466,388 | 32,931,128 | 12,563,462 | 9,008,841 | (a) | 25,651,250 | ||||||||||||||||||||||||||||||||||
(2,625,000 | ) | (b) | (2,704,243 | ) | (b) | |||||||||||||||||||||||||||||||||||||||||
(3,791 | ) | (f) | (3,800 | ) | (e) | |||||||||||||||||||||||||||||||||||||||||
6,596,687 | (f) | |||||||||||||||||||||||||||||||||||||||||||||
(32,931,128 | ) | (g) | ||||||||||||||||||||||||||||||||||||||||||||
190,303 | (g) | |||||||||||||||||||||||||||||||||||||||||||||
Statutory reserve | 2,949,930 | - | (2,949,930 | ) | - | - | 3,032,854 | - | (3,032,854 | ) | - | (g) | - | |||||||||||||||||||||||||||||||||
Accumulated deficit | (26,019,942 | ) | (12,176,924 | ) | 26,019,942 | - | (12,176,924 | ) | (34,930,006 | ) | (16,312,921 | ) | 34,930,006 | (g) | (16,312,921 | ) | ||||||||||||||||||||||||||||||
Accumulated other comprehensive loss | (3,488,161 | ) | (172 | ) | 3,488,161 | - | (172 | ) | ||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive gain | (875,704 | ) | 20,655 | 875,704 | - | (g) | 20,655 | |||||||||||||||||||||||||||||||||||||||
Total stockholders’ equity (deficit) | 6,404,986 | (95,045 | ) | (6,404,986 | ) | 9,388,262 | 9,293,217 | 190,303 | (3,728,660 | ) | - | 12,901,285 | 9,362,928 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ deficit | $ | 9,464,905 | $ | 3,619,305 | $ | (9,464,905 | ) | $ | 9,088,262 | $ | 12,707,567 | $ | 947,241 | $ | 9,178,154 | $ | - | $ | 6,304,598 | $ | 16,429,993 |
(1) | Derived from Hudson’s unaudited condensed consolidated balance sheet as of June 30, | |
(2) | Derived from | |
(3) | To eliminate |
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR
THE SIX MONTHS ENDED JUNE 30, 2021
Hudson (4) (Historical) | Fr8App (5) (Historical) | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||
Net revenue | $ | - | $ | 10,666,316 | $- | $10,666,316 | ||||||||||
Cost of revenue | - | (9,698,511 | ) | - | (9,698,511) | |||||||||||
Gross profit | - | 967,805 | - | 967,805 | ||||||||||||
Operating expenses | ||||||||||||||||
Compensation and employee benefits | - | 2,034,999 | - | 2,034,999 | ||||||||||||
Sales and marketing | - | 163,929 | - | 163,929 | ||||||||||||
General and administrative | 395,665 | 1,134,840 | - | 1,530,505 | ||||||||||||
Depreciation and amortization | - | 158,141 | - | 158,141 | ||||||||||||
Total operating expenses | 395,665 | 3,491,909 | - | 3,887,574 | ||||||||||||
Operating loss | (395,665 | ) | (2,524,104 | ) | - | (2,919,769) | ||||||||||
Other expenses | ||||||||||||||||
Interest income (expense), net | 4 | (287,442 | ) | - | (287,438) | |||||||||||
Other income (expense) | 3,631 | - | - | 3,631 | ||||||||||||
Gain from extinguishment of debt | - | 115,678 | 115,678 | |||||||||||||
Loss before provision for income taxes | (392,030 | ) | (2,695,868 | ) | - | (3,087,898) | ||||||||||
Income tax expense | - | 17,095 | - | 17,095 | ||||||||||||
Net loss attributable to common stockholders | (392,030 | ) | (2,712,963 | ) | (3,104,993) | |||||||||||
Other comprehensive loss | ||||||||||||||||
Foreign currency translation | (48,812 | ) | 20,025 | - | (28,787) | |||||||||||
Comprehensive loss | $ | (440,842 | ) | $ | (2,692,938 | ) | $(3,133,780) | |||||||||
Net loss per share attributable to common stockholder, basic and diluted | $ | (0.06 | ) | $ | (0.20 | ) | $(0.08) | |||||||||
Weighted average number of common shares | 6,406,146 | 13,463,481 | (h) | 39,439,579 |
(4) | Derived from Hudson’s unaudited condensed consolidated statement of operations for the six months ended June 30, 2021. | |
(5) | Derived from Fr8App’s unaudited condensed consolidated statement of operations for the six months ended June 30, 2021. |
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR
THE YEAR ENDENDED DECEMBER 31, 20192020
Hudson (4) (Historical) | Fr8Hub (5) (Historical) | Elimination (6) | Pro Forma Adjustments | Notes | Pro Forma Combined | Hudson (4) (Historical) | Fr8App (5) (Historical) | Pro Forma Adjustments | Notes | Pro Forma Combined | |||||||||||||||||||||||||||||||
Net revenue | $ | 1,366,417 | $ | 4,179,845 | $ | (1,366,417 | ) | $ | - | $ | 4,179,845 | $ | 618 | $ | 9,205,941 | $ | - | $ | 9,206,559 | ||||||||||||||||||||||
Cost of revenue | (123 | ) | (3,848,776 | ) | 123 | - | (3,848,776 | ) | - | (8,411,570 | ) | - | (8,411,570 | ) | |||||||||||||||||||||||||||
Gross profit | 1,366,294 | 331,069 | (1,366,294 | ) | - | 331,069 | 618 | 794,371 | - | 794,989 | |||||||||||||||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||||||||||||||
Compensation and employee benefits | - | 1,559,278 | - | - | 1,559,278 | - | 2,212,407 | - | 2,212,407 | ||||||||||||||||||||||||||||||||
Sales and marketing | 100,460 | 130,641 | (100,460 | ) | - | 130,641 | 10,748 | 23,622 | - | 34,370 | |||||||||||||||||||||||||||||||
General and administrative | 1,893,499 | 1,047,551 | (1,893,499 | ) | - | 1,047,551 | 4,123,108 | 2,737,184 | - | 6,860,292 | |||||||||||||||||||||||||||||||
Depreciation and amortization | - | 659,961 | - | - | 659,961 | - | 531,027 | - | 531,027 | ||||||||||||||||||||||||||||||||
Total operating expenses | 1,993,959 | 3,397,431 | (1,993,959 | ) | - | 3,397,431 | 4,133,856 | 5,504,240 | - | 9,638,096 | |||||||||||||||||||||||||||||||
Operating loss | (627,665 | ) | (3,066,362 | ) | 627,665 | - | (3,066,362 | ) | (4,133,238 | ) | (4,709,869 | ) | - | (8,843,107 | ) | ||||||||||||||||||||||||||
Other expenses | |||||||||||||||||||||||||||||||||||||||||
Interest income (expense), net | 2,192,297 | (428,683 | ) | (2,192,297 | ) | - | (428,683 | ) | 365,014 | (334,170 | ) | - | 30,844 | ||||||||||||||||||||||||||||
Other expenses, net | (5,611,484 | ) | - | 5,611,484 | - | - | |||||||||||||||||||||||||||||||||||
Impairment loss on loans to third parties and property and equipment | (57,941,663 | ) | - | 57,941,663 | - | - | |||||||||||||||||||||||||||||||||||
Other income (expense) | 38,870 | - | - | 38,870 | |||||||||||||||||||||||||||||||||||||
Reversal of impairment (impairment loss) on loans to third parties | (5,345,999 | ) | - | (5,345,999) | |||||||||||||||||||||||||||||||||||||
Loss from extinguishment of debt | - | (784,886 | ) | (784,886 | ) | ||||||||||||||||||||||||||||||||||||
Loss before provision for income taxes | (61,988,515 | ) | (3,495,045 | ) | 61,988,515 | - | (3,495,045 | ) | (9,075,353 | ) | (5,828,925 | ) | - | (14,904,278 | ) | ||||||||||||||||||||||||||
Income tax expense | 7,243 | 9,981 | (7,243 | ) | - | 9,981 | - | 23,051 | - | 23,051 | |||||||||||||||||||||||||||||||
Net loss | (61,995,758 | ) | (3,505,026 | ) | 61,995,758 | - | (3,505,026 | ) | (9,075,353 | ) | (5,851,976 | ) | (14,927,329 | ) | |||||||||||||||||||||||||||
Change in redemption value of redeemable preferred stock | - | (912,687 | ) | - | (912,687 | ) | |||||||||||||||||||||||||||||||||||
Net loss attributable to common stockholders | (9,075,353) | (6,764,663 | ) | (15,840,016 | ) | ||||||||||||||||||||||||||||||||||||
Other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | (365,258 | ) | (1,529 | ) | 365,258 | - | (1,529 | ) | 2,686,394 | 2,159 | - | 2,688,553 | |||||||||||||||||||||||||||||
Comprehensive loss | $ | (62,361,016 | ) | $ | (3,506,555 | ) | $ | 62,361,016 | $ | - | $ | (3,506,555 | ) | $ | (6,388,959 | ) | $ | (5,849,817 | ) | $ | (12,238,776 | ) | |||||||||||||||||||
Earnings per share, basic & fully diluted | $ | (14.02 | )(7) | $ | (37.28 | ) | $ | (0.09 | ) | ||||||||||||||||||||||||||||||||
Net loss per share, attributable to common stockholder, basic and diluted | $ | (1.42 | ) | $ | (0.85 | ) | $ | (0.40 | ) | ||||||||||||||||||||||||||||||||
Weighted average number of common shares | 4,422,837 | (7) | 94,055 | (g) | 39,242,270 | 6,406,146 | 7,953,545 | (h) | 39,439,579 |
(4) | Derived from Hudson’s audited consolidated statement of operations for the year ended December 31, | |
(5) | Derived from | |
|
See accompanying notes to the Pro Forma Statements
PRO FORMA CONDENSED COMBINED STATEMENT FOR
NINE MONTHS ENDED SEPTEMBER 30, 2020
Hudson (8) (Historical) | Fr8Hub (9) (Historical) | Elimination (10) | Pro Forma Adjustments | Notes | Pro Forma Combined | |||||||||||||||||||
Net revenue | $ | 605 | $ | 5,415,877 | $ | (605 | ) | $ | - | $ | 5,415,877 | |||||||||||||
Cost of revenue | - | (4,921,266 | ) | - | - | (4,921,266 | ) | |||||||||||||||||
Gross profit | 605 | 494,611 | (605 | ) | - | 494,611 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Compensation and employee benefits | - | 1,387,980 | - | - | 1,387,980 | |||||||||||||||||||
Sales and marketing | 10,534 | 18,940 | (10,534 | ) | - | 18,940 | ||||||||||||||||||
General and administrative | 862,015 | 2,052,936 | (862,015 | ) | - | 2,052,936 | ||||||||||||||||||
Depreciation and amortization | - | 440,470 | - | - | 440,470 | |||||||||||||||||||
Total operating expenses | 872,549 | 3,900,326 | (872,549 | ) | - | 3,900,326 | ||||||||||||||||||
Operating loss | (871,944 | ) | (3,405,715 | ) | 871,944 | - | (3,405,715 | ) | ||||||||||||||||
Other expenses | ||||||||||||||||||||||||
Interest income (expense), net | 181,014 | (224,890 | ) | (181,014 | ) | - | (224,890 | ) | ||||||||||||||||
Other expenses, net | 50,000 | - | (50,000 | ) | - | - | ||||||||||||||||||
Reversal of impairment (impairment loss) on loans to third parties | 687 | - | (687 | ) | - | - | ||||||||||||||||||
Loss from extinguishment of debt | - | (784,886 | ) | - | - | (784,886 | ) | |||||||||||||||||
Loss before provision for income taxes | (640,243 | ) | (4,415,491 | ) | 640,243 | - | (4,415,491 | ) | ||||||||||||||||
Income tax expense | - | 13,451 | - | - | 13,451 | |||||||||||||||||||
Net loss | (640,243 | ) | (4,428,942 | ) | 640,243 | (4,428,942 | ) | |||||||||||||||||
Change in redemption value of redeemable preferred stock | - | (912,687 | ) | - | - | (912,687 | ) | |||||||||||||||||
Net loss attributable to common stockholders | (5,341,629 | ) | (5,341,629 | ) | ||||||||||||||||||||
Other comprehensive loss | ||||||||||||||||||||||||
Foreign currency translation | 25,125 | 1,357 | (25,125 | ) | - | 1,357 | ||||||||||||||||||
Comprehensive loss | $ | (615,118 | ) | $ | (4,427,585 | ) | $ | 615,118 | $ | (4,427,585 | ) | |||||||||||||
Earnings per share, basic & fully diluted | $ | (0.137 | )(11) | $ | (0.87 | ) | $ | (0.14 | ) | |||||||||||||||
Weighted average number of common shares | 4,662,656 | (11) | 6,127,358 | (g) | 39,242,270 |
| ||
|
See accompanying notes to the Pro Forma Statements
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the Merger, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results of the Combined Company following the Merger.
The Merger isunaudited pro forma condensed combined financial information was prepared assuming the transaction will be accounted for as an equity transaction. This unaudited pro forma condensed combined financial information gives effect to certain financing transactions that will occur after June 30, 2021.
The merger is expected to be treated as an equity transaction. To determine the accounting for this transaction under U. S. GAAP, a reverse recapitalizationcompany must assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business, asset acquisition or an equity transaction. The transaction between Fr8App and Hudson represents an equity transaction rather than a business combination under ASC 805. Accordingly, Fr8App is not expected to receive material non-monetary assets as part of this transaction. Therefore, no goodwill or intangible assets will be recognized as a result of the transaction. The transaction has been determined to be an equity transaction where in accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations. substance Fr8App is exchanging equity for the net monetary assets of Hudson.
Management evaluated the guidance contained in ASC 805 with respect to the identification of the acquirer in the Merger and determined that Fr8HubFr8App will be the acquirer of Hudson for accounting purposes based on evaluation of the following facts and circumstances:
● | ||
● | The Combined Company’s board of directors is expected to be composed of | |
● |
Accordingly, for accounting purposes, the financial statements of the Combined Company will represent a continuation of the financial statements of Fr8HubFr8App with the acquisition being treated as the equivalent of FR8HubFr8App issuing stock for the net assets of Hudson, accompanied by a recapitalization. The net assets of Hudson will be stated at historical cost, with no goodwill or other intangible assets recorded. Due to the spin-off of Hudson’s previously existing business immediately prior to the Merger process, the Pro Forma Statements reflect an elimination of all of Hudson net assets.
The unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2020 and unaudited Pro Forma Condensed Statements of Operations for the nine months ended September 30, 2020 shall combine Hudson and Fr8Hub financial information as of and for the period ended September 30, 2020. However, the Hudson’s financial information is not available and as such the unaudited pro forma condensed combined financial information of the Combined Company includes Hudson’s unauditedUnaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 20202021 and the unauditedUnaudited Pro Forma Condensed Combined Statements of Operations for the six months ended June 30, 2020. Owing to2021 and the spin-offyear ended December 31, 2020 combines Hudson and Fr8App financial information as of Hudson’s previously existing business prior toJune 30, 2021 and for the Merger process, Hudson’s assets, liabilities, revenuessix months ended June 30, 2021 and expenses will be eliminated in the Elimination column and have no impact on such items in the Pro Forma Combined column.year ended December 31, 2020, as applicable.
Stockholders’ equity reflects the bridge financing and the additional shares issued to both Companies’ shareholders as described in Note 2(a). As described in Note 1. Basis of Presentation, Fr8hubabove, Fr8App was determined to be the accounting acquirer and since Hudson will spin-off all of its existing business, the equity of the Combined Company will represent a continuation of the equity of Fr8hubFr8App with the equivalent of Fr8hubFr8App issuing stock to the shareholders of Hudson, accompanied by a recapitalization.
One-time direct and incremental transaction costs anticipated to be incurred prior to, or concurrent with, the consummation of the Merger are reflected in the unaudited pro forma condensed combined balance sheet as a direct reduction to the Combined Company’s additional paid-in capital and are assumed to be cash settled, with the exception of certain fees paid to Fr8App’s financial adviser (“Finder’s Fee”) in shares to Fr8Hub’s financial adviser in exchange for services provided in connection with the Merger, which are neutral to stockholders’ equity.
The Pro Forma Statements do not reflect the income tax effects of the pro forma adjustments. The Combined Company’s management believes this unaudited pro forma condensed combined financial information tois not be meaningful given the Combined Company incurred significant losses during the historical periods presented.
The Pro Forma Statements do not necessarily reflect what the Combined Company’s financial condition or results of operations would have been had the Merger occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the Combined Company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
2. Adjustments to Unaudited Pro Forma Condensed Combined Financial Information
The Pro Forma Statements have been prepared to illustrate the effect of the Merger and the other transactions contemplated by the Merger agreementAgreement and have been prepared for informational purposes only. The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give pro forma effect to events that are (1) directly attributable to the Merger, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the results of the Combined Company. Fr8HubFr8App and Hudson have not had any historical relationship prior to the Merger. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
The stockholders’ equity reflects the bridge financingconversion of the 2020 Bridge Notes, January Bridge Note, May Bridge Notes, July Bridge Note, and the full funding of the Pre-Merger Financing and the additional shares issued to both Companies’ shareholders as described in Note 2(a)(g). The holders of the January Bridge Note, May Bridge Notes and the July Bridge Note have an Opt Out Option to elect for all or a portion of such converting principal and accrued and unpaid interest to reduce amounts that the holders are otherwise committed to fund in cash in the Pre-Merger Financing. Since the full funding of Pre-Merger Financing is not definite, though probable, Note (i) to the Pro Forma Financial Information discloses the impact on the pro forma financial information should the Pre-Merger Financing be reduced by the full exercise of the Opt Out Option.
As described in Note 1.1, Basis of Presentation, Fr8hubFr8App was determined to be the accounting acquirer and since Hudson will spin-off all of its existing business, the equity of the combined companyCombined Company will represent a continuation of the equity of Fr8hubFr8App with the acquisition being treated as the equivalent of Fr8hubFr8App issuing stock to the shareholders of Hudson and Fr8App at the exchange ratio,Exchange Ratio, accompanied by issuing stock to the shareholders of Fr8hub at the exchange ratio.a recapitalization.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The adjustments included in the unaudited pro forma condensed combined balance sheet as of SeptemberJune 30, 20202021 are as follows:
(a) | To record cash to be received On Pursuant to an amendment to the Total cash of $9,008,841 represented as an adjustment in the pro forma is comprised of Pre-Merger Financing |
(b) | Represents preliminary estimated direct transaction costs of
|
(c) | Represents an amount of $175,000 held in escrow to be used to pay transaction costs in connection with the transactions contemplated by the |
(d) | Represents an amount of |
(e) | |
Reflects par value of $0.0001 per share of 39,439,579 shares upon closing of the |
Class of Shares to be issued | Number of shares to be issued | Par value | ||||||
Preferred | 15,416,086 | $ | 1,542 | |||||
Common | 24,023,493 | 2,402 | ||||||
39,439,579 | $ | 3,944 |
(f) | Reflects the conversion of the 2020 Bridge Notes and January Bridge Note into Series A3 Preferred shares. |
On October 7, 2020, the Company entered into a note purchase agreement for the 2020 Bridge Notes with certain existing shareholders and investors pursuant to which the Company issued bridge notes in the aggregate principal amount of $4,004,421. The 2020 Bridge Notes will mature on October 7, 2022 and carry an annual interest rate of 5%. Each note is convertible into conversion shares pursuant to one of the following: 1. Automatic PIPE financing conversion; 2. Optional next equity financing conversion; 3. Optional corporate transaction conversion; or 4. Optional maturity conversion. There is no pre-determined conversion price in any of the above under the note purchase agreements, but rather, the applicable conversion price in connection with any conversion of the 2020 Bridge Notes will be determined by reference to a formula that includes a 50% discount to the per share price or value of the Company’s shares, as the case may be, implied by the event in connection with which, or at the time at which, conversion occurs.
On January 29, 2021, the Company entered into a note purchase agreement with an existing shareholder pursuant to which the Company issued the January Bridge Note in the aggregate principal amount of $1,000,000 and with the same maturity date, interest rate as the 2020 Bridge Notes. The January Bridge Note conversion terms are the same as the 2020 Bridge Notes with the exception of a discount rate of 20% instead of 50%.
On May 24, 2021, the Company entered into a note purchase agreement with an existing shareholder pursuant to which the Company issued the May Bridge Notes in the aggregate principal amount of $1,608,842 and with the same maturity date, interest rate as the January Bridge Note. The terms of the May Bridge Notes are similar to the January Bridge Note with the exception of having a 25% discount to the per share price or value of the Company’s shares, as the case may be, implied by the event in connection with which, or at the time at which, conversion occurs.
The note balances as of June 30, 2021 are as follows:
2020 Bridge Notes | $ | 4,004,421 | ||
January Bridge Note | 1,000,000 | |||
May Bridge Notes | 1,608,842 | |||
Accrued interest | 168,425 | |||
Less: unamortized deferred financing costs and discount | (185,001 | ) | ||
Total notes, net | $ | 6,596,687 |
(g) | To eliminate historical stockholders’ equity of Hudson. In addition, the Hudson pro forma adjustment to additional paid-in capital of $190,303 was determined as follows: |
ASSETS: | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 699,000 | ||
Other receivables | 140,935 | |||
Due from related parties | 82,576 | |||
Prepaid expenses and other assets | 9,565 | |||
Property and equipment, net and other long-term assets | 15,165 | |||
Total identifiable assets acquired | 947,241 | |||
Accrued expenses | 252,293 | |||
Accounts payable- related party | 361,339 | |||
Income tax payable | 143,306 | |||
Total liabilities assumed | 756,938 | |||
Identifiable net monetary assets | 190,303 |
Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
The adjustments included in the unaudited pro forma condensed combined statementstatements of operations for the ninesix months ended SeptemberJune 30, 20202021 and the year ended December 31, 20192020 are as follows:
(h) | The pro forma share calculations are presented as though the Merger occurred at the beginning of the periods presented, and the calculation of weighted average shares outstanding for basic and diluted net loss per Common share assumes that the shares issuable relating to the Merger have been outstanding for the entire periods presented. There is no substantive difference between Preferred Stock and Common Stock for any substantive right, including dividends and liquidation. The holders of Preferred Stock do not have rights to preferential or cumulative dividends and they share ratably with common stockholders in any type of distribution. Rights to earnings and dividends are currently identical to those of the common stockholders. As the Preferred Stock is considered to be Common Stock in substance, there is only one net loss per share disclosed. The pro forma calculation of the weighted average shares outstanding as if the Merger was consummated on January 1, 2020, is as follows: |
(g) The pro forma share calculations are presented as though the Merger occurred at the beginning of the periods presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable relating to the Merger have been outstanding for the entire periods presented. The pro forma calculation of the weighted average shares outstanding as if the Merger was consummated on January 1, 2019, as follows:
Class | June 30, 2021 | To be Issued Prior to Merger | Total Outstanding Prior to Merger | Estimated Exchange Ratio | Post-Merger Shares | Hudson Outstanding Ordinary Shares | Pro Forma Outstanding Shares | |||||||||||||||||||||
Common | 1,296,652 | (624,841 | )(2) | 671,811 | 1.26622 | 850,658 | 6,406,146 | 7,256,804 | ||||||||||||||||||||
A2 Preferred | 1,426,876 | 1,426,876 | 1.26622 | 1,806,733 | 1,806,733 | |||||||||||||||||||||||
A1-A Preferred | 7,758,329 | 7,758,329 | 1.26622 | 9,823,722 | 9,823,722 | |||||||||||||||||||||||
A1-B Preferred | 2,977,544 | 2,977,544 | 1.26622 | 3,770,215 | 3,770,215 | |||||||||||||||||||||||
Series Seed | 12,175 | 12,175 | 1.26622 | 15,416 | 15,416 | |||||||||||||||||||||||
A3 Preferred | 12,616,726 | (1) | 12,616,726 | 1.26622 | 15,975,505 | (3) | 15,975,505 | |||||||||||||||||||||
A4 Preferred | 624,841 | (2) | 624,841 | 1.26622 | 791,183 | 791,183 | ||||||||||||||||||||||
Total | 13,471,575 | 12,616,726 | 26,088,302 | 33,033,433 | 6,406,146 | 39,439,579 |
(1) | The number of shares of A3 Preferred Stock including accumulated interest through June 30, 2021 was determined as follows: |
Class | September 30, 2020 | Issued post September 30, 2020 | To be Issued Prior to Merger | Total Outstanding Prior to Merger | Exchange Ratio | Post-Merger Shares | Hudson Outstanding Ordinary Shares | Pro Forma Outstanding (*) | ||||||||||||||||||||||||
Common | 251,989 | 1,753 | 406,402 | 660,144 | 1.502561201 | 991,907 | 6,406,146 | 7,398,053 | ||||||||||||||||||||||||
A2 Preferred | 1,426,876 | 1,426,876 | 1.502561201 | 2,143,968 | 2,143,968 | |||||||||||||||||||||||||||
A1A Preferred | 7,758,329 | 7,758,329 | 1.502561201 | 11,657,363 | 11,657,363 | |||||||||||||||||||||||||||
A1B Preferred | 2,977,544 | 2,977,544 | 1.502561201 | 4,473,942 | 4,473,942 | |||||||||||||||||||||||||||
Series Seed | 12,175 | 12,175 | 1.502561201 | 18,294 | 18,294 | |||||||||||||||||||||||||||
A3 Preferred | 8,393,527 | 8,393,527 | 1.502561201 | 12,611,789 | 12,611,789 | |||||||||||||||||||||||||||
A4 Preferred | 624,841 | 624,841 | 1.502561201 | 938,861 | 938,861 | |||||||||||||||||||||||||||
Total | 12,426,912 | 1,753 | 9,424,770 | 21,853,435 | 32,836,124 | 6,406,146 | 39,242,270 |
Series A3 Preferred Stock | Initial Principal and Interest | Combined Company Conversion Price | Combined Company Shares | Exchange Ratio | Pre-Merger Fr8App Shares | |||||||||||||||
2020 Bridge Notes | $ | 4,146,939 | $ | 0.75 | 5,529,252 | 1.26622 | 4,366,751 | |||||||||||||
January Bridge Note | $ | 1,019,726 | $ | 1.20 | 849,772 | 1.26622 | 671,111 | |||||||||||||
May Bridge Notes | $ | 1,614,411 | $ | 1.125 | 1,435,032 | 1.26622 | 1,133,323 | |||||||||||||
July Bridge Note | $ | 1,000,000 | $ | 1.125 | 888,889 | 1.26622 | 702,004 | |||||||||||||
Pre-Merger Financing | $ | 8,008,841 | $ | 1.50 | 5,339,227 | 1.26622 | 4,216,679 | |||||||||||||
Finder’s fee (*) | $ | 2,900,000 | $ | 1.50 | 1,933,333 | 1.26622 | 1,526,858 | |||||||||||||
Total | $ | 18,689,917 | 15,975,505 | 12,616,726 |
(*) The holdersAt the consummation of the participating securities listed above would have a contractual obligation to shareMerger, the Finders’ Fees as defined in the losses of the issuing entity. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any deemed liquidation event all distributions or proceeds available for the Combined Company’s stockholders wouldMerger Agreement will be distributed to all stockholders pari passupaid in Series A3 Preferred Stock and pro rata based on the number of shares held by each stockholder (on an as-converted to common stock basis).Series A3 Warrants.
(2) | Immediately prior to the Merger each share of the Fr8App common stock currently held by certain shareholders will be converted into the right to receive the Exchange Ratio in Series A4 Preferred Stock. |
(3) | The 12,616,726 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 55,914,267 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 55,914,267 shares of Combined Company common stock. However, only 15,975,505 shares of Series A3 Preferred Stock of the Combined Company will be initially convertible into common stock of the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining shares of Series A3 Preferred Stock of the Combined Company, up to a maximum of 39,938,762 shares, will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the volume weighted average price, or “VWAP”, of the Combined Company’s common stock during specified periods following the closing of the Merger. Pursuant to the Certificate of Designation of the Combined Company’s Series A3 Preferred Stock, for purposes of determining such price protection adjustments, the VWAP shall not be less than $0.8571 per share. As a result, the maximum number of shares of Combined Company common stock issuable upon such adjustment, if any, would be 55,914,267 shares. |
Opt Out Option
(i) | The holders of the January Bridge Note, the May Bridge Notes and the July Bridge Note (“2021 Bridge Notes”) have the option to elect for all or a portion of such converting principal and accrued and unpaid interest to reduce amounts that the holders are otherwise committed to fund in cash in the Pre-Merger Financing. If and to the extent the holders exercise this Opt Out Option, the $8,008,841 in aggregate gross proceeds expected to be received by Fr8App would be correspondingly reduced on a dollar-for-dollar basis by the amount of converted principal and accrued and unpaid interest under the 2021 Bridge Notes with respect to which such option is exercised. In addition, the Exchange Ratio for which all shares of common stock, preferred stock, series seed, warrants and options of Fr8App issued and outstanding immediately prior to their conversion into an equivalent class of securities or the right to receive an equivalent class of securities of the Combined Company, would increase from an estimated 1:1.26622 to an estimated 1:1.40279. Since this conversion is not definite, this note discloses the impact on the pro forma financial information should the Opt Out Option be exercised. |
Pursuant to Rule 11-02(a)(10) of Regulation S-X, if the transaction is structured in such a manner that significantly different results may occur, additional pro forma presentations which give effect to the range of possible results may be provided. Since funding of the full Pre-Merger Financing is not definite, though probable, the following tables provides the impact on the pro forma financial information should the funding be reduced by the full amount of $3,634,137. |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SUMMARY
OPT OUT OPTION EXERCISED IN FULL
AS OF JUNE 30, 2021
Pro Forma Combined (1) | Pro Forma Adjustments | Notes | Pro Forma Combined Adjusted | |||||||||||
ASSETS: | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 10,126,690 | $ | (3,634,137 | ) | (1) | $ | 6,492,553 | ||||||
Other current assets | 5,761,459 | 5,761,459 | ||||||||||||
Total current assets | 15,888,149 | (3,634,137 | ) | 12,254,012 | ||||||||||
Other non-current assets | 541,844 | - | 541,844 | |||||||||||
Total assets | $ | 16,429,993 | $ | (3,634,137 | ) | $ | 12,795,856 | |||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT: | ||||||||||||||
Total current liabilities | 7,067,065 | - | 7,067,065 | |||||||||||
Convertible notes payable, net | - | - | ||||||||||||
Total liabilities | 7,067,065 | 7,067,065 | ||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||
Preferred stock | 1,542 | 164 | (3) | 1,706 | ||||||||||
Common stock | 2,402 | (222 | ) | (3) | 2,180 | |||||||||
Additional paid-in capital | 25,651,250 | (3,634,137 | ) | (1) | 22,042,408 | |||||||||
58 | (3) | |||||||||||||
Accumulated deficit | (16,312,921 | ) | (16,312,921 | ) | ||||||||||
Accumulated other comprehensive gain | 20,655 | - | 20,655 | |||||||||||
Total stockholders’ equity (deficit) | 9,362,928 | (3,634,137 | ) | 5,728,791 | ||||||||||
Total liabilities and stockholders’ deficit | $ | 16,429,993 | $ | (3,634,137 | ) | $ | 12,795,856 |
(1) | Based on Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2021 |
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS SUMMARY
OPT OUT OPTION EXERCISED IN FULL
Six Months Ended June 30, 2021 | Year Ended December 31, 2020 | Notes | ||||||||
Net revenue | $ | 10,666,316 | $ | 9,206,559 | ||||||
Cost of revenue | (9,698,511 | ) | (8,411,570 | ) | ||||||
Gross profit | 967,805 | 794,989 | ||||||||
Operating expenses | 3,887,574 | 9,638,096 | ||||||||
Operating loss | (2,919,769 | ) | (8,843,107 | ) | ||||||
Other expenses | (283,807 | ) | (6,061,171 | ) | ||||||
Loss before provision for income taxes | (3,087,898 | ) | (14,904,278 | ) | ||||||
Income tax expense | 17,095 | 23,051 | ||||||||
Net loss | (3,104,993 | ) | (14,927,329 | ) | ||||||
Change in redemption value of redeemable preferred stock | (912,687 | ) | ||||||||
Net loss attributable to common stockholders | (3,104,993 | ) | (15,840,016 | ) | ||||||
Other comprehensive gain (loss) | (28,787 | ) | 2,688,553 | |||||||
Comprehensive loss | $ | (3,133,780 | ) | $ | (12,238,776 | ) | ||||
Net loss per share, basic & fully diluted per Common Stock | $ | (0.08 | ) | $ | (0.41 | ) | ||||
Weighted average number of common shares | 38,856,746 | 38,856,746 | (2) |
(1) | To reduce cash received from the Pre-Merger Financing by the principal and accrued and unpaid interest of the 2021 Bridge Notes as follows: |
January Bridge Note | $ | 1,000,000 | ||
May Bridge Notes | 1,608,842 | |||
July Bridge Note | 1,000,000 | |||
Accrued Interest | 25,295 | |||
Total | $ | 3,634,137 |
(2) | The pro forma calculation of the weighted average shares outstanding for basic and diluted net loss per Common share, assuming that the Opt Out Option was exercised in full by the 2021 Bridge Notes holders and the shares issuable relating to the Merger have been outstanding for the entire periods presented as if the Merger was consummated on January 1, 2020 is as follows: |
Class | June 30, 2021 | To be Issued Prior to Merger | Total Outstanding Prior to Merger | Estimated Exchange Ratio | Post-Merger Shares | Hudson Outstanding Ordinary Shares | Pro Forma Outstanding Shares | |||||||||||||||||||||
Common | 1,296,652 | (624,841 | )(b) | 671,811 | 1.40279 | 942,413 | 6,406,146 | 7,348,559 | ||||||||||||||||||||
A2 Preferred | 1,426,876 | 1,426,876 | 1.40279 | 2,000,257 | 2,000,257 | |||||||||||||||||||||||
A1-A Preferred | 7,758,329 | 7,758,329 | 1.40279 | 10,875,966 | 10,875,966 | |||||||||||||||||||||||
A1-B Preferred | 2,977,544 | 2,977,544 | 1.40279 | 4,174,052 | 4,174,052 | |||||||||||||||||||||||
Series Seed | 12,175 | 12,175 | 1.40279 | 17,067 | 17,067 | |||||||||||||||||||||||
A3 Preferred | 9,661,248 | (a) | 9,661,248 | 1.40279 | 13,552,747 | (c) | 13,552,747 | |||||||||||||||||||||
A4 Preferred | 624,841 | (b) | 624,841 | 1.40279 | 876,523 | 876,523 | ||||||||||||||||||||||
Total | 13,471,575 | 9,661,248 | 23,132,823 | 32,450,600 | 6,406,146 | 38,856,746 |
(a) | The number of shares of Series A3 Preferred Stock including accumulated interest through June 30, 2021 was determined as follows: |
Series A3 Preferred Stock | Initial Principal and Interest | Combined Company Conversion Price | Combined Company Shares | Exchange Ratio | Pre-Merger Fr8App Shares | |||||||||||||||
2020 Bridge Notes | $ | 4,146,939 | $ | 0.75 | 5,529,252 | 1.40279 | 3,941,597 | |||||||||||||
January Bridge Note | $ | 1,019,726 | $ | 1.20 | 849,772 | 1.40279 | 605,771 | |||||||||||||
May Bridge Notes | $ | 1,614,411 | $ | 1.125 | 1,435,032 | 1.40279 | 1,022,981 | |||||||||||||
July Bridge Note | $ | 1,000,000 | $ | 1.125 | 888,889 | 1.40279 | 633,656 | |||||||||||||
Pre-Merger Financing | $ | 4,374,704 | $ | 1.50 | 2,916,469 | 1.40279 | 2,079,042 | |||||||||||||
Finder’s fee (*) | $ | 2,900,000 | $ | 1.50 | 1,933,333 | 1.40279 | 1,378,201 | |||||||||||||
Total | $ | 15,055,780 | 13,552,747 | 9,661,248 |
(*) | At the consummation of the Merger, the Finders’ Fees as defined in the Merger Agreement will be paid in Series A3 Preferred Stock and Series A3 Warrants. |
(b) | Immediately prior to the Merger 624,841 of Fr8App common stock currently held by certain shareholders, will be converted into the right to receive the Exchange Ratio in Series A4 Preferred Stock. |
(c) | The 9,661,248 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 13,552,747 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 47,434,614 shares of Combined Company common stock. However, only 13,552,747 shares of Series A3 Preferred Stock of the Combined Company will be initially convertible into common stock of the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining shares of Series A3 Preferred Stock of the Combined Company, up to a maximum of 33,881,867 shares, will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the volume weighted average price, or “VWAP”, of the Combined Company’s common stock during specified periods following the closing of the Merger. If conditions to trigger convertibility under the VWAP price-protection adjustments does not occur for a maximum of 120 trading days past closing of the Merger. |
(3) | Reflects par value of $0.0001 per share of 38,856,746 shares upon closing of the Merger as follows: |
Class of Shares to be issued | Number of shares to be issued | Par value | ||||||
Preferred | 17,061,838 | $ | 1,706 | |||||
Common (*) | 21,794,908 | 2,180 | ||||||
38,856,746 | $ | 3,886 |
(*) includes 13,552,747 shares of Series A3 Preferred Stock converted to shares of Common Stock (note 2a)
MARKET PRICE AND DIVIDEND INFORMATION
Hudson ordinary shares have been listed on the NASDAQ Global Market since August 8, 2017 initially under the symbol “CIFS.” On April 10, 2020, Hudson 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 its name change and new ticker symbol on the NASDAQ Global Market was changed to “HUSN” on May 8, 2020. On June 15, 2020, we received notification from the NASDAQ that our application to list our ordinary shares on The NASDAQ Capital Market had been approved. Our shares began trading on the NASDAQ Capital Market at the opening of business on July 16, 2020.On October 29, 2020, we effected a 5:1 reverse split of our ordinary shares.
Prior to our listing on the NASDAQ Global Market, there was no market for our ordinary shares.
The following table presents, for the periods indicated, the range of high and low per share sales prices for shares of Hudson ordinary shares as reported on the NASDAQ for each of the periods set forth below.
Fr8HubFr8App is a private company and its common stock is not publicly traded.
Ordinary Shares of Hudson
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 20192021, 2020 and 2018.2019. The prices are inter-dealer prices, without retail markup, markdown or commission.
Period | High | Low | High | Low | ||||||||||||||
Fiscal Year ended December 31, 2018 | $ | 47.98 | $ | 0.635 | ||||||||||||||
Fiscal Year ended December 31, 2019 | $ | 4.96 | $ | 0.81 | $ | 4.96 | $ | 0.81 | * | |||||||||
Fiscal Year ended December 31, 2020 | $ | 3.72 | $ | 0.352 | * | |||||||||||||
Fiscal Year ended December 31, 2021 (through August 30, 2021) | $ | 4.95 | $ | 2.14 |
The following table sets forth the high and low last trade prices of our ordinary shares as reported by The NASDAQ Stock Market for each fiscal quarter of 20182019, 2020 and 2019.2021. The prices are inter-dealer prices, without retail markup, markdown or commission.
Period | High | Low | ||||||
Fiscal Year 2018, quarter ended | ||||||||
March 31, 2018 | $ | 47.98 | $ | 31.57 | ||||
June 30, 2018 | $ | 34.85 | $ | 14.95 | ||||
September 30, 2018 | $ | 16.65 | $ | 7.99 | ||||
December 31, 2018 | $ | 8.55 | $ | 0.635 | ||||
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 |
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 | $ | 4.95 | $ | 2.83 | ||||
June 30, 2021 | $ | 4.00 | $ | 2.94 |
The following table sets forth the monthly high and low last trade prices of*On October 29, 2020, our ordinary shares as reported by The NASDAQ Stock Market for each month during the nine months preceding the date of this proxy statement/prospectus. The prices are inter-dealer prices, without retail markup, markdown or commission, and do not necessarilybegan to trade trading on a 5:1 reverse split adjusted basis. Prices indicated may reflect actual transactions.
Period | High | Low | |||||||
Month Ended: | |||||||||
September 30, 2020 | $ | 0.50 | $ | 0.352 | |||||
August 31, 2020 | $ | 0.61 | $ | 0.438 | |||||
July 31, 2020 | $ | 0.839 | $ | 0.571 | |||||
June 30, 2020 | $ | 1.18 | $ | 0.47 | |||||
May 31, 2020 | $ | 0.70 | $ | 0.39 | |||||
April 30, 2020 | $ | 0.556 | $ | 0.412 | |||||
March 31, 2020 | $ | 0.639 | $ | 0.384 | |||||
February 29, 2020 | $ | 0.97 | $ | 0.613 | |||||
January 31, 2020 | $ | 1.20 | $ | 0.834 |
a pre-reverse split price.
On October 14, 2020, the last full trading day immediately preceding the public announcement of the Merger, the closing price per share of the ordinary shares of Hudson on Nasdaq was $0.645.$0.645 ($3.225 as adjusted for the Reverse Split). On November 10, 2020,August 30, 2021, the last reported sale price of the ordinary shares of Hudson on Nasdaq was $2.33$2.60 per share.
Following the closing of the Merger, Hudson expects the Combined Company’s common stock will be listed on Nasdaq and will trade under Purchaser’s new name, “Freight Technologies, Inc.”, and trading symbol “FRGT.”
As of October 5, 2020,August 30, 2021, there were 399396 stockholders of record. The number of record holders was determined from the records of Hudson’s transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. Hudson’s transfer agent is Transhare Securities Transfer and Registrar.
Dividend Policy
Hudson 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.
You should carefully consider the risks described below regarding the Redomestication Merger and the Merger, the Hudson business and the Fr8HubFr8App business, together with all of the other information included in this proxy statement/prospectus, before making a decision about voting on the proposals submitted for your consideration.
Risks RelatingRelated to the Redomestication
As a stockholder of a Delaware company, your rights after the Redomestication Merger will be different from, and may be less favorable than, your current rights as a shareholder of a BVI company.
Upon completion of the Redomestication Merger, the rights of Hudson shareholders will be governed by the Purchaser’s certificate of incorporation, as amended and restated, the Purchaser bylaws, as amended and restated, and applicable Delaware law. While there will be substantial similarities between their rights after the redomestication and their rights as Hudson shareholders prior to the redomestication, various differences are noted in “Proposal 2 – The Redomestication Merger Proposal – Significant Differences Between the Corporation Laws of the BVI and Delaware,in Shareholder Rights.” beginning on page 101. Some of these differences may be less favorable to shareholders of Hudson.
The Redomestication Merger is subject to conditions, including certain conditions that may not be satisfied, or completed on a timely basis, if at all. If Hudson fails to complete the Redomestication Merger, Hudson cannot obtain the expected benefits of the Redomestication Merger and Hudson may suffer administrative losses and expenses based on its efforts to seek the redomestication.
The Redomestication Merger is subject to a number of conditions to completion. These include shareholder approval of the Redomestication Merger, the Merger Agreement, and the proposals related to the amended and restated certificate of incorporation of the Purchaser which will survive after the Redomestication Merger. Hudson cannot predict whether and when these other conditions will be satisfied. Any failure to complete or delay in completing the Redomestication Merger could cost Hudson additional time, expense, effort and attention, as well as cause Hudson not to realize some or all of the benefits expected as a result of completing the Redomestication Merger successfully within its expected time frame. See “The Merger Agreement – Conditions to Completionthe Closing of the Merger”beginning on page 132.
Risks Related to the Disposition137.
There cancould be no assurance that the Disposition will occuradverse United States federal income tax consequences to U.S. Holders if we are or at all, and if it occurs, on favorable terms to the shareholders of Hudson.have been a passive foreign investment company.
AlthoughWhile we intend to complete the Disposition prior to the Merger,do not believe we are or have been a passive foreign investment company (“PFIC”), there can be no assurance that we are not currently or have been a PFIC during a U.S. Holder’s holding period. If (a) we have been a PFIC for any taxable year during the Disposition will occur within our proposed time frame, or at all, and the Disposition may be effected at a different time or in a different manner. The Disposition will require the creationholding period of a new Spin-Off Entity,U.S. Holder (and a valuationU.S. Holder of Hudson shares has not made certain elections with respect to its current financial advisory services, commercial payment advisory services, international corporate financing advisory servicesHudson shares) and intermediary bank loan advisory services, including all subsidiaries and all assets and liabilities and(b) Purchaser is not a PFIC in the negotiationtaxable year of the termsRedomestication Merger, such U.S. Holder would likely recognize gain (but not loss if the Redomestication Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Disposition and consideration thereof. The Disposition may result in additional and unforeseen expenses to Hudson.
The Disposition is expected to be subject to numerous conditions, someCode) upon the exchange of which are outside of our control. These include finalizing the assets and liabilities that would be contributedHudson shares for Purchaser Common Stock pursuant to the Spin-Off Entity, the effectiveness of a Form 10 registration statement to be filed with the SEC, the approval of the listing of Spin-Off Entity’s common stock on a national securities exchange, final approval from our board of directors and other customary conditions. There can be no assurance that the Spin-Off Entity will be able to obtain any such consents and approvals on the expected timeline of the proposed Disposition, or at all and if so, on favorable terms to our shareholders. We may elect to dispose of all or a portion of our business in one or more alternate transactions, or the separation of our business may not occur at all. Until the Disposition occurs, the Hudson board of directors or a sub-committee thereof will have the discretion to determine and change the terms of the Disposition or to determine not to proceed with the Disposition.
Redomestication Merger.
No market for Spin-Off Entity common stock currently exists and an active trading market mayAlthough we do not developbelieve that we are or be sustained after the Disposition. Following the Disposition, Spin-Off Entity’s stock price may fluctuate significantly, and as such, the value of Hudson shareholders’ in Spin-Off Entity, if any, is uncertain.
Currently, there is no public market Spin-Off Entity’s common stock. An active trading market for its common stock may not develop following the Disposition may not be sustained in the future. The lack of an active market may make it more difficult for our shareholders to sell Spin-Off Entity’s shares and could lead to its share price being depressed or volatile. We cannot predict the prices at which Spin-Off Entity common stock may trade after the Disposition. The market price of its common stock may fluctuate widely, depending on many factors. Accordingly,have been a PFIC during a U.S. Holder’s holding period, it is uncertain as to when or at what price Hudson shareholdersnot 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 abletreated as a PFIC. Please see “Material U.S. Federal Income Tax Consequences of the Redomestication Merger and the Merger—Tax Consequences to sell shares in Spin-Off Entity.U.S. Holders—Effect of the PFIC Rules on the Redomestication Merger” for a more detailed discussion with respect to our potential PFIC status and certain tax implications thereof.
Hudson and its shareholders may not realizeU.S. Holders could be subject to tax on the potential benefits from the Disposition, including the anticipated ability to monetize retained shares of Spin-Off Entity common stock.Redomestication Merger.
Hudson and its shareholders may not realize the potential benefits expected from the Disposition. In addition, Hudson may incur significant costs and adverse effects from the separation of its financial advisory business, including diminished diversification of revenue sources, which may increase volatility of results of operations, cash flows and working capital.
In addition, until the marketOur counsel has fully analyzed the value of Hudson after the Disposition, Hudson shares may experience increased price volatility. In addition, it is possibleopined that the combined market pricesRedomestication Merger will qualify as a reorganization within the meaning of Code section 368(a)(1)(F) and that any gain realized by a U.S. Holder of our ordinary shares andas a result of the Spin-Off Entity common stock immediately after the DispositionRedomestication Merger will be less than the market price of ordinary shares immediately before the Disposition, which could reduce our access to capital.
If we complete the Disposition, we will not be able to rely on the earnings, assets or cash flows of our financial advisory business for working capital and cash flow requirements, and our ability to service our debt and operate our business, may be adversely affected.
Historically, we have benefited from our ownership of our financial advisory business. Following completion of the Disposition or any other disposition of our financial advisory business, we will not be able to rely on the earnings, assets or cash flow of our financial advisory business, and Spin-Off Entity will not provide funds to finance our working capital or other cash requirements.
Historical financial data for our financial advisory business presented in this prospectus is not necessarily representative of results our financial advisory business would have achieved as an independent, publicly traded company for the periods presented herein and has not been prepared on the same basis as carve-out financial statements that may be disclosed in connection with the filing of a Form 10 registration statement for the Disposition.
Our financial advisory business has been operated as an operating segment of Hudson, and the historical financial information relatednontaxable to the Hudson business includedU.S. Holder, provided that even in this prospectus supplement has been derived from our financial statements and accounting records and reflects assumptions and allocations made by us. The historical financial information for the financial advisory business presented herein was not prepared on a “carve out” basis and is not necessarily indicative of carve out financial statements that may be disclosed in connection with any filing ofqualifying Section 368(a)(1)(F) reorganization a Form 10 registration statement for the Disposition. The financial information of the financial advisory business, as presented, does not necessarily reflect the results of operations and financial condition the financial advisory business would have achieved as an independent, publicly traded company during the periods presented, or those that it will achieve in the future.
The Spin-Off EntityU.S. Holder may be subject to tax under Code section 367(b) and, if Hudson was or has been a PFIC during the passive foreign investment company tax regime.
IfU.S. Holder’s holding period of Hudson ordinary shares, under the Spin-Off entity is incorporatedPFIC rules of the Code, as a foreign corporation,described more fully in “Material U.S. Federal Income Tax Consequences of the Redomestication Merger and the Merger — Tax Consequences of the Redomestication Merger to U.S. Holders of Hudson Shares,” below. Our counsel’s opinion is not binding on the stockInternal Revenue Service and if the Redomestication Merger was determined to not qualify as a Section 368(a)(1)(F) reorganization, the U.S. Holder would recognize gain or loss equal to the difference between the fair market value of the Spin-Off Entity mayshares that he exchanges for Purchaser Common Stock and his adjusted basis in those shares and, if Hudson was or has been a PFIC during the U.S. Holder’s holding period of Hudson ordinary shares, he might also be subject to U.S. tax on any gain under the same passive foreign investment company (PFIC) rules as may currently apply to Hudson. See the discussion of the PFIC rules, below, under “Risks Related to Hudson Ordinary Shares”.rules.
Risks Related to the Merger and the Combined Company
The Applicable Per Share Merger Consideration is not adjustable based on the market price of the Hudson ordinary shares so the Merger Consideration at the Closing may have a greater or lesser value than at the time the Merger Agreement was signed.
The Merger Agreement has set the Applicable Per Share Merger Consideration for the Fr8HubFr8App Common Stock, and the Applicable Per Share Merger Consideration is only adjustable upward or downward based on increases or decreases in the number of shares of Fr8Hub’sFr8App’s issued and outstanding capital stock and the number of shares of Fr8HubFr8App capital stock issuable upon the exercise or conversion of other Fr8HubFr8App securities, increases or decreases in the number of shares of Hudson’s issued and outstanding capital stock and the number of shares of Hudson capital stock issuable upon the exercise or conversion of other Hudson securities, as described in the section titled “The Merger—Merger Consideration.” Any changes in the market price of Hudson ordinary shares before the Closing of the Merger will not affect the number of shares Fr8HubFr8App stockholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the Closing of the Merger the market price of Hudson ordinary shares declines from the market price on the date of the Merger Agreement, then Fr8HubFr8App stockholders could receive Merger Consideration with substantially lower value. Similarly, if before the Closing of the Merger the market price of Hudson ordinary shares increases from the market price on the date of the Merger Agreement, then Fr8HubFr8App shareholders could receive Merger Consideration with substantially more value for their shares of Fr8HubFr8App capital stock than the parties had negotiated for in the establishment of the Applicable Per Share Merger Consideration. Because the Applicable Per Share Merger Consideration does not adjust as a result of changes in the value of Hudson ordinary shares, for each one percentage point that the market value of Hudson ordinary shares rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total Merger Consideration issued to Fr8HubFr8App stockholders.
Hudson shareholders will have a significantly reduced ownership and voting interest after the Merger and will exercise less influence over management.
Immediately after the completion of the Merger, it is expected that former holders of Hudson ordinary shares, who now collectively own 100% of Hudson, will own approximately 14.3% of Purchaser Common Stock based on the number of ordinary shares Hudson had outstanding as of December 29, 2020.June 22, 2021.
The Transactions are subject to approval by the shareholders of both Hudson and Fr8Hub.Fr8App.
In order for the Merger to be completed, both Hudson shareholders and Fr8HubFr8App stockholders must approve all the Proposals; and that requires for Hudson, the affirmative vote of the holders of at least a majority of the ordinary shares present by proxy or in person and entitled to vote and voting at the Meeting, and for Fr8Hub,Fr8App, shares represented by consent of holders of at least a majority of the outstanding shares entitled to vote, with holders of Fr8HubFr8App shares of preferred stock voting together with Fr8HubFr8App common stock, as a single class and on an as-converted to common stock basis.
Failure to complete the Transactions may result in Hudson or Fr8HubFr8App paying a breakup fee to the other party and could harm the price of Hudson ordinary shares and its future business and operations of each company.
If the Merger is not completed, Hudson and Fr8HubFr8App are subject to the following risks:
● | Hudson may experience negative reactions from the financial markets and Hudson’s customers and employees; | |
● | the Merger Agreement places certain restrictions on the conduct of Hudson’s business prior to the completion of the Merger or the termination of the Merger Agreement. Such restrictions, the waiver of which is subject to |
● | if the Merger Agreement is terminated under certain circumstances and certain events occur, Hudson or | |
● | the price of Hudson ordinary shares may decline; and | |
● | costs related to the Merger, such as legal, accounting and investment banking fees must be paid even if the Merger is not completed. |
In addition, if the Merger Agreement is terminated and the Hudson board of directors determines to seek another business combination, there can be no assurance that Hudson will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Merger.
Hudson may be unable to identify and complete an alternative strategic transaction or continue to operate the business due to its limited cash availability, and it may be required to dissolve and liquidate its assets. In such case, Hudson would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash, if any, left to distribute to shareholders after paying the debts and other obligations of Hudson and setting aside funds for reserves.
As of June 30,December 31, 2020, Hudson’s cash balance was $3,779,082,$3,274,287, and its working capital was $7,346,063.$1,646,786. Hudson has typically funded its operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of its ordinary shares.
If the conditions to the Merger are not met, the Merger may not occur.
Even if the Proposals referred to herein are approved by the shareholders of Hudson and the stockholders of Fr8Hub,Fr8App, specified other conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the Merger Agreement and described in the section titled “The Merger Agreement—Conditions to the Closing of the Merger.” Hudson and Fr8HubFr8App cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger may not occur or will be delayed, and Hudson and Fr8HubFr8App each may lose some or all of the intended benefits of the Merger.
The consummation of the Transactions contemplated by the Merger Agreement is dependent upon Hudson and Fr8HubFr8App obtaining all relevant and necessary consents and approvals.
A condition to consummation of the Merger is that Hudson and Fr8HubFr8App obtain certain consents or approvals from third parties, including approval from NASDAQ for the listing of the Purchaser Common Stock on the Nasdaq Capital Market following the Merger and to list the shares of Purchaser Common Stock being issued in the Merger. In addition, the Hudson shareholders must approve the issuance of Purchaser Common Stock pursuant to the Merger Agreement and all Transactions contemplated therein. The Fr8HubFr8App shareholders must adopt the Merger Agreement and approve the Merger, and all Transactions contemplated by the Merger Agreement. There can be no assurance that Hudson or Fr8HubFr8App will be able to obtain all such relevant consents and approvals on a timely basis or at all. Each of Hudson and Fr8HubFr8App has incurred, and expects to continue to incur, significant costs and expenses in connection with the proposed Merger. Any failure to obtain, or delay in obtaining, the necessary consents or approvals would prevent Hudson and Fr8HubFr8App from being able to consummate, or delay the consummation of, the transactions contemplated by the Merger Agreement, which could materially adversely affect the business, financial condition and results of operations of Hudson and Fr8Hub,Fr8App, and, correspondingly, the Combined Company if the Merger is consummated. There is no guarantee that such approvals will be obtained or that such conditions will be satisfied.
The Transactions may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes.
Hudson can refuse to complete the Merger if there is a material adverse change affecting Fr8HubFr8App between October 10, 2020, the date of the Merger Agreement, and the Closing. However, certain types of changes do not permit Hudson to refuse to complete the Merger, even if such change could be said to have a material adverse effect on Fr8Hub,Fr8App, including:
● | general business or economic conditions affecting the industries in which | |
● | natural disasters, war or outbreak of hostilities or terrorism; | |
● | general changes in financial or capital market, or political conditions; or | |
● | the taking of any action required to be taken by the Merger Agreement. |
If adverse changes occur and Hudson still completes the Merger, the Combined Company stock price may suffer. This, in turn, may reduce the value of the Merger to the shareholders of Hudson and Fr8Hub.Fr8App.
The market price of the Combined Company’s common stock following the Merger may decline as a result of the Merger and the Disposition.Merger.
The market price of the Purchaser Common Stock may decline as a result of the Merger and the Disposition for a number of reasons including if:
● | investors react negatively to the prospects of | |
● | the effect of the Merger | |
● | the Purchaser does not achieve the perceived benefits of the Merger |
The lack of a public market for Fr8HubFr8App shares makes it difficult to determine the fair market value of the Fr8HubFr8App shares, and Fr8HubFr8App stockholders may receive consideration in the Merger that is less than the fair market value of the Fr8HubFr8App shares and/or Hudson may pay more than the fair market value of the Fr8HubFr8App shares.
Fr8Hub Fr8App is privately held and its capital stock is not traded in any public market. The lack of a public market makes it extremely difficult to determine Fr8Hub’sFr8App’s fair market value. Because the percentage of Purchaser Common Stock to be issued to Fr8Hub’sFr8App’s stockholders was determined based on negotiations between the parties, it is possible that the value of the Purchaser Common Stock to be received by Fr8HubFr8App stockholders will be less than the fair market value of the Fr8HubFr8App shares exchanged therefor, or Hudson may pay more than the aggregate fair market value for Fr8Hub.Fr8App. The formula for the Applicable Per Share Merger Consideration was determined assuming a valuation of $10.0 and $60.0 million of Hudson and Fr8Hub,Fr8App, respectively.
Hudson and Fr8HubFr8App do not anticipate that the Combined Company will pay any cash dividends in the foreseeable future.
The current expectation is that the Combined Company will retain its future earnings, if any, to fund the development and growth of the Combined Company’s business. As a result, capital appreciation, if any, of the Purchaser Common Stock will be your sole source of gain, if any, for the foreseeable future.
The Proposed Charter provides that derivative actions brought on behalf of the Purchaser, actions against our directors, officers or employees of the Purchaser for breach of fiduciary duty and certain other actions may be brought only in the Court of Chancery in the State of Delaware and the stockholders shall be deemed to have consented to this choice of forum provision, which may have the effect of discouraging lawsuits against our directors, officers, other employees or stockholders.
The Proposed Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of the Purchaser, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Purchaser to the Purchaser or the Purchaser’s stockholders, (c) any action asserting a claim against the Purchaser, its directors, officers or employees arising pursuant to any provision of the DGCL or the charter or bylaws, or (d) any action asserting a claim against the Purchaser, its directors, officers or employees governed by the internal affairs doctrine.
The federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint, claim or proceeding asserting a cause of action arising under the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in the Proposed Charter.
The choice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Purchaser or its directors, officers or other employees, and may result in increased costs to a stockholder who has to bring a claim in a forum that is not convenient to the stockholder, which may discourage such lawsuits. Although under Section 115 of the DGCL, exclusive forum provisions may be included in a company’s certificate of incorporation, the enforceability of similar forum provisions in other companies’ certificates or incorporation or bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the exclusive forum provision of our Proposed Charter inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.
Anti-takeover provisions under Delaware law could make an acquisition of the Combined Company more difficult and may prevent attempts by the Combined Company stockholders to replace or remove the Combined Company management.
Because the Combined Company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding Combined Company voting stock from merging or combining with the Combined Company. Although Hudson and Fr8HubFr8App believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with the Combined Company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the Combined Company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.
The historical audited and unaudited pro forma condensed combined financial information may not be representative of the Combined Company’s results after the Merger.
The historical audited and unaudited pro forma condensed combined financial information included elsewhere in this prospectus has been presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that actually would have occurred had the Merger been completed as of the date indicated, nor is it indicative of future operating results or financial position.
Risks Related to Managing the Future Operation of the Combined Company
Fr8App’s management has no prior experience managing business or operations in China.
The executive management team of the Combined Company is expected to be composed of Fr8App’s current Chief Executive Officer, Mr. Javier Selgas, Fr8App’s President, Mr. Mike Flinker, FreightHub’s Chief Operating Officer, Ms. Reyes, and Fr8App’s Chief Financial Officer, Mr. Paul Freudenthaler. While all of them have experience managing businesses outside of the U.S., none of them have any prior experience managing business operations in China where Hudson’s financial advisory services business is exclusively. Failure to identify and manage risks of operating a business in China could cause the operating result of the Combined Company to suffer.
It may be difficult for management to evaluate Hudson’s financial advisory services business following the Merger.
In recent months, Hudson has made certain operational adjustments and reduced its number of employees to only those personnel essential to running its business. Both of Hudson’s Chief Executive Officer and Chief Financial Officer are relatively new to Hudson. Hudson’s Chief Executive Officer, Mr. Warren Wang, joined Hudson in April 2020 and Hudson’s Chief Financial Officer, Mr. Hon Man Yun joined in August 2020. Without internal accounting staff and executives with institutional knowledge of Hudson’s operations, it may be difficult for management of the Combined Company to evaluate Hudson’s financial advisory services business.
Risks Related to COVID-19 Pandemic
COVID-19 pandemic might have a material adverse effect on our business, financial condition, results of operations, and liquidity.
In December 2019, a novel strain of coronavirus was reported to have surfaced, which has and is continuing to spread throughout the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the COVID-19 disease a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic.” The COVID-19 outbreak has resulted in, and a significant outbreak of other infectious diseases could result in, a widespread health crisis that could materially and adversely affect the economies and financial markets worldwide, and the operations and financial position of any potential target business with which we consummate a business combination could be materially and adversely affected. Furthermore, we may be unable to complete a business combination if continued concerns relating to COVID-19 restrict travel, limit the ability to have meetings with potential investors, if the target company’s personnel, vendors and service providers are unavailable to negotiate and consummate a transaction in a timely manner, or if COVID-19 causes a prolonged economic downturn. The extent to which COVID-19 impacts our search for a business combination will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our ability to consummate a business combination, or the operations of a target business with which we ultimately consummate a business combination, may be materially adversely affected.
In addition, our ability to consummate a business combination may be dependent on the ability to raise equity and debt financing which may be impacted by COVID-19 and other events, including as a result of increased market volatility, decreased market liquidity and third-party financing being unavailable on terms acceptable to us or at all.
COVID-19 could negatively affect our internal controls over financial reporting as a portion of our workforce is required to work from home and therefore new processes, procedures, and controls could be required to respond to changes in our business environment. Further, should any key employees become ill from COVID-19 and unable to work, the attention of the management team and resources could be diverted.
The potential effects of COVID-19 could also heighten the risks we face related to each of the risk factors disclosed below. As COVID-19 and its impacts are unprecedented and continuously evolving, the potential impacts to these risk factors remain uncertain. As a result, COVID-19 may also materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider may present significant risks to our operations.
Risks Related to Hudson’s Business and Industry
We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.
The market for China’s financial services is new and may not develop as expected. The regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. Potential borrowers may not be familiar with this market and may have difficulty distinguishing our services from those of our competitors. Convincing potential new borrowers of the value of our services is critical to the expansion of our operations.
We launched our services in October 2014 and have a limited operating history. As our business develops or in response to competition, we may continue to introduce new services or make adjustments to our existing services, or make adjustments to our business model. Any significant change to our business model, such as our offering of entrusted loan services, may not achieve expected results and may have a material and adverse impact on our financial conditions and results of operations. It is therefore difficult to effectively assess our future prospects. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving market. These risks and challenges include our ability to, among other things:
● | navigate an evolving regulatory environment; | |
● | maintain and deepen the relationship our senior management have with the banks and working with a broader base of commercial banks and/or financial institutions; | |
● | expand the base of borrowers; | |
● | broaden our operation geographically; | |
● | enhance our risk management capabilities; | |
● | improve our operational efficiency; | |
● | attract, retain and motivate talented employees; and | |
● | defend ourselves against regulatory, litigation, privacy or other claims. |
If we fail to educate potential borrowers and banks about the value of our services, if the market for our services does not develop as we expect, or if we fail to address the needs of our target market, or other risks and challenges, our business and results of operations will be harmed.
Our historical financial results may not be indicative of our future performance.
Our business had achieved rapid growth since our inception although our business had underperformed for the financial year ended December 31, 2018 and continued to decline for the financial yearyears ended December 31, 2019.2019 and December 31, 2020. Our net revenue increased from $0 for the period from September 16, 2014 (Inception) through December 31, 2014 to $7,781,686 for the year ended December 31, 2015, $15,821,980 for the year ended December 31, 2016, $25,116,139 for the year ended December 31, 2017, decreased to $14,402,329 for the year ended December 31, 2018, and to $1,366,417 for the year ended December 31, 2019.2019 and to $618 for the year ended December 31, 2020. Our net loss was $164,250 for the period from September 16, 2014 (Inception) through December 31, 2014, and increased to a net income of $5,612,025 for the year ended December 31, 2015, $13,888,767 for the year ended December 31, 2016, $24,048,184 for the year ended December 31, 2017, a net loss of $3,818,737 for the year ended December 31, 2018, and a net loss of $61,995,758 for the year ended December 31, 2019. For the first six months of 2020, we posted2019, and a net loss of $640,243. Accordingly, our erratic$9,075,353 for the year ended December 31, 2020. Our negative growth rate in recent years and the limited history of financial leasing business make it difficult to evaluate our prospects. We may not and will most likely not be able to come back to our historically rapid growth or may not be able to grow our business at all.
If we are unable to maintain or increase the volume of loan transactions facilitated through us or if we are unable to retain existing clients or attract new clients, our business and results of operations will be adversely affected.
The volume of financing facilitated through us has grown rapidly since our inception although we underperformed during the financial years ended December 31, 2018, 2019 and December 31, 2019.2020. The total amount of loans facilitated through us was $0 in 2020 compared to RMB153 million (approximately $22 million) in 2019, compared to RMB659 million (approximately $996 million) in 2018, RMB 16.4 billion (approximately $2,429 million) in 2017, RMB9.8 billion (approximately $1,471 million) in 2016 and RMB 4.5 billion (approximately $728 million) in 2015, which increased substantially from zero in 2014 (we only began operations in October 2014). For the first six months of 2020, we did not facilitate any loans. To resume our high growth momentum of growth, we must increase the volume of loan transactions by retaining current customers and attracting more customers.
The overall transaction volume may be affected by several factors, including our brand recognition and reputation, the interest rates offered to borrowers relative to market rates, the effectiveness of our risk control, the repayment rate of our borrowers, the efficiency of our services, the macroeconomic environment and other factors. In connection with the introduction of new products or in response to general economic conditions, we may also impose more stringent borrower qualifications to ensure the quality of borrowers referred by us, which may negatively affect the growth of loan volume.
If we are unable to attract qualified borrowers and sufficient bank commitments or if borrowers do not continue to use our services at the current rates, we might be unable to increase our transaction volume and revenues as we expect, and our business and results of operations may be adversely affected.
If we are unable to maintain low default rates for loans facilitated by us, our business and results of operations may be materially and adversely affected.
Investments in loans referred by us involve inherent risks as the return of the principal on a loan investment made through us is not guaranteed, although we aim to limit losses due to borrower defaults to within an industry acceptable range through various preventive measures we have taken or will take.
Our ability to attract borrowers and banks, and build trust in, our services is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and maintain low default rates. To conduct this evaluation, we have employed a series of risk management procedures and developed a proprietary credit assessment and decisioning model. Our credit scoring model aggregates and analyzes the data submitted by a borrower as well as the data we collect from a number of internal and external sources, and then generates a score for the prospective borrower. The score will be used to determine the credit-worthiness of a borrower and whether we should sign a service contract with that borrower.
If we are unable to effectively and accurately assess the credit profiles of borrowers, we may either be unable to offer attractive fee rates or returns to borrowers, or unable to maintain low default rates of loans facilitated by us. If we expand to serve new borrower groups beyond prime borrowers in the future, we may find it difficult or unable to maintain low default rates of loans facilitated through us. If widespread borrower defaults were to occur, banks will incur losses and lose confidence in our services and our business and results of operations may be materially and adversely affected.
Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.
Our operations were heavily dependent on the relationship our executive management, particularly Jianxin Lin and Jinchi Xu, have with our bank partners. We do not have any formal agreement with our bank partners for the provision of commercial payment advisory services, intermediary bank loan advisory services or the international corporate financing advisory service. WhileWe are dependent of our senior management, namely Mr. Jianxin Lin was our largest shareholder and Mr. Xu wasWarren Wang, our Chief OperatingExecutive Officer and Chief Financial Officer and although we have provided different incentives to them, we were unfortunately unable to retain their services. Mr. Lin and Mr. Xu have been replaced by Mr. Warren Wang and Mr. Hon Man Yun, respectively and we are now dependent on themour Chief Financial Officer to formulateforge a new strategy and lead us into the new phasedirection for us. If either of growth and direction. We cannot assure you thatthem is unable or unwilling to continue in their present positions, we can continue to retain their services. If we are unablemay not be able to replace them easily or at all, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
Our business is dependent on the continued efforts of our senior management, some of whom have interests and responsibilities outside of our business. Apart from the possibility of a conflict of interest, if one or more of them is/are unable to devote sufficient time and effort to our business, our business may be adversely impacted.
Our business is still in its infancy and our growth is dependent on the availability and efforts of our senior management. However certain members of our management have commitments and responsibilities outside of our Company. Apart from the possibility of a conflict of interest, if any of our management is unable to provide sufficient time, and effort to our business, our business may be adversely impacted.
Successful strategic relationships with the banks are important for our future success.
Our operations are heavily dependent on the relationship our senior management has with our bank partners. We anticipate that we will continue to leverage our strategic relationships with the existing bank partners to grow our business while we will also pursue new relationships with other banks or financial institutions. Identifying, negotiating and documenting relationships with these partners require significant time and resources. We do not have any current agreements with our present banking partners and accordingly are not prohibited from working with their competitors or from offering competing services and vice versa. Our competitors may be effective in providing incentives to our partners to favor their products or services. Certain types of partners may devote more resources to support their own competing businesses. In addition, these partners may not perform as expected under our “agreements” with them and we may have disagreements or disputes with such partners, which could adversely affect our brand and reputation. If we cannot successfully maintain effective strategic relationships with these bank partners, our business will be harmed.
We may not be familiar with new regions or markets we enter and may not be successful in offering new products and services.
We may expand our business and enter other regional markets in the future. However, we may be unable to replicate our success in Fujian province in new markets. In expanding our business, we may enter markets in which we have limited, or no, experience. We may not be familiar with the local business and regulatory environment and we may fail to attract a sufficient number of customers due to our limited presence in that region. In addition, competitive conditions in new markets may be different from those in our existing market and may make it difficult or impossible for us to operate profitably in these new markets. If we are unable to manage these and other difficulties in our expansion into other regions in China, our prospects and results of operations may be adversely affected.
As we continuously adjust our business strategies in response to the changing market and evolving customer needs, our new business initiatives will likely lead us to offer new products and services. However, we may not be able to successfully introduce new products or services to address our customers’ needs because we may not have adequate capital resources or lack the relevant experience or expertise or otherwise. In addition, we may be unable to obtain regulatory approvals for our new products and services. Furthermore, our new products and services may involve increased and unperceived risks and may not be accepted by the market and they may not be as profitable as we anticipated, or at all. If we are unable to achieve the intended results for our new products and services, our business, financial condition, results of operations and prospects may be adversely affected.
Our business model could be negatively affected by changes and fluctuation in the banking industry.
Our business model is premised on the fact that SMEs and microenterprises are generally underserved by the banking industry because commercial banks in China have been reluctant to lend to SMEs and microenterprises without credit support, such as third-party guarantees, or adequate collateral of tangible assets, and we believe that they will remain so in the foreseeable future. This has created opportunities for us to develop and expand our business. However, new trends in the banking industry or the applicable regulatory requirements may alleviate the high transaction costs or the lack of collateral and public information generally associated with bank financing to our target clients or otherwise make this business more attractive to banks. In the event that commercial banks begin to compete with us by making loans directly to our target clients without our facilitation, we may experience less demand for and greater competition with respect to our financial leasing business. Furthermore, any such direct competition with our cooperating banks will undermine our relationship with them and may adversely affect our business, results of operations and prospects.
In addition, our business may be subject to factors affecting the banking industry generally, such as the abrupt spike in China’s interbank rates and the subsequent fears of tightened liquidity as experienced by Chinese banks in the second and third quarters of 2013, as well as the increasing non-performing loan ratios as reported by the banking industry in 2014. Such factors adversely affecting China’s banking industry may result in constraints on the banking system’s liquidity and subsequent reductions in the amount of, or tightened approval requirements for, loans available to our clients. As a result, we may experience reduced demand for our services as the banks may have less available funding.
Fraudulent activity associated with borrowers referred by us could negatively impact our operating results, brand and reputation and cause the use of our financing products and services to decrease.
We are subject to the risk of fraudulent activity associated with borrowers and third parties handling borrower information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, reduce the volume of loan transactions facilitated through us and lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. Although we have not experienced any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that any of the foregoing may occur causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and financial conditions could be materially and adversely affected.
Misconduct, errors and failure to function by our management and employees could harm our business and reputation.
We are exposed to many types of operational risks, including the risk of misconduct and errors by our management and employees. Our business depends on our management and employees to interact with potential borrowers, conduct due diligence review and collect borrowers’ information, all of which involve the use and disclosure of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and banks is governed by various PRC laws. It is not always possible to identify and deter misconduct or errors by management and employees, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of our management and employees take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore we could be subject to civil liability and our relevant management and employees could be subject to criminal liability.
The laws and regulations governing the financial advisory service industry in China are developing and evolving and subject to changes. If our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected.
Due to the relatively short history of the financial advisory service industry in China, the regulatory framework governing our industry is under development by the PRC government.
As of the date of this proxy statement/prospectus, we have not been subject to any material fines or other penalties under any PRC laws or regulations including those governing the financial advisory service industry in China. However, if our practice is deemed to violate any rules, laws or regulations, we may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the relevant government authorities as well. If such situations occur, our business, financial condition and prospects would be materially and adversely affected. In addition, given the evolving regulatory environment in which we operate, we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.
We had previously made several direct loans to selected corporate clients in contravention of the PRC Lending General Provisions and may be subject to fines by the People’s Bank of China (“PBOC”).
From the inception of the Company to the end of its fiscal year of 2019,2020, we made a total of $45,514,815 in direct loans to 6 clients with interest rates from 8% to 16%. The terms of these loans were generally for six to twelve months. We earned $6,182,343 in interest for making these loans.
As advised by our PRC legal counsel, Sino-Integrity Law Firm, such direct lending activities with corporate clients are not in compliance with certain provisions of the Lending General Provisions, under which, the PBOC could impose fines on us and the amount of the potential fine would be no less than one time but no more than five times the gains that we obtained from such direct lending activities. The gains from said lending activities that were subject to PBOC’S regulation were approximately $6.1 million and accordingly, the potential fine would be no less than $6.1 million and no more than $30.5 million However, pursuant to Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, private lending contracts relating to direct private lending activities between companies (such as ours) are effective if such lending activities are not part of the ordinary business of the lender. Therefore, according to our PRC legal counsel and based on past practices and recent interpretation of the Supreme People’s Court, it is unlikely PBOC will impose any fines or penalties on us. However, we cannot assure that no such fines or other punitive actions will be taken against us.
If our financial advisory services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.
We incur expenses and consume resources upfront to develop, acquire and market new financial advisory services. New services must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.
Our existing or new loan or wealth management products that we refer our customers and changes to our services could fail to attain sufficient market acceptance for many reasons, including but not limited to:
● | our failure to predict market demand accurately and supply loan and wealth management products that meet this demand in a timely fashion; | |
● | borrowers and investors using our services may not like, find useful or agree with any changes; | |
● | our failure to properly price new loan and wealth management products; | |
● | defects, errors or failures in our services; | |
● | negative publicity about our services or our effectiveness; | |
● | views taken by regulatory authorities that the new products or our services do not comply with PRC laws, rules or regulations applicable to us; and | |
● | the introduction or anticipated introduction of competing products by our competitors. |
If our new loan products or service changes do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.
If we do not compete effectively, our results of operations could be harmed.
The financing service industry in China is intensely competitive and evolving. We compete with a large number of companies that provide financing services. We also compete with 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. With respect to borrowers to purchase wealth management products, we primarily compete with other investment products and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes.
Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have longer operating histories, more extensive borrower or investor bases, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. Our competitors may be better at developing new products, offering more attractive investment returns or lower fees, responding faster to new technologies and undertaking more extensive and effective marketing campaigns. In response to competition and in order to grow or maintain the volume of loan transactions facilitated through us, we may have to offer higher investment return to investors or charge lower transaction fees, which could materially and adversely affect our business and results of operations. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our services could stagnate or substantially decline, we could experience reduced revenues or we could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.
Our direct lending/entrusted loan activities are subject to greater credit risks than larger lenders, which could adversely affect our results of operations.
There are inherent risks associated with our direct lending activities, including credit risk, which is the risk that borrowers may not repay the outstanding loans balances in our direct loan activities. So far, our direct lending clients have all been SMEs. These borrowers generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may have fewer financial resources to weather a downturn in the economy. Such borrowers may expose us to greater credit risks than lenders lending to larger, better-capitalized state-owned businesses with longer operating histories. Conditions such as inflation, economic downturn, local policy change, adjustment of industrial structure and other factors beyond our control may increase our credit risk more than such events would affect larger lenders.
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations, including the levels of our net revenues, expenses, net income and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our ordinary shares.
In addition, we may experience seasonality in our business, reflecting seasonal fluctuations in SME’s bank financing patterns. For example, we may experience lower transaction value during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year.
We may be involved in legal proceedings arising from our operations.
We may become involved in disputes with borrowers, bank lenders and/or other parties in connection with provision of our financial advisory services. In particular, the bank lenders may name us as a defendant in its collection proceeding against the borrowers we introduced. These disputes may lead to legal proceedings, and may cause us to suffer costs. Such legal proceedings may also adversely affect our reputation which in turn could lead to a slowdown in our new business opportunities.
If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.
We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers and investors to us. Successful promotion of our brand and our services depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our services. Our efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.
Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. Economic conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and there are new challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. Adverse economic conditions could also reduce the number of qualified borrowers seeking loans through us. Should any of these situations occur, the amount of loans facilitated through us and our net revenues will decline, and our business and financial conditions will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
We may need additional capital, and financing may not be available on terms acceptable to us, or at all.
We have incurred tremendous lossesreceived proceeds from our initial public offering and capital contributions from Mr. Jianxin Lin, our founder in the past two financial years.past. Although we believe that our anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you this will be the case. We may need additional cash resources in the future if we experience changes in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.
We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our services and better serve borrowers and investors. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:
● | difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; |
● | inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; | |
● | difficulties in retaining, training, motivating and integrating key personnel; | |
● | diversion of management’s time and resources from our normal daily operations; | |
● | difficulties in successfully incorporating licensed or acquired technology and rights into our platform and loan products; | |
● | difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations; | |
● | difficulties in retaining relationships with customers, employees and suppliers of the acquired business; | |
● | risks of entering markets in which we have limited or no prior experience; | |
● | regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; | |
● | assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability; | |
● | failure to successfully further develop the acquired technology; | |
● | liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; | |
● | potential disruptions to our ongoing businesses; and | |
● | unexpected costs and unknown risks and liabilities associated with strategic investments or |
We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.
The future development and implementation of anti-money laundering laws in China may increase our obligation to supervise and report transactions with our customers, thereby increasing our compliance efforts and costs and exposing us to criminal measures or administrative sanctions for non-compliance.
We believe that we are not currently subject to PRC anti-money laundering laws and regulations and are not required to establish specific identification and reporting procedures relating to anti-money laundering. PRC laws and regulations relating to anti-money laundering have evolved significantly in recent years and may continue to develop. In the future, we may be required to supervise and report transactions with our customers for anti-money laundering or other purposes, which may increase our compliance efforts and costs and may expose us to potential criminal measures or administrative sanctions if we fail to establish and implement the required procedures or otherwise fail to comply with the relevant laws and regulations.
Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain employees or attract qualified individuals to offer our employees,services, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our business.
Increases in labor costs in the PRC may adversely affect our business and results of operations.
The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.
We do not have any business insurance coverage.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs. Furthermore, we do not maintain key man life insurance on any of members of key management. In the event any key member were to be unable to continue their services for any reason including death or disability, our operations will be severely impacted which, in turn, will severely impact our revenue and profitability.
Our ability to protect the confidential information of our borrowers may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.
We collect, store and process certain personal and other sensitive data from our borrowers, which makes our computer systems an attractive target and potentially vulnerable to cyber- attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our computer systems could cause confidential borrower information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with borrowers and investors could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.
Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.
Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. After our platform is established and with the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.
In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.
Any significant disruption in service on our computer systems, including events beyond our control, could prevent us from processing loans, reviewing borrowers’ applications and materials, reduce the attractiveness of our services and result in a loss of borrowers.
In the event of an outage and physical data loss, our ability to perform our servicing obligations, process applications or make loans available would be materially and adversely affected. The satisfactory performance, reliability and availability of our computer system and the material information save therein are critical to our operations, customer service, reputation and our ability to retain existing and attract new borrowers. Much of our system hardware is hosted in a leased facility located in Beijing that is operated by our IT Staff. We also maintain a real-time backup system at a separate facility also located in Beijing. Our operations depend on our ability to protect our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to our leased Beijing facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.
Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our borrowers and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on loans, damage our brand and reputation, divert our employees’ attention, subject us to liability and cause borrowers to abandon our services, any of which could adversely affect our business, financial condition and results of operations.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. We have made application for thirteen trademarks, six of which have been approved and the remaining seven are pending with the Trademark Office under the State Administration for Industry and Commerce. Thus, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.
It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.
Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.
If we cannot maintain our corporate culture as we attempt to grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our platform.
Our business could also be adversely affected by the effects of Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, COVID-19 or other epidemics and pandemics. Our business operations could be disrupted if any of our employees is suspected of having Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS, COVID-19 or other epidemics or pandemics, since it could require our employees to be quarantined and/or our offices to be closed and disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.
War, terrorism, other acts of violence or natural or man-made disasters, including a global pandemic, may affect the markets in which the Company operates, the Company’s customers, the Company’s delivery of products and customer service, and could have a material adverse impact on our business, results of operations, or financial conditions.
The Company’s business may be adversely affected by instability, disruption or destruction in a geographic region in which it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of disease (including the recent outbreak of the coronavirus commonly referred to as “COVID-19”). Such events may cause customers to suspend their decisions on using the Company’s products and services. Also, the occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to result in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These, in turn, will not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event. Also, it will substantially hamper our efforts to provide our investors with timely information and comply with our filing obligations with the Securities and Exchange Commission.
We are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition and results of operations.
We are subject relating various risks and costs associated with to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. This data is wide ranging and relates to our investors, employees, contractors and other counterparties and third parties. The relevant PRC laws apply not only to third-party transactions, but also to transfers of information between us, WFOE, VIE, and VIE’s subsidiaries, and among us, WFOE, VIE, HKSQ VIE’s and our variable interest entities’ subsidiaries, and other parties with which we have commercial relations.
The PRC regulatory and enforcement regime with regard to privacy and data security is evolving. The PRC Cybersecurity Law which was promulgated on November 7, 2016 and became effective on June 1, 2017 provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of critical information infrastructure. According to the Cybersecurity Review Measures promulgated by the Cyberspace Administration of China and certain other PRC regulatory authorities in April 2020, which became effective in June 2020, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security. If we provide or are deemed to provide such network products and services to critical information infrastructure operators, or we are deemed to be a critical information infrastructure operator, we would be required to follow cybersecurity review procedures. There can be no assurance that we would be able to complete the applicable cybersecurity review procedures in a timely manner, or at all, if we are required to follow such procedures. Any failure or delay in the completion of the cybersecurity review procedures may prevent us from using or providing certain network products and services, and may result in fines of up to ten times the purchase price of such network products and services being imposed upon us, if we are to be deemed a critical information infrastructure operator using network products or services without having completed the required cybersecurity review procedures. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number of mobile apps operated by several US-listed Chinese companies and prohibiting these apps from registering new users during the review period.
On June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which shall take effect in September 1, 2021. The Data Security Law provides for data security and privacy obligations of entities and individuals carrying out data activities, prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any data stored in China without approval from the competent PRC authority, and sets forth the legal liabilities of entities and individuals found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million, suspension of relevant business, and revocation of business permits or licenses.
On August 20, 2021, the Standing Committee of the National People’s Congress adopted the Personal Information Protection Law, which shall come into force as of November 1, 2021. The Personal Information Protection Law includes the basic rules for personal information processing, the rules for cross-border provision of personal information, the rights of individuals in personal information processing activities, the obligations of personal information processors, and the legal responsibilities for illegal collection, processing, and use of personal information.
In addition, on July 10, 2021, the Cyberspace Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments) for public comments, which proposes to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may affect national security, including listings in foreign countries by companies that possess personal data of more than one million users. The PRC National Security Law covers various types of national security, including technology security and information security.
We currently have fewer than 500 registered users on our digital platform. We only require and obtain user information after users register with us. As our business grows, we may have more than one million users in the future. Although we believe we currently are not required to obtain clearance from the Cyberspace Administration of China for our Re-domestication and Merger under the Measures for Cybersecurity Review (Revision Draft for Comments) or the Opinions on Strictly Cracking Down on Illegal Securities Activities, we face uncertainties as to the interpretation or implementation of such regulations or rules, and if required, whether such clearance can be timely obtained, or at all.
Compliance with the PRC Cybersecurity Law, the PRC National Security Law, the Data Security Law, the Personal Information Protection Law, the Cybersecurity Review Measures, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, including data security and personal information protection laws, may result in additional expenses to us and subject us to negative publicity, which could harm our reputation among users and negatively affect the trading price of our ordinary shares in the future. There are also uncertainties with respect to how the PRC Cybersecurity Law, the PRC National Security Law and the Data Security Law will be implemented and interpreted in practice. PRC regulators, including the Ministry of Public Security, the MIIT, the SAMR and the Cyberspace Administration of China, have been increasingly focused on regulation in the areas of data security and data protection, including for mobile apps, and are enhancing the protection of privacy and data security by rule-making and enforcement actions at central and local levels. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business, prohibition against new user registration (even for a short period of time) and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
Risks Related to Hudson’s Corporate Structure
If the PRC government deems that the contractual arrangements in relation to our variable interest entity do not comply with PRC governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties or be forced to relinquish our interests in those operations. Further, our shares may decline in value or become worthless if we are unable to assert our contractual control rights over the assets of our PRC VIE and subsidiaries that conduct our operations.
Foreign ownership of certain types of internet businesses, such as internet information services, is subject to restrictions under applicable PRC laws, rules and regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity interests in a value-added telecommunication service provider. Any such foreign investor must also have experience and a good track record in providing value-added telecommunications services overseas. Accordingly, under current and applicable PRC laws, it is possible that we acquire up to 50% equity interests in Sheng Ying Xin. However, if we were to acquire more than 50% of the equity interests in Sheng Ying Xin, Sheng Ying Xin will lose its ICP License. Under current PRC laws, any foreign-invested entity providing value-added telecommunication services is required to demonstrate to the relevant branch of the Ministry of Industry and Information Technology (the “MIIT”), namely in our case, the Beijing Communication Administration, that its foreign investors have a positive track of, and operation experience in operating value-added telecommunication services outside the PRC. In practice, the Beijing Communication Administration makes a determination after sixty (60) days after receiving the complete set of application documents. We believe that we presently do not have the necessary experience and track record in providing value- added telecommunications services overseas and intend to take steps to build a track record and accumulate the requisite experience in anticipation that we may acquire the equity interests in Sheng Ying Xin when the restrictions on percentage of foreign ownership are eased or lifted. There is however no guarantee that we will be successful in this endeavor and if we are unsuccessful, we will not be able to acquire the equity interests in Sheng Ying Xin.
All our revenue is mainly generated by contractually controlled and managed entity, Sheng Ying Xin and its wholly-owned subsidiaries, Kashgar SYX and Fu Hui (Shenzhen) Commercial Factoring Co., Ltd., and FuhuiFu Hui (Xiamen) Commercial Factoring Co., Ltd. Sheng Ying Xin is 99% directly owned by our former Chief Executive Officer, Mr. Jianxin Lin and 1% indirectly owned by Mr. Lin through his nominee, Mr. Shaoyong Huang. On December 30, 2018, Sheng Ying Xin disposed of one of its wholly-owned subsidiaries, Beijing Anytrust Science & Technology Co., Ltd to reduce operating losses.
The contractual arrangements give us effective control over Sheng Ying Xin and enable us to obtain substantially all of the economic benefits arising from it as well as consolidate the financial results of it in our results of operations. Although the structure we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
In the opinion of Sino-Integrity Law firm, our PRC counsel, the ownership structures of our wholly-foreign owned enterprise and our variable interest entityentities in China, both currently and immediately after giving effect to this offering, do not and will not violate any applicable PRC law, regulation or rule currently in effect based on the current interpretation of those law, regulation or rule; and the contractual arrangements between our wholly-foreign owned enterprise, our variable interest entityentities and their respective equity holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect based on the current interpretation of those law, regulation or rule. We also do not require the approval of the People’s Republic of China government to be listed on the Nasdaq Capital Market.
However, Sino-Integrity Law Firm has also advised us that there are substantial uncertainties regarding the interpretation and application of current PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the opinion of our PRC legal counsel.counsel and this could significantly affect our financial performance and the enforceability of the contractual arrangements.
It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or our variable interest entityentities are found to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including revoking the business and operating licenses of our PRC subsidiarysubsidiaries or variable interest entity,entities, requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our variable interest entity in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our variable interest entityentities or otherwise separate from itthem and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our variable interest entity in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results of operations. Further, our shares may also decline in value or become worthless if we are unable to assert our contractual control rights over the assets of our VIE and HKSQ VIE and subsidiaries that conduct our operations.
Substantial uncertainties exist with respect to the interpretation of the PRC Foreign Investment Law (“FIL”) and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 FIL Draft, which expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the 2015 FIL Draft, variable interest entities that are controlled via contractual arrangement would also be deemed as foreign invested enterprises, if they are ultimately “controlled” by foreign investors.
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the PRC, or the FIL, which will comecame into effect on January 1, 2020, repealing simultaneously the Law of the PRC on Sino-foreign Equity Joint Ventures, the Law of the PRC on Wholly Foreign-owned Enterprises and the Law of the PRC on Sino-foreign Cooperative Joint Ventures, together with their implementation rules and ancillary regulations. Pursuant to the FIL, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises, or other organizations, including investment in new construction project, establishment of foreign funded enterprise or increase of investment, merger and acquisition, and investment in any other way stipulated under laws, administrative regulations, or provisions of the State Council. Although the FIL has deleted the particular reference to the concept of “actual control” and contractual arrangements compared to the 2015 FIL Draft, there is still uncertainty regarding whether our variable interest entityentities would be identified as a FIE in the future.
The “variable interest entity” structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China.
Even if our VIEvariable interest entities were to be identified as a FIE in the future, we believe that our current business would not be adversely affected. However, if we were to engage in any business conduct involving third parties identified as prohibited or restricted on the Negative List, our VIEvariable interest entities as well as its subsidiarytheir subsidiaries may be subject to laws and regulations on foreign investment. In addition, our shareholders would also be prohibited or restricted to invest in certain sectors on the Negative List. However, even if our VIEvariable interest entities were to be identified as a FIE, the validity of our contractual arrangements with Sheng Ying Xin and its shareholders as well as our corporate structure would not be adversely affected. We would still be able to receive benefits from our variable interest entityentities in accordance with the contractual agreements. In addition, as the Chinese government has been updating the Negative List in recent years and reducing the sectors prohibited or restricted for foreign investment, it is probable in the future that, even if our variable interest entity isentities are identified as a FIE, it isFIEs they are still allowed to acquire or hold equity of enterprises in sectors currently prohibited or restricted for foreign investment.
In addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law. For instance, the draft Foreign Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that would be required for each investment and alteration of investment specifics, a prospectus would be mandatory, and large foreign investors meeting certain criteria would be required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible could be subject to criminal liabilities.
Our contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership.
We rely on contractual arrangements with our variable interest entityentities to operate our electronic platform in China and other businesses in which foreign investment is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entity.
If we had direct ownership of the variable interest entity,entities, we would be able to exercise our rights as an equity holder directly to effect changes in the boards of directors of the entity, which could effect changes at the management and operational level. Under our contractual arrangements, we may not be able to directly change the members of the boards of directors of the entity and would have to rely on the variable interest entityentities and the variable interest entityentities’ equity holders to perform their obligations in order to exercise our control over the variable interest entity.entities. The variable interest entityentities equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our Company or may not perform their obligations under these contracts. For example, our variable interest entityentities and itstheir equity holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using our domain names and trademarks which the relevant variable interest entity has exclusive rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of the variable interest entityentities at any time pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved, we will have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. See “Any“Any failure by our variable interest entityentities or itstheir equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.” Consequently, the contractual arrangements may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership.
Any failure by our variable interest entityentities or itstheir equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.
If our variable interest entityentities or itstheir equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Although our wholly-owned PRC subsidiary, WFOE, has entered into an exclusive option agreement in relation to our variable interest entity, which provides that WFOE may exercise an option to acquire, or nominate a person to acquire, ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules and regulations, the exercise of the call option is subject to the review and approval of the relevant PRC governmental authorities. WFOE has also entered into a share pledge agreement with respect to the variable interest entity to secure certain obligations of such variable interest entity or its equity holders to WFOE under the contractual arrangements. However, the enforcement of such agreement through arbitral or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the share pledge agreement are primarily intended to help WFOE collect debts owed to WFOE by the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the assets or equity of the variable interest entity.
In addition, although the terms of the contractual arrangements provide that they will be binding on the successors of the variable interest entity equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case of the death, bankruptcy or divorce of a variable interest entity equity holder will be subject to or will be willing to honor the obligations of such variable interest entity equity holder under the contractual arrangements. If the relevant variable interest entity or its equity holder (or its successor), as applicable, fails to transfer the shares of the variable interest entity according to the relevant exclusive option agreement or share pledge agreement, we would need to enforce our rights under the exclusive option agreement or share pledge agreement, which may be costly and time-consuming and may not be successful.
The contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements, we may not be able to exert effective control over the variable interest entities, and our ability to conduct our business, as well as our financial condition and results of operations, may be materially and adversely affected.
We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our variable interest entity,entities, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.
Our variable interest entityentities holds licenses and approvals and assets that are necessary for our business operations, to which foreign investments are typically restricted under applicable PRC law. The contractual arrangements contain terms that specifically obligate variable interest entityentities’ equity holders to ensure the valid existence of the variable interest entities and restrict the disposal of material assets of the variable interest entities. However, in the event the variable interest entityentities’ equity holders breach the terms of these contractual arrangements and voluntarily liquidate our variable interest entityentities or our variable interest entity declaresentities declare bankruptcy and all or part of itstheir assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the variable interest entity,entities, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if our variable interest entity undergoesentities undergo a voluntary or involuntary liquidation proceeding, itstheir equity holders or unrelated third-party creditors may claim rights to some or all of the assets of such variable interest entity,entities, thereby hindering our ability to operate our business as well as constrain our growth.
The equity holders, directors and executive officers of our variable interest entity,entities, as well as our employees who execute other strategic initiatives may have potential conflicts of interest with our Company.
PRC laws provide that a director and an executive officer oweowes a fiduciary duty to the company he or she directs or manages. The directors and executive officers of the variable interest entity must act in good faith and in the best interests of the variable interest entity and must not use their respective positions for personal gain. On the other hand, such officers and directors who may be directors/employees of our Company, also have a duty of care and loyalty to act in the best interests of our Company, which in the ordinary course will include acting in the best interests of our shareholders as a whole under British Virgin Islands law. We control our variable interest entityentities through contractual arrangements and the business and operations of our variable interest entityentities are closely integrated with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these individuals may arise due to dual roles both as directors and executive officers of the variable interest entityentities and as directors or employees of our Company, and may also arise due to dual roles both as variable interest entityentities’ equity holders and as directors or employees of our Company.
We cannot assure you that these individuals will always act in the best interests of our Company should any conflicts of interest arise, or that any conflicts of interest will always be resolved in our favor. We also cannot assure you that these individuals will ensure that the variable interest entityentities will not breach the existing contractual arrangements. If we cannot resolve any such conflicts of interest or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement action under the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal proceedings. See “Any“Any failure by our variable interest entityentities or itstheir equity holders to perform their obligations under the contractual arrangements would have a material and adverse effect on our business, financial condition and results of operations.”
The contractual arrangements with our variable interest entityentities may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entityentities or their equity holders owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our variable interest entity,entities, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable transfer pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entityentities and/or variable interest entityentities equity holders could be increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late payment interest. Our net income may be materially reduced if our tax liabilities increase.
Risks Related to Doing Business in the People’s Republic of China
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.
All of our operations are conducted in the PRC and substantially all of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.regulations, which can change quickly with little advance notice.
Most of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Further, enforcement of laws and that rules and regulations in China can change quickly with little advance notice. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.
PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify Ministry of Commerce (“MOFCOM”), in advance of any transaction where the parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review. Our proposed acquisition of control of, or decisive influence over, at least any two participating companies (including us) with a turnover within the PRC of more than RMB400 million (approximately $60.15 million) in the fiscal year prior to any proposed acquisition and all of the participating companies (including us)with a turnover within the PRC of more than RMB2 billion (approximately $0.30 billion) or with a global turnover of RMB10 billion (approximately $1.50 billion) in the fiscal year prior to any proposed acquisition, would be subject to MOFCOM merger control review. Certain transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure. If MOFCOM’s practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete large acquisitions in the future in a timely manner or at all.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.
SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. For further discussion on SAFE Circular 37 and its impact on dividend distribution, please see below “Regulations“Regulations Relating to Foreign Exchange and Dividend Distribution – SAFE Circular 37” on page 190..
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. On February 28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Pursuant to SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, will directly review the applications and conduct the registration. Furthermore, since it is unclear how those new SAFE regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
Any failure to comply with PRC regulations regarding our employee equity incentive plans, should we have one, may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted restricted shares, RSUs or options may follow SAFE Circular 37 and the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, to apply for the foreign exchange registration. According to those regulations, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under our equity incentive plans (should we have one) or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under PRC law.
In addition, the State Administration for Taxation has issued circulars concerning employee share options, restricted shares or RSUs. Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares or RSUs vest, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related to their share options, restricted shares or RSUs. Although we currently withhold income tax from our PRC employees in connection with their exercise of options and the vesting of their restricted shares and RSUs, if the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities.
We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary in China to fund offshore cash and financing requirements.
We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary and on remittances from the variable interest entity, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our principal operating subsidiary or the variable interest entity incurs additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiary and certain other subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside a portion of its net income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. As of December 31, 2019,2020, these restricted assets totaled RMB 70,438,226 (approximately $11,353,962).
Limitations on the ability of the variable interest entity to make remittance to WFOE to pay dividends to us could limit our ability to access cash generated by the operations of those the variable interest entity, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.
PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using proceeds from any offering and/or future financing activities to make loans or additional capital contributions to our PRC operating subsidiaries.
Under PRC laws and regulations, we are permitted to utilize the proceeds from an offering to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration and filing requirements.
Any loans to our PRC subsidiary, which is treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of approved total investment and the amount of registered capital of such foreign-invested company. We may also decide to finance our PRC subsidiary by means of capital contributions. These capital contributions must be filed with the MOFCOM or its local counterpart.
In addition, on March 30, 2015, SAFE promulgated the Circular on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises, or SAFE Circular 19, prohibiting foreign-invested enterprise from using an RMB fund converted from its foreign exchange capital for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises or purchasing real estate not for self-use.
If we fail to comply with such regulations, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we do not generate any revenue offshore. However, if this proportion were to increase and if we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”
We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company.
On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax and Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.
According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
Bulletin 7 may be determined by the tax authorities to be applicable to some of our offshore restructuring transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and withholding or tax payment obligation, while our PRC subsidiaries may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and PRC subsidiaries may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Bulletin 7, our income tax costs associated with such potential acquisitions or disposals will increase, which may have an adverse effect on our financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our revenue effectively.
Presently all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC subsidiary, which is a wholly-foreign owned enterprise, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our ordinary shares, or pay principal and interest in foreign currencies to the holders of the notes. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.
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Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. In April 2012, the PRC government announced that it would allow more RMB exchange rate fluctuation. On August 11, 2015, the PRC government set the central parity rate for the RMB nearly 2% lower than that of the previous day and announced that it will begin taking into account previous day’s trading in setting the central parity rate. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Substantially all of our revenues and costs are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while a significant portion of our debt is denominated in U.S. dollars. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the Renminbi may materially and adversely affect our liquidity and cash flows. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive.
The recent spate of government interference by the PRC government into business activities of U.S. listed Chinese companies may negatively impact our operations, value of our securities and/or significantly limit or completely hinder our ability to offer future securities to investors and cause the value of such securities to significantly decline or be worthless.
Recently, the Chinese government announced that it would step up supervision of Chinese firms listed offshore. Under the new measures, China will improve regulation of cross-border data flows and security, crack down on illegal activity in the securities market and punish fraudulent securities issuance, market manipulation and insider trading. China will also check sources of funding for securities investment and control leverage ratios. The Cyberspace Administration of China (“CAC”) has also opened a cybersecurity probe into several U.S.-listed tech giants focusing on anti-monopoly, financial technology regulation and more recently, with the passage of the Data Security Law, how companies collect, store, process and transfer data. If we are subject to such a probe or if we are required to comply with stepped-up supervisory requirements, valuable time from our management and money may be expended in complying and/or responding to the probe and requirements, thus diverting valuable resources and attention away from our operations. This may, in turn, negatively impact our operations.
Further, given the Chinese government’s significant oversight and discretion over the conduct of our business operations in Hong Kong and China, the Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations and consequently, the value of our capital stock. The Chinese government could also significantly limit or completely hinder our ability to offer future securities to investors and cause the value of such securities to significantly decline or be worthless.
If our public accounting firm does not permit the Public Company Accounting Oversight Board (“PCAOB”) to inspect it within three years pursuant to the Holding Foreign Companies Accountable Act, we may be delisted.
The Holding Foreign Companies Accountable Act requires that the Public Company Accounting Oversight Board (“PCAOB”) be permitted to inspect our public accounting firm within three years. If our public accounting firm does not permit, or the PCAOB is unable to conduct, such an inspection, it may result in the delisting of our ordinary shares from the Nasdaq Capital Market.
It may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator, such as the Department of Justice, the SEC, the PCAOB and other authorities, to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
Our principal business operation is conducted in the PRC. In the event that the U.S. regulators carry out investigation on us and there is a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the PRC.
Failure to comply with laws and regulations applicable to our business in China could subject us to fines and penalties and could also cause us to lose customers or otherwise harm our business.
Our business is subject to regulation by various governmental agencies in China, including agencies responsible for monitoring and enforcing compliance with various legal obligations, such as value-added telecommunication laws and regulations, privacy and data protection-related laws and regulations, intellectual property laws, employment and labor laws, workplace safety, environmental laws, consumer protection laws, governmental trade laws, import and export controls, anti-corruption and anti-bribery laws, and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in China. These laws and regulations impose added costs on our business. Noncompliance with applicable regulations or requirements could subject us to:
● | investigations, enforcement actions, and sanctions; | |
● | mandatory changes to our network and products; | |
● | disgorgement of profits, fines, and damages; | |
● | civil and criminal penalties or injunctions; | |
● | claims for damages by our customers or channel partners; | |
● | termination of contracts; | |
● | loss of intellectual property rights; | |
● | failure to obtain, maintain or renew certain licenses, approvals, permits, registrations or filings | |
● | necessary to conduct our operations; and | |
● | temporary or permanent debarment from sales to public service organizations. |
If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be adversely affected. In addition, responding to any action will likely result in a significant diversion of our management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could materially harm our business, results of operations, and financial condition.
Additionally, companies in the technology industry have recently experienced increased regulatory scrutiny. Any reviews by regulatory agencies or legislatures may result in substantial regulatory fines, changes to our business practices, and other penalties, which could negatively affect our business and results of operations.
Changes in social, political, and regulatory conditions or in laws and policies governing a wide range of topics may cause us to change our business practices. Further, our expansion into a variety of new fields also could raise a number of new regulatory issues. These factors could negatively affect our business and results of operations in material ways.
Moreover, we are exposed to the risk of misconduct, errors and failure to functions by our management, employees and parties that we collaborate with, who may from time to time be subject to litigation and regulatory investigations and proceedings or otherwise face potential liability and penalties in relation to noncompliance with applicable laws and regulations, which could harm our reputation and business.
Risks Related to Hudson 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, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ordinary shares. Some of these companies have experienced significant volatility, including significant price declines after their initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards other PRC companies listed in the United States and consequently may impact the trading performance of our ordinary shares. 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; | |
● | 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; | |
● | fluctuations of exchange rates between the Renminbi 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 in China and globally; and | |
● | changes or developments in the PRC or 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 from time to time 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,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 cash and assets, and such use may not produce income or increase our ordinary shares price.
Our management has considerable discretion in the application of the Company’s cash and assets. You will not have the opportunity, as part of your investment decision, to assess whether its cash and assets are being used appropriately, which may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ordinary shares price. The Company may place its cash in investments that do not produce income or that lose value.
Substantial future sales or perceived potential sales of our 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 November [ ], 2020August 24, 2021, we had 6,406,146 ordinary shares outstanding. 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.
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.
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); | |
● | have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors; | |
● | 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.
If and when permitted by law, we may conduct a public offering and listing of our shares in China, which may result in increased regulatory scrutiny and compliance costs as well as increased fluctuations in the prices of our ordinary shares and ordinary shares listed in overseas markets.
Although not currently allowed under PRC law, if and when permitted by law, we may conduct a public offering and/or listing of our shares on a stock exchange in China in the future. We have not set a specific timetable or decided on any specific form for an offering in China. The precise timing of the offering and/or listing of our shares in China would depend on a number of factors, including relevant regulatory developments and market conditions. If we complete a public offering or listing in China, we would become subject to the applicable laws, rules and regulations governing public companies listed in China, in addition to the various laws, rules and regulations that we are subject to in the United States as a reporting company. The listing and trading of our securities in multiple jurisdictions and multiple markets may lead to increased compliance costs for us, and we may face the risk of significant intervention by regulatory authorities in these jurisdictions and markets.
In addition, under current PRC laws, rules and regulations, our ordinary shares will not be interchangeable or fungible with any shares we may decide to list on a PRC stock exchange, and there is no trading or settlement between these markets in the United States and mainland China. Furthermore, these two markets have different trading characteristics and investor bases, including different levels of retail and institutional participation. As a result of these differences, the trading prices of our ordinary shares may not be the same as the trading prices of any shares we may decide to list on a PRC stock exchange. The issuance of a separate class of shares and fluctuations in its trading price may also lead to increased volatility in, and may otherwise materially decrease, the prices of our ordinary shares.
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 substantially all of our operations in China and most of our directors and substantially all of our executive officers reside outside the United States.
We are incorporated in the British Virgin Islands and conduct substantially all of our operations in China through our wholly-foreign owned enterprise and the variable interest entity. Some of our directors and our executive officers reside outside the United States and a substantial portion of their assets are 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 China 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 China 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 China, 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. 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.
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 U.S. Holders if we are or have been a passive foreign investment company.
While we do not believe we are or have been a passive foreign investment company (“PFIC”), there can be no assurance that we are not currently or have been a PFIC during a U.S. Holder’s holding period. If (a) we have been a PFIC for any taxable year during the holding period of a U.S. Holder (and a U.S. Holder of Hudson shares has not made certain elections with respect to its Hudson shares) and (b) Purchaser is not a PFIC in the taxable year of the Redomestication Merger, such U.S. Holder would likely recognize gain (but not loss if the Redomestication Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code) upon the exchange of Hudson shares for Purchaser Common Stock pursuant to the Redomestication Merger.
Although we do not believe that we are or have been a PFIC during a U.S. Holder’s holding period, 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. Please see “Material U.S. Federal Income Tax Consequences of the Redomestication Merger, the Disposition and the Merger—Tax Consequences to U.S. Holders—Effect of the PFIC Rules on the Redomestication Merger” for a more detailed discussion with respect to our potential PFIC status and certain tax implications thereof.
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 NASDAQThe Nasdaq Stock Market LLC (“Nasdaq”) that we no longer meets Listing Rule 5450(v)(1)(A) which requires us 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 hadhas 45 calendar days (no later than March 13, 2020) to submit a plan to regain compliance. We had already submitted our plan and were 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.
On June 15, 2020,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 our application to list our ordinary shares on Thewe no longer meet Nasdaq Capital Market had been approved. Our shares began trading on the Nasdaq Capital Market at the opening of business on July 16, 2020, thus resolving the needListing Rule 5550(b)(1), which requires us to maintain a minimum $10,000,000$2,500,000 in stockholders’ equity for continued listinglisting. We had reported in our last annual report 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 a minimum $5,000,000 in MVPHS.
On October 15, 2020, we announced that we would effect a 5:1 reverse split of our ordinary shares effective on October 29, 2020. We believe that the reverse split will resolve the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market.has granted us until November 9, 2021 to regain compliance.
We intend to actively monitor the closing bid price for our ordinary shares and will take all reasonable actions to ensure compliance, including without limitation, applying to transfereffecting the Company’s securities to the Nasdaq Capital Market. ThereMerger. However, there can be no assurance that the Companywe will be able to regain compliance with the Nasdaq Rules or will otherwise be in compliance with other Nasdaq listing criteria. 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 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. The delisting of our ordinary shares, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that a company has filed audit reports included in this proxy statement/prospectus haveissued by a registered public accounting firm that has not been prepared by auditors whose work may not be inspected fullysubject to inspection by the Public Company Accounting Oversight BoardPCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such ordinary 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 as such, you may be depriveddocumentation requirements of the benefitsHFCA 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 such inspection.the HFCA Act, including the listing and trading prohibition requirements described above.
Our currentauditor, the independent registered public accounting firm that issueissues the audit reportsreport included in this proxy statement/prospectus filed with the SECstatement, as auditorsan auditor of companies that are traded publicly in the United States and firmsa firm registered with the Public Company Accounting Oversight Board (United States),PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. However, 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 has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act 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 lawsHFCA 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 the price of our ordinary shares.
The recent joint statement by the SEC, proposed rule changes submitted by NASDAQ, and an act passed by the U.S. Senate and the U.S. House of Representatives, all call for additional and more stringent criteria to be applied to emerging market companies. These developments could add uncertainties to our future offerings, business operations share price and reputation.
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the United States to undergo regular inspections by the PCAOB to assess their respective compliance with the lawsscrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of the United Stateseffective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, professional standards.in many cases, allegations of fraud.
Any other clients of our auditors have substantial operations within mainland China, and the PCAOB has been unable to complete inspections of the work of our auditors without the approval of the Chinese authorities. Thus, our auditors and their audit work are not currently inspected fully by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulationregulators in their oversight of financial statement audits of U.S.-listed companies with significant operationoperations in China. However, it remains unclear what further actionsOn April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China, reiterating past SEC and PCAOB will take to addressstatements on matters including the problem.difficulty associated with inspecting accounting firms and audit work papers in China and higher risks of fraud in emerging markets and the difficulty of bringing and enforcing SEC, Department of Justice and other U.S. regulatory actions, including in instances of fraud, in emerging markets generally.
Inspections of other firms thatOn May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB has conducted outside mainland China have identified deficiencies in those firms’is unable to audit procedures and quality control procedures, which can be addressed as part ofspecified reports because the inspection processcompany uses a foreign auditor not subject to improve future audit quality. The lack of PCAOB inspections in mainland China prevents the PCAOB from regularly evaluating our auditors’ audit procedures and quality control procedures as they relate to their work in mainland China. As a result, investors may be deprived of the benefits of such regular inspections.
The inability of the PCAOB to conduct full inspections of auditors in mainland China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures and quality control procedures as compared to auditors who primarily work in jurisdictions where the PCAOB has full inspection access. Investors may lose confidence in our reported financial information and the quality of our financial statements.
In addition, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress which, if passed, would require the SEC to maintain a list of issuers for whichinspection. If the PCAOB is unable to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (“EQUITABLE”) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s listcompany’s auditors for three consecutive years. Enactment of this legislation or other effortsyears, the issuer’s securities are prohibited to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ordinary shares could be adversely affected. It is unclear if this proposed legislation will be enacted. Furthermore, various deliberations have been carried out withintrade on a national exchange. On December 2, 2020, the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets.House of Representatives approved the Holding Foreign Companies Accountable Act.
On AprilMay 21, 2020,2021, NASDAQ filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in a “Restrictive Market”, (ii) prohibit Restrictive Market companies from directly listing on NASDAQ Capital Market, and only permit them to list on NASDAQ Global Select or NASDAQ Global Market in connection with a direct listing and (iii) apply additional and more stringent criteria to an applicant or listed company based on the PCAOB issuedqualifications of the company’s auditors.
As a joint statement reiteratingresult of these scrutiny, criticism and negative publicity, the greater risk that disclosurespublicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our future offerings, business and our share price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from developing our growth. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our shares.
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 in many emerging markets, includingto establish the PRC, comparedcompany’s initial valuation, and there would not be sufficient liquidity to those made by U.S. domestic companies. In discussingsupport a public market for the specific issues relatedcompany; and (iii) where the company did not demonstrate sufficient nexus to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in the PRC, with respect to their audit work of U.S. reporting companies. However, it remains unclear what further actions, if any, the SEC and PCAOB will take to address the problem. There have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting the PRC-based companies from accessing U.S. capital markets.
Ifmarket, including having no U.S. shareholders, operations, or members of the board of directors or management. For the any such policiesaforementioned concerns, we may be subject to the additional and more stringent criteria of NASDAQ for our continued listing, which might cause delay or deliberations were to materialize, the resulting legislation, if it were to apply to us, would likely have a material adverse impact on our business and the priceeven denial of our ordinary shares.listing application for Purchaser Common Stock.
Risks Related to Fr8Hub’sFr8App’s Business
Fr8Hub’s 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.
Fr8Hub 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 Fr8Hub’sFr8App’s products were launched in 2017. Fr8HubFr8App 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 Fr8HubFr8App products were 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 Fr8Hub’sFr8App’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 Fr8HubFr8App had a longer operating history or a history of successfully developing and marketing its product offerings. Fr8Hub’sFr8App’s relatively limited operating history may make it difficult for you to evaluate the success of its business and assess its future viability.
Fr8Hub Fr8App may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving its business objectives. Fr8Hub’sFr8App’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.
A significant data breach or IT system disruption could materially adversely affect Fr8Hub,Fr8App, including requiring Fr8HubFr8App to increase spending on data and system security.
Fr8Hub 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, Fr8HubFr8App 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 Fr8Hub’sFr8App’s business.
In addition, the provision of service to Fr8Hub’sFr8App’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. Fr8HubFr8App 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.
Fr8Hub’s 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 Fr8Hub’sFr8App’s business. In addition, the foregoing breaches in security could expose Fr8HubFr8App and its customers to a risk of loss, disclosure or misuse of proprietary information and sensitive or confidential data.
Fr8Hub 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 Fr8Hub’sFr8App’s web portal and platform solution will not sometimes malfunction or be subject to malicious attacks. Any unexpected malfunction of Fr8Hub’sFr8App’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 Fr8HubFr8App is unaware of a data breach or system disruption that has had a material adverse effect on it, Fr8HubFr8App 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 Fr8HubFr8App operates could materially and adversely affect the demand for its services, its operations and financial conditions.
Fr8Hub 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 Fr8HubFr8App operates could have a material adverse effect on customers’ demand for its services. Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s control, and it may be difficult for Fr8HubFr8App to adjust its business model to mitigate the impact of these factors. In particular, Fr8Hub’sFr8App’s business is affected by levels of industrial production, consumer spending and retail activity and Fr8HubFr8App could be materially and adversely affected by adverse developments in these and other aspects of the economies in which Fr8HubFr8App operates. If Fr8HubFr8App 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.
A global pandemic or spread of disease, real or perceived, as well as natural disasters in any country in which Fr8HubFr8App 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 Fr8Hub’sFr8App’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, Fr8HubFr8App has experienced great volatility in global and domestic supply chains. The extent to which COVID-19 ultimately impacts the 3PL industry, Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s business and result in decreased revenues. Customers may reduce shipments, or Fr8Hub’sFr8App’s costs to operate its business may increase, either of which could have a material adverse effect on Fr8Hub.Fr8App. Any such event affecting one of the countries in which Fr8HubFr8App 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.
There is no assurance that any part of the loan Fr8Hub took under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act will be forgiven.Fr8App’s
On May 6, 2020, Fr8Hub received the proceeds from a loan in the amount of $114,700 (the “PPP Loan”) from International Bank of Commerce, as lender, pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Fr8Hub’s PPP Loan matures on May 6, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on December 6, 2020. Under the terms of the PPP, all or a portion of the principal may be forgiven if the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. However, there is no assurance that Fr8Hub will be able to obtain forgiveness of the PPP Loan in whole or in part. With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the note.
Fr8Hub’s industry is rapidly evolving. It expects to continue to face significant competition, which could adversely affect Fr8Hub.Fr8App.
The 3PL industry is rapidly evolving, including demand for greater efficiency and increased visibility into the shipment lifecycle. Fr8HubFr8App expects continued significant competition on a national and international level. Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s 3PL services. If Fr8HubFr8App is unable to adapt to these changes, its business could be adversely affected.
Fr8HubFr8App 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 Fr8Hub’sFr8App’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 Fr8HubFr8App serves, Fr8Hub’sFr8App’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, Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s business and operating results.
Fr8HubFr8App 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 Fr8Hub’sFr8App’s customers and Fr8Hub’sFr8App’s operating results and financial condition.
Fr8HubFr8App 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. Changes in fuel prices, disruption in energy supplies as a result of war, actions by producers or other factors beyond Fr8Hub’sFr8App’s control, could in turn have a material adverse effect on Fr8Hub’sFr8App’s business.
Fr8HubTruck 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.
Fr8HubFr8App currently does not hold any patents or own any registered trademarks. Although Fr8HubFr8App 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 Fr8Hub’sFr8App’s U.S. Trademark Application Serial No. 87102800 (the “Trademark Application”) for its “Fr8HUB” unitary design mark (the “Mark”), seeking. 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 have the Trademark Trial and Appeal Board (“TTAB”) rejectirrevocably abandon the Trademark Application and refusepermanently 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 register the Mark. On September 15, 2020, Fr8Hub filed a reply motionSource Identifiers, refraining from filing additional trademark applications involving the Source Identifiers, and refraining from otherwise seeking to extendsecure or enforce its rights to the timeSource 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 respond to Hub Group’s discovery requests and extend the TTAB trial schedule without consent. This and other similar litigation may be costly and may divert resources and management’s attention from Fr8Hub’s business. Ifestimate. Hub Group obtainshas fully released any further legal claims concerning Fr8App’s use of the relief it requests Fr8Hub may be prevented from registeringSource Identifiers through the Mark.date of the Settlement.
The impact of environmental laws and regulations and their enforcement could materially and adversely affect Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s business. Routes and pricing for commercial freight could be regulated. Controlled margins or prices for certain goods could be put into effect. Fr8HubFr8App 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 Fr8Hub’sFr8App’s Financial Position and Need for Additional Capital
Fr8HubFr8App has a history of significant operating losses and expect to incur losses for the foreseeable future, and Fr8HubFr8App may never achieve or maintain profitability.
Fr8Hub Fr8App has a history of significant operating losses, and Fr8HubFr8App has not been profitable since inception in 2015. Fr8HubFr8App plans to continue to invest in improving Fr8Hub’sFr8App’s platform and services. Recurring losses from Fr8Hub’sFr8App’s operations could raise substantial doubt regarding its ability to continue as a going concern. If Fr8HubFr8App fails to transition from a company with a development focus to fully commercializing its product offerings, it may not be able to fund its operations without raising additional capital. While Fr8HubFr8App 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 Fr8HubFr8App 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 Fr8Hub’sFr8App’s existing shareholders, restrict its operations or cause it to relinquish valuable rights.
While Fr8HubFr8App has been successful in raising capital in the past, there is no assurance that Fr8HubFr8App can access additional capital in the future when needed, on favorable terms, or at all. To the extent that Fr8HubFr8App 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 Fr8HubFr8App 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 Fr8Hub,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 Fr8HubFr8App 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 Fr8Hub.Fr8App. Adequate additional financing may not be available to Fr8HubFr8App on acceptable terms, or at all. If Fr8HubFr8App 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.
Risks Related to Fr8Hub’sFr8App’s Operations
A number of Fr8Hub’sFr8App’s personnel are based outside of the United States and regularly conduct business outside of the United States. Fr8HubFr8App is subject to economic, political, regulatory and other risks associated with international operations.
As a number of personnel that support Fr8Hub’sFr8App’s operations are based in Mexico, Fr8Hub’sFr8App’s business is subject to risks associated with conducting business outside of the United States. Accordingly, Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s results of operations and financial condition.
Though most of Fr8Hub’sFr8App’s revenues are denominated in U.S. dollars, Fr8HubFr8App does effect contracts in Mexico whereby Fr8HubFr8App invoices for its services in Mexican pesos. Fr8HubFr8App may execute contracts in Canadian dollars or other currencies at some point in the future. Fr8HubFr8App 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 Fr8Hub’sFr8App’s results from operations.
Fr8Hub 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 Fr8Hub’sFr8App’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 Fr8Hub.Fr8App.
Fr8HubFr8App may be subject to claims by third parties asserting that its employees or Fr8HubFr8App has misappropriated their intellectual property, or claiming ownership of what Fr8HubFr8App regards as its own intellectual property.
Many of Fr8Hub’sFr8App’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 Fr8HubFr8App tries to ensure that its employees do not use the proprietary information or know-how of others in their work for Fr8Hub, Fr8HubFr8App, 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 Fr8HubFr8App 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 Fr8HubFr8App 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 Fr8HubFr8App 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
Fr8Hub’s 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.
Fr8Hub’s Fr8App’s President, Chief Executive Officer and Chief Financial Officer all joined Fr8HubFr8App only in September 2020 and their Chief Operating Officer in August 2021 and have not worked together prior to joining Fr8Hub. Fr8Hub’sFr8App. 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 Fr8HubFr8App has entered into employment agreements with certain of its executive officers, any of them could leave Fr8Hub’sFr8App’s employment at any time. Fr8HubFr8App 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 Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s business, including scientific and technical personnel, will also be critical to its success. There is currently a shortage of skilled executives in Fr8Hub’sFr8App’s industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Fr8HubFr8App may have to incur additional recruiting and training expenses to adequately staff its company. Fr8HubFr8App 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 Fr8Hub’sFr8App’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, Fr8HubFr8App 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 Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s carriers’ businesses and in turn, its business could be materially and adversely affected. Fr8HubFr8App 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 Fr8HubFr8App and it could be the target of an attack or have a security breach, which could materially adversely affect Fr8Hub.Fr8App.
Fr8HubFr8App 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 Fr8HubFr8App is subject to a variety of laws and regulations in the United States and abroad that involve matters central to its business.
Fr8Hub’s 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. Fr8HubFr8App 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 Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’s business. These may involve privacy, data protection and personal information, content, intellectual property, data security, retention and deletion. In particular Fr8HubFr8App 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 Fr8HubFr8App operates and may be interpreted and applied inconsistently from country to country and inconsistently with its current policies and practices. Fr8Hub’sFr8App’s customers upload and store customer data in its cloud-based platform. This presents legal challenges to Fr8Hub’sFr8App’s business and operations, such as consumer privacy rights or intellectual property rights. Both in the U.S. and abroad, Fr8HubFr8App 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. Fr8HubFr8App 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 Fr8HubFr8App 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 Fr8Hub’sFr8App’s business.
Fr8Hub’s Fr8App’s growth plan may not succeed as quickly as anticipated, if at all.
Fr8Hub’s 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 Fr8Hub’sFr8App’s customers. Since many shippers are small companies slow to adapt to new technologies, Fr8HubFr8App may not be able to establish a consistently effective method for marketing its platform and mobile application to such industry participants. Fr8Hub’sFr8App’s plan to commercialize and grow the usage of its platform and service offerings may not succeed as quickly as anticipated, if at all.
Fr8HubFr8App expects to expand its organization, and as a result, it may encounter difficulties in managing its growth, which could disrupt its operations.
Fr8Hub 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 Fr8Hub’sFr8App’s solution platform for both its shippers and carriers with live 24/7 tracking on shipment. Fr8HubFr8App 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, Fr8HubFr8App may encounter difficulties in managing its growth. Fr8HubFr8App 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.
Fr8HubFr8App 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.
If the Merger is completed, Fr8Hub’sFr8App’s financial statements will become those of the Combined Company and Fr8Hub’sFr8App’s management team as the executive officers of the Combined Company 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 Combined Company’s internal control over financial reporting. In particular, Fr8HubFr8App 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. Fr8HubFr8App 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.
To address these potential control weaknesses, Fr8HubFr8App will likely need to add personnel as well as implement new financial processes. Fr8HubFr8App 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. Fr8HubFr8App 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 Combined Company’s independent registered public accounting firm will not be required to attest to the effectiveness of the Combined Company’s internal control over financial reporting for so long as the Combined Company remains a “smaller reporting company” as defined in applicable SEC regulations. The management team of the Combined 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 Combined Company following the Merger, Fr8HubFr8App will need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. The Combined Company’s audit committee must also be advised and regularly updated on management’s review of internal controls. Fr8HubFr8App 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 Fr8HubFr8App may not be able to complete its evaluation, testing and any required remediation in a timely fashion. Moreover, if Fr8HubFr8App 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 Fr8Hub’sFr8App’s internal control over financial reporting that are deemed to be material weaknesses, the market price of the Combined Company’s common stock could decline and the Combined Company could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources.
This proxy statement/prospectus and the documents incorporated by reference into this proxy statement/prospectus 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 nor F8Hub 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, Hudson’s ability to solicit a sufficient number of proxies to approve the merger and other matters related to the closing of the merger.
For a discussion of the factors that may cause Hudson, Fr8HubFr8App or the Purchaser (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, or for a discussion of risk associated with the ability of Hudson and Fr8HubFr8App to complete the merger and the effect of the merger on the business of Hudson, Fr8HubFr8App and the combined company, see the section titled “Risk Factors.”
These forward-looking statements include, but are not limited to, statements concerning the following:
● | likelihood of the satisfaction of certain conditions to the completion of the Merger and whether and when the Merger will be consummated; | |
● | any statements concerning the attraction and retention of highly qualified personnel; | |
● | any statements concerning the Purchaser’s financial performance; | |
● | any statements regarding expectations concerning | |
● | future regulatory, judicial and legislative changes in |
You should not rely upon forward-looking statements as predictions of future events. Neither Hudson nor Fr8HubFr8App 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 proxy statement/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 nor Fr8HubFr8App undertakes any obligation to update publicly any forward-looking statements for any reason after the date of this proxy statement/prospectus or to conform these statements to actual results or to changes in expectations.
THE MEETING OF HUDSON’S SHAREHOLDERS
Date, Time and Place
The Meeting of Hudson’s shareholders will be held on _________,[_________], 2021, at [__________], which we refer to as the “Meeting”. Hudson is sending this proxy statement/prospectus to its shareholders in connection with the solicitation of proxies by the Hudson board of directors for use at the Meeting and any adjournments or postponements of the Meeting. This proxy statement/prospectus is first being furnished to Hudson shareholders on the record date of ___[___] on or about _________,[_________], 2021.
Purposes of the Meeting
The purposes of the Meeting are to vote on the following Proposals: (i) a proposal to approve and adopt the Merger Agreement; (ii) a proposal to approve the Redomestication Merger; (iii) the proposals related to the Purchaser amended and restated certificate of incorporation; (iv) a proposal to approve the spin-off of Hudson’s current businesses; (v) a proposal for election of directors; (vi)(v) a proposal to approve the issuance of more than 20% of the issued and outstanding Purchaser Common Stock pursuant to the terms of the Merger Agreement and as required by and in accordance with NASDAQ Listing Rule 5635(a), (b) and (d); (vii)(vi) approve and adopt the Freight Technologies, Inc. 2021 Equity Incentive Plan; and (viii)(vii) a proposal to adjourn the Meeting, if necessary or appropriate, to solicit additional proxies in favor of the proposals listed above.
Recommendation of the Hudson Board of Directors
The board of directors of Hudson unanimously: (i) has determined that the Merger Agreement and the Transactions contemplated thereby, including the Merger, are fair to, and in the best interests of, Hudson and its shareholders; (ii) has approved the Merger Agreement and the other Transactions contemplated thereby; (iii) has approved the Redomestication Merger; (iv) has approved the amended and restated certificate of incorporation of Purchaser; (v) has approved a proposal to spin-off Hudson’s current businesses; (vi) has approved the election of directors; (vii)(vi) has approved the issuance of more than 20% of the issued and outstanding Purchaser Common Stock pursuant to the terms of the Merger Agreement and as required by and in accordance with NASDAQ Listing Rule 5635(a), (b) and (d); (viii)(vii) has approved and the adoption of the 2021 Plan; and (ix)(viii) has approved the proposal to adjourn the Meeting, if necessary or appropriate, to solicit additional proxies in favor of the proposals listed above.
The board of directors of Hudson recommends that the Hudson shareholders (i) vote “FOR” the proposal to approve and adopt the Merger Agreement and the actions contemplated thereby; (ii) vote “FOR” the proposal to approve the Redomestication Merger; (iii) vote “FOR” the proposals related to the amended and restated certificate of incorporation of Purchaser; (iv) vote “FOR” the proposal to spin-off Hudson’s current businesses; (v) vote “FOR” the election of directors; (vi)(v) vote “FOR” the issuance of more than 20% of the issued and outstanding Purchaser Common Stock pursuant to the terms of the Merger Agreement and as required by and in accordance with NASDAQ Listing Rule 5635(a), (b) and (d); (vii)(vi) vote “FOR” the adoption of the 2021 Plan; and (viii)(vii) vote “FOR” the proposal to authorize the Hudson Board of Directors, in its discretion, to adjourn the Meeting.
Record Date and Voting Power
Only holders of record of Hudson at the close of business on the record date, ______,[______], 2021 are entitled to notice of, and to vote at, the Meeting. At the close of business on the record date, ___________[___________] ordinary shares of Hudson were issued and outstanding. Each ordinary share entitles the holder thereof to one vote on each matter submitted for stockholder approval. See the section titled “Principal Stockholders of Hudson” for information regarding persons known to the management of Hudson to be the beneficial owners of more than 5% of the outstanding ordinary shares of Hudson.
Voting and Revocation of Proxies
The proxy accompanying this proxy statement/prospectus is solicited on behalf of the Hudson Board of Directors for use at the Meeting.
If you are a shareholder of record of Hudson as of the record date referred to above, you may vote in person at the Meeting or vote by proxy using the enclosed proxy card. Whether or not you plan to attend the Meeting, Hudson urges you to vote by proxy to ensure your vote is counted. You may still attend the Meeting, and vote in person if you have already voted by proxy. As a stockholder of record you are entitled:
● | to vote in person, come to the Meeting Hudson will give you a ballot when you arrive; | |
● | to vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided. If you return your signed proxy card to Hudson before the Meeting, Hudson will vote your shares as you direct; or | |
● | to vote on the Internet, go to the website on the proxy card or voting instruction form to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m. Eastern Time on |
If your Hudson shares are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that proxy card regarding how to instruct your broker to vote your Hudson shares.
If you do not give instructions to your broker, the question of whether your broker or nominee will still be able to vote your shares depends on whether the NASDAQ deems the particular proposal to be a “routine” matter and how your broker or nominee exercises any discretion they may have in the voting of the shares that you beneficially own. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under the rules and interpretations of the NASDAQ, “non-routine” matters are matters that may substantially affect the rights or privileges of stockholder, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation (including any advisory stockholder votes on executive compensation and on the frequency of stockholder votes on executive compensation), and certain corporate governance proposals, even if management-supported.
For any proposal that is considered a “routine” matter, your broker or nominee may vote your shares in its discretion either for or against the proposal even in the absence of your instruction. For any proposal that is considered a “non-routine” matter for which you do not give your broker instructions, the Hudson shares will be treated as broker non-votes. Broker non-votes occur when a beneficial owner of shares held in street name does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.” Broker non-votes will not be considered to be shares “entitled to vote” at the meeting and will not be counted as having been voted on the applicable proposal.
Hudson believes that all of the proposals will be considered “non-routine” matters by the NASDAQ. This belief is based on preliminary guidance from the NASDAQ and may be incorrect or change before the Meeting. Therefore, if you are a beneficial owner and want to ensure that shares you beneficially own are voted in favor or against any or all of the proposals, the only way you can do so is to give your broker or nominee specific instructions as to how the shares are to be voted.
All properly executed proxies that are not revoked will be voted at the Meeting and at any adjournments or postponements of the Meeting in accordance with the instructions contained in the proxy. If a holder of Hudson ordinary shares executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted:
● | “FOR” the Merger Proposal; | |
● | “FOR” the Redomestication Merger Proposal; | |
● | “FOR” the Amended and Restated COI Proposal; | |
● | “FOR” the | |
● | “FOR” the NASDAQ Proposal; | |
● | “FOR” the Equity Plan Proposal; and | |
● | “FOR” the Adjournment Proposal. |
Hudson shareholders of record may change their vote at any time before their proxy is voted at the Meeting in one of three ways. First, a shareholder of record of Hudson can send a written notice to Hudson stating that the shareholder would like to revoke its proxy. Second, a shareholder of record of Hudson can submit new proxy instructions either on a new proxy card or via the Internet. Third, a shareholder of record of Hudson can attend the Meeting and vote in person. Attendance alone will not revoke a proxy. If a shareholder of record of Hudson or a shareholder who owns Hudson shares in “street name” has instructed a broker to vote its ordinary shares of Hudson, the shareholder must follow directions received from its broker to change those instructions.
Required Vote
The presence, in person or represented by proxy, at the Meeting of the holders of a majority of the ordinary shares of Hudson outstanding and entitled to vote at the Meeting is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes will be counted towards a quorum.
● | Proposal 1 - The Merger Proposal requires the affirmative vote of the majority of the Hudson ordinary shares present in person or represented by proxy and entitled to | |
● | Proposal 2 - The Redomestication Proposal requires the affirmative vote of the majority of the Hudson ordinary shares present in person or represented by proxy and entitled to | |
● | Proposal 3 – The Amended and Restated COI Proposal requires the affirmative vote of the majority of the Hudson ordinary shares present in person or represented by proxy and entitled to | |
● | Proposal 4 – The | |
● | Proposal 5 | |
● | Proposal 6 | |
● | Proposal 7 | |
The information above with respect to the effect of broker non-votes may be incorrect or change before the Meeting. Therefore, if you are a beneficial owner and want to ensure that shares you beneficially own are voted in favor or against any or all of the Proposals, the only way you can do so is to give your broker or nominee specific instructions as to how the shares are to be voted.
If on the date of the Meeting, or a date preceding the date on which the Meeting is scheduled, Hudson reasonably believes that (i) it will not receive proxies sufficient to obtain the required vote to approve the Proposals, whether or not a quorum would be present or (ii) it will not have sufficient ordinary shares of Hudson represented (whether in person or by proxy) to constitute a quorum necessary to conduct the business of the Meeting, Hudson may postpone or adjourn, or make one or more successive postponements or adjournments of, the Meeting as long as the date of the Meeting is not postponed or adjourned more than an aggregate of 30 calendar days in connection with any postponements or adjournments.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers, employees and agents of Hudson may solicit proxies from Hudson shareholders by personal interview, telephone, telegram, email or otherwise. Hudson will pay the costs of printing and filing this proxy statement/prospectus and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of ordinary shares of Hudson for the forwarding of solicitation materials to the beneficial owners of ordinary shares of Hudson. Hudson shall reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.
Other Matters
As of the date of this proxy statement/prospectus, the Hudson board of directors does not know of any business to be presented at the Meeting other than as set forth in the notice accompanying this proxy statement/prospectus. If any other matters should properly come before the Meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.
The following is a description of the material aspects of the Redomestication Merger. While Hudson believes that the following description covers the material terms of the redomestication, the description may not contain all of the information that is important to Hudson’s shareholders. Hudson encourages the Hudson shareholders to carefully read this entire proxy statement/prospectus, including the Merger Agreement attached to this proxy statement/prospectus as Annex A and incorporated herein by reference, for a more complete understanding of the redomestication.
General
Upon the terms and subject to the conditions set forth in the Merger Agreement (and in accordance with the plan of merger and articles of merger), Hudson will be merged with and into Purchaser, its wholly-owned subsidiary, in accordance with the BVI Act and the DGCL. As a result of this Redomestication Merger, the separate existence of Hudson shall cease, and Purchaser will continue as the surviving corporation incorporated in the State of Delaware. Following the redomestication, Purchaser, (i) shall possess all of Hudson’s and Purchaser’s assets, rights, powers and property as constituted immediately prior to the redomestication; (ii) shall continue to be subject to all of Hudson’s and Purchaser’s debts, liabilities and obligations as constituted immediately prior to the redomestication; (iii) shall be subject to all actions previously taken by the board of directors of Hudson and Purchaser prior to the redomestication; and (iv) each issued and outstanding ordinary share of Hudson shall be deemed converted into one share of Purchaser Common Stock. Purchaser’s name will be changed to “Freight Technologies, Inc.” as part of the Redomestication Merger.
How will the Redomestication Merger be effected?
The Redomestication Merger will be effected by the merger of Hudson with and into Purchaser, a wholly-owned subsidiary of Hudson that has been recently incorporated under the DGCL for purposes of the redomestication. Hudson as it currently exists as a BVI company will cease to exist as a result of the Redomestication Merger, and Purchaser will be the surviving corporation. Immediately following the Redomestication Merger, Purchaser shall effect the Disposition. The existing holders of ordinary shares of Hudson will own all of the outstanding shares of Purchaser Common Stock prior to the completion of the Merger with Fr8Hub.Fr8App. Assuming approval and adoption by Hudson shareholders of the Merger Agreement, Hudson currently intends to cause the Redomestication Merger to become effective as soon as reasonably practicable following the Meeting, which is scheduled for [●], 2021.Meeting.
At the effective time of the Redomestication Merger, each ordinary share of Hudson will be converted automatically into one share of Purchaser Common Stock. Your percentage ownership of Hudson will not be affected by the redomestication. However, there will be the issuance of additional shares of Purchaser Common Stock as Merger Consideration for the Transactions. In addition, Purchaser will assume all outstanding obligations of Hudson and succeed to those benefits enjoyed by Hudson.
You do not need to replace the current certificate representing your Hudson securities after the Redomestication Merger. Do not destroy your current certificates issued by Hudson. The issued and outstanding security certificates of Hudson will represent the rights that Hudson’s shareholders will have in Purchaser. Shareholders, however, may submit their certificates to our transfer agent, Transhare Securities Transfer and Registrar, 15500 Roosevelt Blvd., Suite 302, Clearwater, FL 33760 for new certificates, subject to normal requirements as to proper endorsement, signature guarantee, if required, and payment of applicable taxes.
If you have lost your certificate, you can contact our transfer agent to have a new certificate issued. You may be requested to post a bond or other security to reimburse us for any damages or costs if the lost certificate is later delivered for sale or transfer.
At the effective time of the Redomestication Merger, Purchaser will be governed by the Delaware Certificate of Incorporation, the Delaware Bylaws and the DGCL. Although the Delaware Certificate of Incorporation and the Delaware Bylaws contain many provisions that are similar to the provisions of the BVI memorandum and articles of association, they do include certain provisions that are different. See “Proposal 2 – The Redomestication Merger Proposal – Differences in Shareholder Rights.”
Significant Differences Between the Corporation Laws of the BVI and Delaware
Hudson’s corporate affairs are currently governed by its 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 U.S. domestic 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.
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This section and the section titled “The Merger Agreement” in this proxy statement/prospectus describe the material aspects of the Transactions, including the Merger Agreement. While Hudson believes that this description covers the material terms of the Transactions and the Merger Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus for a more complete understanding of the Transactions and the Merger Agreement, attached as Annex A and the other documents to which you are referred. See the section titled “Where“Where You Can Find More Information” in this proxy statement/prospectus.
Background of the Merger
The following chronology summarizes the key meetings and events that led to the signing of the Merger Agreement. The following chronology does not purport to document every discussion among the Hudson Board, representatives of Hudson or other parties.
Incorporated in 2014, Hudson Capital Inc., formerly known as China Internet Nationwide Financial Services, Inc., commenced its business by providing financial advisory services to small and medium size companies primarily in China. The traditional business segments includeincluded commercial payment advisory, intermediary bank loan advisory and international corporate financing advisory services to help clients to address their commercial payment and investment needs.
From time to time, the Hudson Board, together with Hudson management, has considered various long- and short-term strategic options to strengthen its business and enhance stockholder value. Strategic options that have been considered include strategic alliances, mergers and acquisitions, divestitures, other business combinations, and delisting from the NASDAQ, as well as its continued operations as an independent company.
One of the strategic developments was for Hudson to venture into supply chain financing services, or factoring services. The discussionsfactoring services provided owners of Small-Medium Sized Enterprises with holistic supply chain financing solutions and subsequentvalue-added services in order to reduce financing costs and improve efficiency during a business transaction. With an initial focus on the medical supplies and medical equipment, airline catering and bulk commodity supply chains, the factoring services were operated through the Company’s newly incorporated subsidiaries, Fu Hui (Shenzhen) Commercial Factoring Co., Ltd. (“FuhuiSZ”), and Fuhui (Xiamen) Commercial Factoring Co., Ltd. (“FuhuiXM”). This initiative yielded some results –for FY2018, the Company earned about $500,000 from providing such services.
Another initiative was to venture into the Fintech services industry. In November 2017, the Company acquired Beijing Anytrust Science & Technology Co., Ltd. (“Anytrust”), a data analytics company providing data infrastructure design, big data access and analytics, and document automation for enterprises and government agencies with customers including Tianhong Asset Management, Yinhua Fund Management and BAIC Motor, etc. Unfortunately, in spite of launching the beta version of AnyInfo, a vertical search engine and big data platform covering a broad range of publicly available data of over 30 million enterprises in China in early 2018 and an Enterprise Edition of it in September 2018, Hudson only earned approximately $0.55 million in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and Hudson was losing approximately $0.3 million per month in Anytrust. By December 2018, it determined that Anytrust was no longer a commercially viable entity.
Hudson continued to explore other potential businesses in 2019. One specific area of interest was commercial real estate. For years, Chinese investors had been one of the largest groups of investors in this asset class, both within and outside of China. Hudson’s existing businesses given years of relationships with Chinese borrowers/lenders provided the financing infrastructure should quality commercial real estate assets arise as attractive investment opportunities. Various talks took place, and the company reached a non-binding LOI with Jiangxi Lihong Construction Engineering Group Co., Ltd (“JXLH”) in December 2019 whereby JXLH and/or its affiliates may sell to and/or contribute certain real estate assets, estimated at a then residual value of $50,000,000, into the company. However, the proposed transaction did not materialize as negotiations with Fr8Hub were considered a continuation of Hudson’s periodic consideration of strategic options, including other business combinations. broke down subsequently.
In December 2019, the Hudson Board became acquainted with Mr. Warren Wang through one of its advisors who believed Mr. Wang’s experience could be beneficial to Hudson through an internal or advisory role. Following his introduction and through a series of discussions in early 2020, Mr. Wang suggested several strategic directions to the Hudson Board that, in his opinion, would benefit the stockholders of Hudson by potentially expanding revenues and improving the Hudson business. As a result of these discussions, the Hudson Board offered Mr. Wang the role of Chief Executive Officer and Chairman of the Board. Hudson’s Board had not been searching for a candidate for those positions but was confident that Mr. Wang’s experience and recommendation to rebrand Hudson and expand its geographic focus would benefit Hudson and its stockholders. On March 31, 2020, Mr. Wang accepted the position and was appointed Hudson’s Chief Executive Officer and Chairman of the Board. The Hudson Board had offered Mr. Wang the position as it believed that Hudson stockholders would benefit from Mr. Wang’s experience and strategic vision for Hudson.
Mr. Wang led Hudson’s efforts to rebrand and shift its focus into new industries and towards new geographies, including North America. As part of these efforts, on April 10, 2020, the Hudson Board resolved to change its name from “China Internet Nationwide Financial Services Inc.” to “Hudson Capital Inc.” to better reflect Hudson’s next phase of growth. The name change took effect on April 23, 2020. On May 8, 2020, the ticker symbol on the NASDAQ exchange was changed from “CIFS” to “HUSN.”
On May 22, 2020 , representativesMr. Wang continued Hudson’s efforts in venturing into commercial real estate, but with a focus in the US given his local connections especially in the tri-state area. Among those candidates that Hudson had explorative discussions with, Hudson entered into a non-binding Letter of Intent with one company which has a multitude of developed mix-used properties as well as developing sites in New Jersey. However, the Covid-19 pandemic and the stay-at-home order caused significant construction delays in those developing sites. Hudson ultimately determined that the pandemic had a disproportionate negative impact on the commercial real estate industry and decided to pivot the company’s efforts to other sectors.
The discussions and subsequent negotiations with Fr8App were considered a continuation of the Hudson Board’s periodic consideration of strategic options in light of this directional shift away from the commercial real estate sector and into industries that were less impacted by the pandemic. In addition, as a result of the continued deterioration of Hudson’s share price and erosion of stockholder value, the Hudson Board determined that it was critical to commit to a strategic option in the near-term. The merger between Hudson and Fr8App is one aspect of the Hudson Board’s efforts, as led by Mr. Wang, to increase the value of Hudson for the benefit of Hudson stockholders.
As an advisor to Fr8App, Chardan Capital Markets LLC’s Mergers and Acquisitions Group (“Chardan M&A”), had identified publicly listed companies, including Hudson, whose business, operational and financial prospects were hindered by the substantially diminished price of its ordinary shares and could potentially benefit through a merger with Fr8App. Chardan M&A had been reaching out to identified companies on behalf of Fr8App. As part of that outreach process, on May 22, 2020, representatives from Chardan M&A, reached out to Mr. Wang to discuss potential collaboration opportunities to increase stockholder value including a potential merger with Fr8HubFr8App and including a proposed spin-off of the Hudson business. This was the first contact between Chardan M&A and Hudson.
On the same day of May 22, 2020, , Mr. Wang called a meeting to discuss these opportunities with Hudson’s management team. Mr. Wang and Hudson’s management team discussed the strategic, financial, and operational challenges of operating Hudson’s business with a substantially diminished ordinary share price including raising more than limited working capital at attractive valuations and limited stockholder dilution, attracting and retaining high quality employees, marketing the Hudson business and retaining clients. As well, Mr. Wang and Hudson’s management team considered the NASDAQ cost burden . Hudsonand potential cost reductions as a spin-off entity. Hudson’s management team, on behalf of Hudson’s Board, decided to pursueconsider the proposed spin-off and merger with Fr8HubFr8App as they recognized that Hudson’s stockholders couldwould retain the current value of the existing Hudson business, strengthened by a reduction in expenses through the proposed spin-off, and benefit from the additional value presented by Fr8Hub and generally reduce expenses at Hudson.Fr8App. Hudson’s management considered the proposed transaction value-accretive to Hudson stockholders. There was no relationship or preexisting arrangements nor contracts presented contracts between Hudson and Fr8Hub,Fr8App, including between their respective management teams or Board of Directors, prior to Chardan M&A’s outreach.outreach on May 22, 2020.
Also on the same day of May 22, 2020, , Chardan M&A, on behalf of Fr8Hub,Fr8App, delivered to Hudson a non-binding term sheet which outlined the proposed terms of a merger transaction between Hudson and Fr8HubFr8App (“non-binding term sheet”). The non-binding term sheet included the terms and structure of a merger transaction between Hudson and Fr8Hub.Fr8App. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 8.3% for the Hudson stockholders and 91.7% for the Fr8Hub stockholders .Fr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment in the amount of $250,000 to Hudson, at closing of the merger transaction to cover expenses related to the merger. The term sheet had been drafted by representatives of Chardan M&A under the direction of Fr8Hub.Fr8App.
On May 25, 2020, representatives of Chardan M&A and representatives of Hudson discussed over the phone the structure of a merger with Fr8Hub,Fr8App, the timing associated with a merger process and the details outlined in the non-binding term sheet dated May 22, 2020. The call concluded with the expectation that HudsonHudson’s management would deliver a revised non-binding term sheet with revised transaction terms.
On May 27, 2020, HudsonHudson’s management delivered a revised non-binding term sheet to Chardan M&A via email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 16.7% for the Hudson stockholders and 83.3% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment of $4,000,000 to Hudson, at closing of the merger transaction to cover expenses related to the merger and provide additional funding for the proposed spin-off of Hudson. HudsonHudson’s management believed the revised terms, including the increased pro-forma equity percentage and cash consideration, would provide improved economics for its stockholders than the term sheet received on May 22, 2020.
Hudson’sThe initial revisions reflected in the term sheet on May 25, 2020 and each subsequent round of revisions by Hudson’s management, on behalf of the Hudson Board, to the Merger Consideration contemplated in the term sheet were founded in an analysis of comparable business combinations and spin-offs involving U.S. exchange-listed entities, the costs associated with pursuing the merger, the valuation of Fr8Hub,Fr8App, and the financial and NASDAQ listing status of Hudson. Hudson’s management’s review of comparable transactions included but was not limited to a review of the SEC filings associated with comparable transactions, the pro-forma equity ownership split of comparable transactions, cash payments in comparable transactions, and the post-merger market performance of comparable transactions. Hudson’s management’s review of the valuation of Fr8HubFr8App included but was not limited to Hudson’s management’s independent consideration of the revenue multiples of public comparable companies and private comparable companies including Uber Freight LLC, Convoy Inc, Transfix, Inc, and NEXT Trucking Inc. HudsonThe comparable companies exhibited Enterprise Value to Revenue multiples of 4.5x – 10.9x as based on publicly available information and the findings of Hudson’s management. Hudson’s management also reviewed the business and product offerings of Fr8HubFr8App and publications and trade reports on trends in the Mexico, U.S. domestic and North American cross-border freight markets. As well, HudsonHudson’s management developed an independent analysis of the future financial prospects of Fr8HubFr8App through methods including but not limited to a review of historic financial statements and discussions with representatives of Fr8HubFr8App and representatives of Chardan M&A regarding Fr8Hub’sFr8App’s prospects for acquisition, new customer growth and the release of new product offerings, cash position and cash requirements. Hudson continued to update its independent analysis of the proposed transaction while continuing its due diligence of Fr8Hub. Fr8App.
On May 28, 2020, Chardan M&A, on behalf of Fr8Hub,Fr8App, delivered a revised non-binding term sheet to the Hudson management team via email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 10.0% for the Hudson stockholders and 90.0% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment of $1,000,000 to Hudson, at the closing of the merger transaction to cover expenses related to the merger.
On May 29, 2020, the Hudson management team delivered a revised non-binding term sheet to Chardan M&A via email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 10.0% for the Hudson stockholders and 90.0% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment of $2,500,000 to Hudson or a payment of $3,000,000 in the form of a one-time lump sum cash payment of $1,500,000 and a one-year secured term note in the aggregate principal amount of $1,500,000, issued by Fr8HubFr8App at closing of the merger transaction to cover expenses related to the merger and provide additional funding for the proposed spin-off of Hudson. The Hudson management team believed that the revised terms, including the increased cash consideration and note, would provide improved economics to its stockholders than the term sheet received on May 28, 2020 and aligned with comparable business combinations previously reviewed by the Hudson management.management team.
On the same day of May 29, 2020, on behalf of Fr8Hub,Fr8App, Chardan M&A delivered another revised non-binding term sheet to HudsonHudson’s management via email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 10.0% for the Hudson stockholders and 90.0% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment in the amount of $1,500,000, at closing of the merger transaction to cover expenses related to the merger. Furthermore, the revised non-binding term sheet included a revenue earn-out structure whereby Fr8HubFr8App would receive an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) in the event Fr8HubFr8App achieves certain financial goals in specific calendar years. Under the terms of the earn-out, if Fr8HubFr8App records audited revenues of $25,000,000 in the calendar year 2021, $50,000,000 in the calendar year 2022, and $100,000,000 in the calendar year 2023; then Fr8HubFr8App stockholders will be entitled to an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) each year Fr8HubFr8App achieves the audited revenue target; up to an aggregate amount of 6.0%.
On June 1, 2020, HudsonHudson’s management delivered a revised non-binding term sheet to Chardan M&A via email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 10.0% for the Hudson stockholders and 90.0% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment of $1,750,000 and a one-year secured term note in the aggregate principal amount of $1,000,000 issued by Fr8HubFr8App to Hudson, at the closing of the transaction to cover expenses related to the transaction and provide additional funding for the proposed spin-off of Hudson. Furthermore, the revised non-binding term sheet included a revenue earn-out structure whereby Fr8HubFr8App would receive an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) in the event Fr8HubFr8App achieves certain financial goals in specific calendar years. Under the terms of the earn-out, if Fr8HubFr8App records audited revenues of $25,000,000 in the calendar year 2021, $50,000,000 in the calendar year 2022, and $100,000,000 in the calendar year 2023; then Fr8HubFr8App stockholders will be entitled to an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) each year Fr8HubFr8App achieves the audited revenue target; up to an aggregate amount of 6.0%. HudsonHudson’s management believed that the revised terms, including the increased cash consideration and note, would provide improved economics to its stockholders than the term sheet received on May 29, 2020.
The earn-out structure, or Contingent Merger Consideration, was proposed by Fr8HubFr8App as a mechanism to acknowledge Fr8Hub’sFr8App’s potential high revenue growth, should it be achieved, without the immediate and irrevocable recognition of that value through shares at time of the merger. HudsonFr8App proposed the revenue targets following a review of Fr8App’s historical growth rates and the corporate development that may be possible as a result of the increase in working capital in connection with the merger transaction. If the milestones are achieved, Fr8App will have generated substantial additional value to the Combined Company, recognized and incentivized by the Contingent Merger Consideration. Hudson’s management agreed to the incorporation of an earn-out structure, in concept as and feltit would appropriately acknowledge the achievement of revenue milestones by Fr8Hub’sFr8App’s business which would benefit the Combined Company. Should the revenue milestones not be achieved in the respective period then no additional shares would be issued to Fr8HubFr8App stockholders for that respective period.
On the same day of June 1, 2020, Chardan M&A, on behalf of Fr8Hub,Fr8App, delivered a revised non-binding term sheet to HudsonHudson’s management via email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 10.0% for the Hudson stockholders and 90.0% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment of $1,000,000 and a two-year secured, convertible notes in the aggregate principal amount of $1,000,000 issued by Fr8HubFr8App to Hudson, at closing of the merger transaction to cover expenses related to the transaction and provide additional funding for the proposed spin-off of Hudson. Furthermore, the revised non-binding term sheet included a revenue earn-out structure whereby Fr8HubFr8App would receive an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) in the event Fr8HubFr8App achieves certain financial goals in specific calendar years. Under the terms of the earn-out, if Fr8HubFr8App records audited revenues of $25,000,000 in the calendar year 2021, $50,000,000 in the calendar year 2022, and $100,000,000 in the calendar year 2023; then Fr8HubFr8App stockholders will be entitled to an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) each year Fr8HubFr8App achieves the audited revenue target; up to an aggregate amount of 6.0%.
On June 3, 2020, Mr. Wang had a virtual meeting with Mr. Antonio Ruiz-Gimenez, Fr8App’s then Fr8Hub’s Chief Executive Officer. During the call, each party discussed their perspective on North American cross-border logistics industry, the sharing economy, the digitization trend, recently funded 3PL competitors, , and the operations of Fr8HubFr8App in Mexico and across the Mexico – United States border. Mr. Wang participated in the call to further clarify his understanding of Fr8Hub’sFr8App’s business and how Hudson’s stockholders could benefit from the positive tailwinds affecting Fr8Hub’sFr8App’s business should a merger be completed.
On June 9, 2020, a representative from Chardan M&A and a representative from HudsonHudson’s management discussed the terms of the transaction over the phone. On this call, Hudson’s management, on behalf of the Hudson Board, and Chardan M&A, on behalf of Fr8Hub,Fr8App, negotiated the remaining diverging positions including the cash payment to cover Hudson’s expenses related to the merger. Hudson’s management, on behalf of the Hudson Board, and Chardan M&A, on behalf of Fr8Hub,Fr8App, came to an agreement in principal of a one-time cash payment in the amount of $1,750,000 to cover Hudson’s expenses related to the merger, at closing of the merger transaction. On that same day, HudsonHudson’s management delivered a revised non-binding term sheet to Chardan M&A by email. Subject to various assumptions, the transaction proposal included an anticipated pro forma, post-closing equity ownership split of 14.3% for the Hudson stockholders and 85.7% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time cash payment in the amount of $1,750,000 to Hudson to cover expenses related to the merger, at closing of the merger transaction. Furthermore, the revised non-binding term sheet included a revenue earn-out structure whereby Fr8HubFr8App would receive an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) in the event Fr8HubFr8App achieves certain financial goals in specific calendar years. Under the terms of the earn-out, if Fr8HubFr8App records audited revenues of $25,000,000 in the calendar year 2021, $50,000,000 in the calendar year 2022, and $100,000,000 in the calendar year 2023; then Fr8HubFr8App stockholders will be entitled to an additional 2.0% of the combined, pro forma entity (on a fully diluted, pro rata basis) each year Fr8HubFr8App achieves the audited revenue target; up to an aggregate amount of 6.0%. HudsonHudson’s management believed the revised terms, including the increased pro-forma equity percentage and cash consideration, would provide improved economics to its stockholders than the term sheet received on June 1, 2020. Additionally, HudsonHudson’s management believed that the earn-out structure, in concept, appropriately acknowledged the achievement of revenue milestones of Fr8Hub’sFr8App’s business that would also benefit the Hudson stockholders’ equity consideration in the Combined Company. Hudson’s management believed that the total merger consideration was in line with its analysis of comparable business combinations and spin-offs involving U.S. exchange-listed entities, the costs associated with pursuing the merger, the valuation of Fr8App, and the financial and NASDAQ listing status of Hudson. Upon receipt, representatives of Chardan M&A and ATW Partners, (“ATW”), Fr8Hub’sFr8App’s majority investor, discussed a response to the revised non-binding term sheet over the phone.
On June 10, 2020, upon final negotiations, Hudson, represented by the Hudson Board, and Fr8HubFr8App, represented by the Fr8App Board, executed a non-binding term sheet, where subject to various assumptions, the transaction proposal included an anticipated pro-forma, post-closing equity ownership split of 14.3% for the Hudson stockholders and 85.7% for the Fr8HubFr8App stockholders. Additionally, as part of the merger, Fr8HubFr8App would deliver a one-time, cash payment in the amount of $1,750,000 to Hudson to cover expenses related to the merger, at closing of the merger transaction. Furthermore, the revised non-binding term sheet included a revenue earn-out structure whereby Fr8HubFr8App would receive an additional 3.33% of the combined, pro forma-entity (on a fully diluted, pro rata basis) in the event Fr8HubFr8App achieves certain financial goals in specific calendar years. Under the terms of the earn-out, if Fr8HubFr8App records audited revenues of $25,000,000 or more in the calendar year 2021, $50,000,000 in the calendar year 2022, and $100,000,000 in the calendar year 2023; then Fr8HubFr8App stockholders will be entitled to an additional 3.33% of the combined, pro forma entity (on a fully diluted, pro rata basis) each year Fr8HubFr8App achieves the audited revenue target; up to an aggregate amount of 10.0%. Terms were determined through an arms-length negotiation between Hudson’s management, on behalf of the Hudson Board, and Fr8App and its representatives, whereby each party accepted or revised specific terms of the transaction, including but not limited to, the Merger Consideration, Contingent Merger Consideration, cash payments, closing conditions, corporate governance, exclusivity, and the structure of the Board of Directors for the Combined Company. All revisions exchanged between Fr8App and Hudson during this arms-length negotiation were informed through the experience of each respective party and through independent analysis as discussed in this Section, “Background of the Merger.” Chardan M&A acted as an advisor to Fr8App through the duration of the arms-length negotiation.
On the same day of June 10, 2020, Fr8HubFr8App engaged Loeb & Loeb LLP (“Loeb & Loeb”) as its outside counsel for the transaction. Upon full execution of the non-binding term sheet, mutual confidentiality was established. Hudson’s management, on behalf of the Hudson Board, began to conduct extensive due diligence of Fr8Hub ,Fr8App, including the review of presentation materials provided by Fr8Hub , theFr8App, Mexico, and U.S. domestic and North American cross-border freight markets, and the valuations of comparable companies in the same sector.
For the rest of June and most of July, representatives of Hudson, Fr8Hub,Fr8App, and Chardan M&A continued customary diligence discussions and the exchange of documentation focused on business, legal, accounting, tax, insurance, employee benefits, and environmental matters. Hudson utilized internal resources to complete due diligence and retained Sichenzia Ross Ference LLP (“SRF”) as Hudson’s outside legal counsel to assist with due diligence. Hudson’s business due diligence included but was not limited to a review of Fr8Hub’sFr8App’s product offerings, Fr8Hub’sFr8App’s historical financial performance, trends in the Mexico and U.S. domestic and North American cross-border freight market, competitors’ activities and market share in the Mexico and U.S. domestic and North American cross-border freight market and their valuations. Hudson’s business due diligence suggested there was substantial opportunity for revenue growth which encouraged Hudson’s view of Fr8Hub’sFr8App’s prospects and confirmed the appropriateness of the earn-out structure. Hudson’s legal due diligence included but was not limited to a review of Fr8Hub’sFr8App’s organizational and founding documents, customer contracts, employee contracts, employee policies, investor documents, and intellectual property. Additionally, Hudson requested details around any prior or pending litigation and concluded that there was no historical or pending litigation. Hudson’s tax due diligence included but was not limited to a review of Fr8Hub’sFr8App’s past tax filings and the tax implications of the proposed merger, spin-off and redomestication. Hudson’s review of the tax implications confirmed its account of tax matters in its negotiations for the pro-forma equity ownership. Hudson’s insurance due diligence included but was not limited to a review of Fr8Hub’sFr8App’s D&O, commercial liability, and other insurance policies held by Fr8HubFr8App as well as the D&O insurance policies as proposed in the Merger Agreement. The cost of additional insurance policies had factored into Hudson’s management’s, on behalf of the Hudson Board, negotiations of the cash payment included in the Merger Agreement .Agreement. Hudson’s accounting due diligence included but was not limited to a review of Fr8Hub’sFr8App’s historical financials, audits, and auditor correspondence. Hudson’s employee benefit due diligence included but was not limited to a review of Fr8Hub’sFr8App’s human resource programs and employee materials. At the conclusion of the benefit due diligence, Hudson’s management did not identify any concerns related to the review of employee benefits and therefore, the review had no negative effects on negotiations. Hudson’s environmental due diligence included but was not limited to a review of Fr8Hub’sFr8App’s environmental policies and protections. Hudson’s transaction due diligence included but was not limited to a review of comparable transactions including their respective filings and merger agreements, a review of the Merger Agreement and its implications to the pro-forma entity, the Fr8HubFr8App financings associated with the merger, and the closing conditions including the proposed spin-off of Hudson. Hudson utilized internal resources to complete due diligence and retained Sichenzia Ross Ference LLP (“SRF”) as Hudson’s outside legal counsel to assist with due diligence . Hudson’s due diligence confirmed its understanding of Fr8HubFr8App and its business and did not uncover any concerns that were not already accounted for in the transaction structure including the earn-out component of the Merger Agreement.
The drafting of the binding Merger Agreement began, and on July 15, 2020, Fr8HubFr8App and Loeb & Loeb shared its first draft with Hudson and SRF.
Throughout the months of July, August and September 2020, ATW Partners’ representatives, Fr8Hub’sFr8App’s management, representatives of Chardan M&A, representatives of Loeb, representatives of RPCK Rastegar Panchal LLP (“RPCK”), ATW’sATW Partners’ outside legal counsel, Hudson’s management and representatives of SRF held several calls to discuss a variety of financial and legal matters regarding the Merger, including the Merger Agreement, financing matters and closing conditions.
On August 20, 2020, Mr. Jinchi Xu tendered his resignation as Hudson’s Chief Financial Officer and director, citing personal reasons and confirmed that it was not a result of any disagreement with Hudson’s policies or practices, which the Hudson Board accepted. The Hudson Board appointed Mr. Hon Man Yun to succeed Mr. Xu.
Throughout the remainder of August, the month of September and early October 2020, Hudson and Fr8HubFr8App exchanged drafts of the Merger Agreement and the ancillary documents, including a Director Voting Agreement, a Lockup Agreement and a New Registration Rights Agreement. All revisions exchanged between Fr8App and Hudson during the arms-length negotiation process over this period were informed through independent analysis and due diligence as discussed in this section, “Background of the Merger.”
In September 2020, Messrs. Mike Flinker and Paul Freudenthaler were brought in to join Fr8HubFr8App as its President and Chief Financial Officer, respectively, Mr. Javier Selgas took the Chief Executive Officer position, and the current three independent directors were identified to join Fr8Hub’sFr8App’s board of directors.
On September 11, 2020, Mr. Selgas and an ATW Partners’ representative executed the Merger Agreement signature page for delivery into an escrow account, held by Loeb & Leob,Loeb, in accordance with the Letter Agreement dated September 10, 2020. The Letter Agreement stated that the signature pages would remain in escrow for a period of 30 calendar days from the date of the Letter Agreement.
On October 9, 2020, Hudson’s management held a telephonic board meeting where the Fr8HubFr8App opportunity was presented to the Hudson Board. Prior to that date, the Hudson Board did not meet to discuss the Fr8App opportunity. The Hudson Board received a presentation on Fr8HubFr8App including its financial performance in 2019 of $4.2 million in revenues and over 100% revenue growth expectations for 2020 and ability to meet the earn-out milestones contemplated in the merger agreement.
Additionally, the presentation covered potential growth opportunities and future business developments including the release of its next-generation software and tools, customer opportunities in the Mexico and U.S. domestic and North American cross-border freight market, expansion of the Mexico and U.S. domestic and North American cross-border freight market, potential consolidation of smaller traditional brokers in Mexico. As well, the presentation covered the differentiating factors of Fr8Hub’sFr8App’s business relative to other freight brokers in the Mexico and U.S. domestic and North American cross-border market. The Hudson Board concluded that Fr8App was highly differentiated in its positioning as the first digital commercial freight-matching broker to offer 3PL while targeting the domestic Mexican and the cross-border Mexico-U.S.-Canada markets. The digital capabilities of Fr8App’s online digital freight marketplace, broker, TMS and API substantially simplify the freight brokerage process for customers against the manual, inefficient, and transparency lacking methods of traditional 3PLs. The Hudson Board concluded that Fr8App has successfully developed tools that match the demand to ease capacity constraints, open up new shipping lanes, and provide a benchmarking for both Shippers and Carriers.
According to the U.S. Bureau of Transportation Statistics, the U.S. domestic truck freight transportation market, in 2018, was approximately $800 billion in size. Over the same period, the Mexican domestic freight market was estimated at approximately $40 billion. In 2019, the cross-border U.S.-Mexico freight transportation market grew to $429 billion while Mexico’s share of trade with the U.S. grew at an annual compound growth rate of approximately 7.5% between 2009 and 2019. The Hudson Board concluded that the U.S. domestic, Mexican domestic, and the cross-border U.S.-Mexico freight transportation markets represented substantial target markets that are poised for continued growth. Additionally, the Hudson Board concluded that Fr8App’s differentiation through automation and digital would allow it to continue capturing market share amongst its peers. The Hudson Board felt this was further evidenced by Fr8App’s financial performance in 2019 and over 100% growth expectations for 2020 and continued ability to attract new clients over the diligence period for the contemplated transaction.
The Hudson Board considered many aspects of the proposed transaction including the transaction structure contemplated in the Merger Agreement and the potential opportunity and potential risks of the Fr8HubFr8App business. The Hudson Board identified several risks including Fr8App’s status as a new entrant in the freight transportation market, the investment in marketing required to introduce Fr8App to the market, the changing landscape of government regulation and political interests as applied to U.S., Mexican, and U.S. – Mexico cross-border shipping, potentially limited Carrier and Shipper dissatisfaction with current offerings, difficulties in attracting key personnel and developing expanded infrastructure to allow for scale as a growth-oriented business. The Hudson Board concluded that these risks did not outweigh the potential growth opportunity and value presented by the merger opportunity. After a formal vote was conducted, the Merger was unanimously approved by the Hudson Board.
The Hudson Board concluded that the Hudson stockholders will benefit from the additional value of the Fr8HubFr8App business while retaining the upside of a strengthened Hudson business through the Spin-Off Entity.spin-off entity. The Hudson Board concluded that Hudson, in its current form, is overburdened by the cost and resources required to maintain its NASDAQ listing and hindered in its ability to secure necessary capital resources as a result of the diminished price of its ordinary shares. The spin-off strengthens Hudsonwill strengthen Hudson’s business by reducing cost, maximizing Hudson’s use of capital and employee resources, and providing relief from the effects of the diminished price in its ordinary shares. The merger with Fr8Hub introducesFr8App will introduce a high growth opportunity in the Mexico and U.S. domestic and North American cross-border freight sector through which Hudson stockholders will participate through their pro-forma equity ownership in the Combined Company. Hudson had periodically considered strategic options including strategic alliances, mergers and acquisitions, divestitures, delisting from NASDAQ, and business combinations with companies other than Fr8Hub.Fr8App. Additionally, under the leadership of Mr. Wang, Hudson had recently undertaken efforts to rebrand and improve the Hudson business by shifting its focus into new industries and towards new geographies, including North America. The improvements in the Hudson business have not translated into improvements in the price of its ordinary shares. The Hudson Board believes it considered all strategic options and could not identify any other strategic option that both strengthened the company and delivered new, additional value to Hudson stockholders. The Hudson Board has concluded that the proposed merger and spin-off are in the best interest of Hudson stockholders as founded in the Hudson Board’s experience, periodic review of strategic options, and efforts to improve business and market performance. The factors that contributed to Hudson’s conclusions to execute the Merger Agreement are further summarized under the section titled “Hudson’s“Hudson’s Reasons for the Merger.Merger.”
On October 10, 2020, the signature pages previously executed by Fr8hubFr8App and ATW were released from the escrow account. Mr. Wang executed the Merger Agreement on the same day.
Mr. Wang was appointed as Chairman and Chief Executive Officer on March 31, 2020. The Hudson Board had offered Mr. Wang the position as the Hudson Board believed that Hudson stockholders would benefit from his experience and strategic vision for Hudson. The merger between Hudson and Fr8App is one aspect of the Hudson Board’s efforts, as led by Mr. Wang, to increase the value of Hudson for the benefit of Hudson stockholders. The Merger provides existing Hudson stockholders an opportunity to participate in the potential growth of the Combined Company while still participating in the continuing business of Hudson through the spin-off entity. While Mr. Wang played a crucial role in identifying Fr8App as a potential strategic investment for Hudson, Mr. Wang does not have the depth and breadth of industry specific experience that the incoming management of Fr8App brings. At that time, it was determined that Mr. Wang’s skills set and expertise are better suited in the spun-off entity. Prior to its amendment in May 2021, the Merger Agreement contemplated that Fr8App management, including Messrs. Selgas, Flinker and Freudenthaler, will lead the Combined Company and Mr. Warren Wang, will lead the spin-off entity in accordance to each of their expertise.
On October 14, 2020, Messrs. Yun, Selgas, Flinker and Freudenthaler met virtually to prepare for the joint announcement that terms of the Merger Agreement had been reached. The parties also pre-recorded the remarks for the investor conference call scheduled for the next day, and reviewed the presentation materials to investors, addressing Fr8Hub’sFr8App’s operations, financial performance, and the Merger, to be incorporated on a Form 6-K filing by Hudson with the SEC.
On October 15, 2020, the parties issued a joint press release announcing the execution of definitive agreements for the contemplated Merger. Shortly thereafter, Hudson filed the Form 6-K attaching the press release, the investor presentation, the Merger Agreement and the ancillary documents.
In April 2021, Hudson management met to review and discuss certain regulatory issues surrounding the proposed spin-off. On May 18, 2021, parties amended the Merger Agreement to no longer require a spin-off of Hudson’s financial advisory services business as part of the merger transaction due to regulatory concerns. At this time, neither the parties nor the Purchaser’s board has made any decisions as to the future of Hudson’s financial advisory services business after the Merger.
Hudson’s Reasons for the Merger
Hudson Board believes that the proposed Transactions create more value for Hudson stakeholders than as a standalone company with a deteriorating stock price. On May 22, 2020, the same day terms of the transaction were introduced to Hudson, Hudson had a market capitalization of approximately $2.6 million as a result of substantial declines in its stock price since Hudson’s initial public offering in August 2017. Following the closing of the proposed Transactions, existing Hudson stockholders will be able to participate in the potential growth of the Combined Company.
The Hudson Board, together with Hudson management, has periodically considered various long- and short-term strategic options to strengthen its business and enhance stockholder value. Strategic options that have been considered include strategic alliances, mergers and acquisitions, divestitures, other business combinations, and delisting from NASDAQ, as well as its continued operations as an independent company. As a result of the continued deterioration of Hudson’s share price and erosion of stockholder value, the Hudson Board determined that it was critical to pursue a strategic option in the near-term. In ultimately pursuing a merger, the Hudson Board considered multiple potential merger candidates but identified Fr8App as the most able to complete a merger and best potential value for Hudson stockholders.
The Hudson Board believes that the value of Hudson’s business and assets exceeds what Hudson is recognizing as a standalone entity in the public markets as reflected in its stock price prior to the merger announcement. The Hudson Board has also determined that its NASDAQ listing is presently underutilized but can be maximized by merging with Fr8App, a new growth opportunity. The Merger Consideration of $1,750,000 cash payment and 14.3% stake of the Combined Company represented a premium to Hudson’s market capitalization as of May 22, 2020, the same day terms of the transaction were introduced to Hudson. Since the announcement of the Merger through and as of June 16, 2021, Hudson’s market capitalization has increased by more than $3.2 million, or approximately 15.7%, suggesting that the proposed transaction, once consummated, will create additional value for the Hudson stockholders.
The Hudson Board determined that the Merger Consideration was financially attractive as based on a review of business diligence. Review included independent analysis of the future financial prospects of Fr8App through methods including but not limited to a review of historic financial statements and discussions with representatives of Fr8App and representatives of Chardan M&A regarding Fr8App’s prospects for acquisition, new customer growth and the release of new product offerings, cash position and cash requirements and consideration of the revenue multiples of public comparable companies and private comparable companies including Uber Freight LLC, Convoy Inc, Transfix, Inc, and NEXT Trucking Inc. After determining a sense of Fr8App’s value through these multiple metrics, Hudson engaged in arm’s length negotiations with Fr8App with the goal of maximizing value for its stockholders as customary in a negotiation process. On October 9, 2020, the Hudson Board determined that they had maximized value through arm’s length negotiations and executed the term sheet.
The Hudson Board determined that the Contingent Merger Consideration was financially attractive as it would appropriately acknowledge the achievement of revenue milestones by Fr8App’s business which, in turn, provides a greater benefit to the Combined Company of which Hudson stockholders are a part. Should the revenue milestones not be achieved in the respective period then no additional shares would be issued to Fr8App stockholders for that respective period. Should the revenue milestones be achieved, it is the expectation of the Hudson Board that the additional market value to Hudson Stockholders will outweigh the consideration granted to Fr8App stockholders well beyond the achievement of the 2023 milestones.
The Hudson Board believes it considered all strategic options and, in pursuing the proposed transactions, could not identify any other strategic option that would both strengthen the company and deliver new and additional value to Hudson stockholders. It was important to the Hudson Board that any strategic option maximize value for the Hudson stockholders by retaining existing value and generating new, additional value. Hudson’s Board has concluded that the proposed transactions, as quantified by the Merger Consideration and Contingent Merger Consideration, meet this qualifier and will maximize stockholder value in the near- and long-term relative to the current trajectory of Hudson as a standalone entity.
After discussion, the Hudson Board (i) determined that the Merger Agreement and the Transactions contemplated thereby, including the Merger, are fair to, advisable and in the best interests of Hudson and its shareholders; and (ii) approved and declared advisable the Merger Agreement and the Merger, including the issuance of shares of Purchaser Common Stock to Fr8HubFr8App stockholders pursuant to the terms of the Merger Agreement.
Hudson has implemented operational changes reducing the size of the organization to streamline its financial advisory services since its IPO in July 2017.services. However, the level of regulatory burden and costs associated with Hudson’s NASDAQ listing have increased over the same period. These diverging factors have resulted in an overburdenedperiod, overburdening Hudson’s cost structure that can be largely alleviated if Hudson completes the spin-off.structure. Additionally, the price of Hudson’s ordinary shares has diminished significantly which has hindered Hudson’sHudson’s ability to raise capital and utilize its public currency.
In April 2021, Hudson expectsmanagement met to review and discuss certain regulatory issues surrounding the structure of the transaction, specifically the proposed spin-off, that it willwould have had a material impact on the transaction. As a result of those discussions, Hudson management determined that a spin-off would not be more efficient in raising the capitalfeasible, and felt necessary to runconsider all strategic options that would strengthen its business once spun-off.and enhance stockholder value. Strategic options that were considered included a merger between Hudson and Fr8App without a spin-off, strategic alliances, other mergers and acquisitions, divestitures, and delisting from the NASDAQ, as well as its continued operations as an independent company. In this review, Hudson management also evaluated Fr8App’s performance since the initial execution of the Merger Agreement in October 2020, Fr8App’s anticipated future performance, and the impact of the Hudson business without a spin-off to the Combined Company.
Accordingly,Hudson management and Fr8App management met via teleconference to update their diligence of the respective parties including a review of their respective business performance and financial condition. Since October 2020, Hudson’s business has continued to decline while the number of Fr8App’s customers grew by more than 120%. Hudson’s 2020 revenue decreased to $618 while Fr8App’s 2020 revenues increased to approximately $9.2 million, an increase of more than 120% compared to 2019. Hudson management believed that Fr8App’s business was building momentum and that Fr8App was well positioned to continue its growth in 2021 as it continued to capitalize on the expanding cross border truckload freight activities between Mexico and the U.S. Hudson’s management considered other potentially available alternatives for Hudson, including divesting Hudson’s assets, seeking alternative strategic alliance or merger partners, or delisting from the NASDAQ. However, given Fr8App’s significant recent growth and its current trajectory, Hudson management concluded that continuing Hudson’s operations as an independent company through the potential merger with Fr8App, even without the spin-off of Hudson’s financial advisory services business, still offered the most compelling value creation opportunity for Hudson and is in the best interests of its stockholders.
Hudson and Fr8App entered into arm’s length negotiations in consideration of a merger between Fr8App and Hudson without a spin-off. The parties considered all aspects of the transaction, including the impact of the Hudson Board believes thatbusiness without a spin-off to the value ofCombined Company, the Initial Merger Consideration, Contingent Merger Consideration, Hudson’s business and assets exceeds what Hudson is recognizingvalue as a standalone entity, the potential value of the Combined Company and other factors. Hudson management also considered the perceived market acceptance of the proposed merger as evidenced by the increase in the public markets as reflected in its stocktrading price of Hudson’s ordinary shares from under $0.50 per share immediately prior to the public announcement of the merger announcement. Theto over $2.30 per share in April 2021. In addition, Hudson management considered the SPA, dated February 9, 2021, by and among Fr8App, ATW Opportunities and certain other Fr8App stockholders, and the likelihood of closing the merger in light of this binding commitment to fund Fr8App’s business plan. Hudson management therefore concluded that the removal of the spin-off allowsfrom the deal structure did not warrant any change in the economics of the transaction as initially negotiated between the parties and set forth in the Merger Agreement, other than a change to the Outside Closing Date.
After reviewing all strategic options available to Hudson to realizeand the fullarms-length negotiations between Hudson and Fr8App, Hudson management concluded that (i) the Hudson stockholders would most benefit from the additional value of thatthe Fr8App business while retaining the upside of the Hudson business as a combined entity; (ii) the economics of the merger between Hudson and Fr8App, including the Contingent Merger Consideration, should remain as negotiated in the Merger Agreement, as amended as the subsequent performance and value created by reducing its cost structureFr8App was commensurate with the value of Hudson and enablingin favor of Hudson’s shareholders; and (iii) the company to more efficiently raise capital.Combined Company would be led solely by the management from Fr8App.
On May 18, 2021, parties amended the Merger Agreement to no longer require a spin-off of Hudson’s financial advisory services business as part of the merger transaction due to regulatory concerns. At this time, the Purchaser’s board has not made any decisions as to the future of Hudson’s financial advisory services business after the Merger. Prior to making any immediate decisions with respect to the future of Hudson’s business, the Purchaser intends to first focus on Fr8App’s business that will be the primary driver of revenues and shareholder value after the consummation of the Merger. From the Purchaser’s perspective there is no valid business reason to divert its attention from building the Fr8App business to focus on Hudson, as a business unit, that is currently inactive. At the end of the fiscal year, the Purchaser, together with its board of directors, plan to take appropriate steps to evaluate Hudson’s business and make a determination as to whether the assets are saleable, or whether the business should be discontinued.
In the course of its evaluation of the Merger Agreement and the Merger, the Hudson Board held a number of meetings on October 9, 2020, consulted with Hudson’s executive management and outside legal counsel, and reviewed and assessed a significant amount of information, and considered a number of factors, including but not limited to the following:
● | the Hudson Board’s belief that Hudson’s business, operational and financial prospects were hindered by the substantially diminished price of its ordinary shares; | |
● | the Hudson Board’s conclusion that the Merger provides existing Hudson stockholders an opportunity to participate in the potential growth of the Combined | |
● | the Hudson Board’s consideration that the Combined Company will be led by an experienced senior management team from | |
● | the regulatory and the NASDAQ cost burden relative to the intended size of Hudson’s business and operations; and | |
● | the valuation of Hudson in the context of the Merger vis-a-vis the perceived value of Hudson reflected in the diminished price of its ordinary shares; | |
The Hudson Board also considered the recent results of operations and financial conditions of Hudson, including:
● | the perceived value of Hudson reflected in the diminished price of its ordinary shares; | |
● | the operational adjustments of Hudson including a reduction in the number of employees to only those personnel essential to running the financial advisory business of Hudson; | |
● | the results of substantial efforts made over several months on alternate strategic transactions for Hudson; | |
● | the current financial market conditions and historical market prices, volatility and trading information with respect to Hudson’s ordinary shares; and | |
● | the risks, costs, timing and limited amount, if any, that would be distributed to Hudson stockholders associated with a potential liquidation of Hudson. |
The Hudson Board also reviewed the terms of the Merger Agreement and associated transactions, including:
● | the fact that the Exchange Ratio in the Merger Agreement, which was expected to give Hudson stockholders approximately 14.3% of the combined company’s outstanding stock, immediately following the Merger, is financially attractive in light of Hudson’s standalone value, Hudson’s recent stock price, Hudson’s strategic alternatives, and the potential value of the Combined Company; | |
● | the number and nature of the conditions to | |
● | the number and nature of the conditions to Hudson’s obligations to consummate the Merger; | |
● | the conclusion of the Hudson Board that the potential termination fee of $500,000 payable by | |
● | the Hudson Board’s belief that the terms of the Merger Agreement, including the parties’ representations, warranties and covenants, deal protection provisions and the conditions were reasonable for a transaction of this nature. |
The Hudson Board also considered a variety of risks and other countervailing factors related to the Merger, including but not limited to the following:
● | the up to $500,000 termination fee payable by Hudson to | |
● | the expenses to be incurred by Hudson in connection with the Merger; | |
● | the possible volatility of the trading price of Hudson’s ordinary shares resulting from the announcement of the Merger; | |
● | the risks that the Merger might not be consummated in a timely manner or at all and the potential effect of the public announcement of the Merger or failure to complete the Merger on the reputation of Hudson; | |
● | the inherent risks associated with conducting diligence on a company whose business model does not operate within the same industry as Hudson, including Hudson’s lack of experience in the logistics industry; | |
● | the risks to Hudson’s business, operations and financial results in the event that the Merger is not consummated; | |
● | the strategic direction of the Combined Company, which will be determined by a board of directors designated primarily by | |
● | various other risks associated with the Combined Company and the Merger, including those described in the section titled “Risk Factors.” |
The foregoing information and factors considered by the Hudson Board are not intended to be exhaustive but are believed to include all of the material factors considered by the Hudson Board. In view of the wide variety of factors considered in connection with its evaluation of the Merger and the complexity of these matters, the Hudson Board did not find it useful, and did not attempt to quantify, rank or assign relative weights to these factors. In considering the factors described above, individual members of the Hudson Board may have given weight to different factors. The Hudson Board conducted an overall analysis of the factors discussed above, including thorough discussions with, and questioning of, Hudson’s executive management and the legal advisors of Hudson, and considered the factors overall to be favorable to, and to support, its determination.
Fr8Hub’s Fr8App’s Reasons for the Merger
In the course of reaching its decision to approve the merger, the Fr8HubFr8App board of directors consulted with its senior management, financial advisor and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:
● | the potential increased access to sources of capital at a lower cost of capital and a broader range of investors to support | |
● | the potential to provide its current stockholders with greater liquidity by owning stock in a public company; | |
● | the | |
● | the cash resources of | |
● | the expectation that the Merger would not be a more time- and cost-effective means to access capital than other options considered; | |
● | the terms and conditions of the Merger Agreement, including, without limitation, the following: |
○ | the determination that the expected relative percentage ownership of Hudson shareholders and | |
○ | the expectation that the Merger will be treated as a reorganization for U.S. federal income tax purposes, with the result that | |
○ | The issuance of additional shares of the Combined Company to existing |
● | the expectation that substantially all of | |
● | the conclusion of the | |
● | the likelihood that the Merger will be consummated on a timely basis. |
The Fr8HubFr8App board of directors also considered a number of uncertainties and risks in its deliberations concerning the Merger and the other transactions contemplated by the Merger Agreement, including but not limited to the following:
● | the possibility that the Merger might not be completed and the potential adverse effect of the public announcement of the Merger on the reputation of |
● | the reasonableness of the termination fee of $500,000, which could become payable by | |
● | the risk that the Merger might not be consummated in a timely manner or at all; | |
● | the expenses to be incurred in connection with the Merger and related administrative challenges associated with combining the companies; | |
● | the additional public company expenses and obligations that | |
● | various other risks associated with the Combined Company and the Merger, including the risks described in the section titled |
Form of the Merger
Upon the terms and subject to the conditions of the Merger Agreement, and as promptly as practicable following the Redomestication Merger, Merger Sub shall be merged with and into Fr8HubFr8App in accordance with the DGCL. At the Closing of this Merger, the separate corporate existence of Merger Sub shall cease and Fr8HubFr8App shall continue as the surviving corporation under the DGCL and as a wholly owned subsidiary of Purchaser.
Merger Consideration
At the Effective time of the Merger, by virtue of the Merger without any further action on the part of the parties, the following shall occur:
● | each share of | |
● | each share of each series of | |
● | each warrant of | |
● | each option of |
Fr8HubFr8App stockholders who would be entitled to a fractional share after applying the Exchange Ratio will automatically be entitled to receive an additional fractional share of the corresponding class of Purchaser shares to round up to the next whole share.
Immediately after the Merger, based on the Applicable Per Share Merger Consideration, Fr8HubFr8App stockholders (including the Investors) will own approximately 85.7% of the post-closing outstanding shares of Parent Common Stock (the “Post-Closing Shares”), Hudson shareholders will own approximately 14.3% of the Post-Closing Shares.
The Applicable Per Share Merger Consideration was determined using a formula intended to allocate to the existing Fr8HubFr8App stockholders (on a fully diluted basis, referred to below as Fr8Hub’sFr8App’s fully-diluted outstanding shares) a percentage of Hudson based on the valuations of Hudson and Fr8Hub,Fr8App, which were agreed in the Merger Agreement to be $10.0 million and $60.0 million, respectively.
The Merger Agreement provides that, promptly after the Effective Time, Purchaser will mail to each record holder of Fr8HubFr8App capital stock immediately prior to the Effective Time a letter of transmittal and instructions for surrendering and exchanging the record holder’s Fr8HubFr8App stock certificates for shares of Purchaser Common Stock, or Preferred Stock, as the case may be. Upon surrender of a Fr8HubFr8App stock certificate for exchange to Purchaser, together with a duly executed letter of transmittal and such other documents as Purchaser or Hudson may reasonably require, the Fr8HubFr8App stock certificate surrendered will be cancelled and the holder of the Fr8HubFr8App stock certificate will be entitled to receive the following a certificate or certificates or book-entry account representing the number of whole shares of Purchaser Common Stock or Preferred Stock that such holder has the right to receive pursuant to the provisions of the Merger Agreement.
At the Effective Time of the Merger, all holders of certificates representing shares of Fr8HubFr8App capital stock that were outstanding immediately prior to the Effective Time of the Merger will cease to have any rights as stockholders of Fr8HubFr8App other than the right to receive Purchaser capital stock based on the Applicable Per Share Merger Consideration. In addition, no transfer of Fr8HubFr8App capital stock after the Effective Time of the Merger will be registered on the stock transfer books of Fr8Hub,Fr8App, as the surviving corporation.
If any Fr8HubFr8App stock certificate has been lost, stolen or destroyed, upon the delivery of an affidavit claiming such certificate has been lost, stolen or destroyed, the surviving corporation may, in its discretion, and as a condition precedent to the delivery of any shares of Purchaser Common Stock, and unpaid dividends and distributions on shares of Hudson ordinary shares, require the owner of such lost, stolen or destroyed certificate to post bond in a reasonable amount set by the surviving corporation as indemnity against any claim suffered by it related to the lost, stolen or destroyed certificate or any Purchaser Common Stock, cash, or dividends and distributions issued in exchange for such certificate as the surviving corporation may reasonably request.
From and after the Effective Time, until it is surrendered, each certificate that previously evidenced Fr8HubFr8App capital stock will be deemed to represent only the right to receive shares of Purchaser Common Stock or Preferred Stock, as the case may be, and/or any dividends or distributions. There will be no dividends or other distributions paid on any shares of Purchaser Common Stock to be issued in exchange for any unsurrendered Fr8HubFr8App stock certificate until the Fr8HubFr8App stock certificate is surrendered as provided in the Merger Agreement.
Effective Time of the Redomestication Merger and the Merger
The Redomestication Merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware and the Articles of Merger and Plan of Merger with the Registrar of Corporate Affairs in BVI (the “Registrar”).
The Merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware.
The closing of the Redomestication Merger and the Merger will occur on a date specified by Hudson and Fr8HubFr8App which will be no later than the second business day after the conditions to effect all Transactions set forth in the Merger Agreement have been satisfied or waived, or such other date and time as Hudson and Fr8HubFr8App may agree to in writing.
Regulatory Approvals
In the United States, Hudson must comply with applicable federal and state securities laws and the rules and regulations of NASDAQ in connection with the issuance of shares of Purchaser Common Stock pursuant to the Merger Agreement and the filing of this proxy statement/prospectus with the SEC.
Material U.S. Federal Income Tax Consequences of the Redomestication Merger the Disposition and the Merger
General
The following are the material U.S. federal income tax consequences of (i) the Domestication Merger to the U.S. Holders of Hudson shares, (ii) the Disposition, to the U.S. Holders of Hudson shares, (iii) the Merger to the U.S. Holders of Fr8HubFr8App securities, and (iv)(iii) the ownership and disposition of Purchaser securities. This discussion is based upon laws and relevant interpretations thereof in effect as of the date of this proxy statement/prospectus, all of which are subject to change.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of Hudson shares or Fr8HubFr8App securities that is for U.S. federal income tax purposes:
● an individual citizen or resident of the United States;
● a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;
● an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
● a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If a beneficial owner of Hudson shares or Fr8HubFr8App securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This summary is based upon existing provisions of the Internal Revenue Code of 1986, as amended, or the “Code,” Treasury regulations promulgated thereunder, published revenue rulings and procedures of the U.S. Internal Revenue Service, or the “IRS,” and judicial decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only holders that own Hudson shares or Fr8HubFr8App securities, or who will own and hold Purchaser Common Stock as a result of owning the corresponding Hudson shares or Fr8HubFr8App securities, as capital assets within the meaning of Section 1221 of the Code. This discussion does not address the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
● financial institutions or financial services entities;
● broker-dealers;
●persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;
● tax-exempt entities;
● governments or agencies or instrumentalities thereof;
● insurance companies;
●regulated investment companies;
● real estate investment trusts;
● certain expatriates or former long-term residents of the United States;
● Non-U.S. Holders (except as specifically provided below);
● persons that actually or constructively own five percent (5%) or more of Hudson shares or Fr8HubFr8App voting securities or Purchaser Common Stock (except as specifically provided below);
● persons that acquired Fr8HubFr8App securities or Purchaser Common Stock pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;
● persons that hold Hudson shares or Fr8HubFr8App securities or Purchaser securities as part of a straddle, constructive sale, hedging, redemption or other integrated transaction;
● persons whose functional currency is not the U.S. dollar;
● controlled foreign corporations; or
●passive foreign investment companies.
This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations of a holder of Hudson shares or Fr8HubFr8App securities or Purchaser Common Stock. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold Hudson shares or Fr8HubFr8App securities, or will hold Purchaser Common Stock, through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of Hudson shares or Fr8HUbFr8App securities (or Purchaser Common Stock), the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) on Hudson shares or Fr8HubFr8App securities (or Purchaser securities) and any consideration received (or deemed received) by a holder in consideration for the sale or other disposition of Hudson shares or Fr8HubFr8App securities (or Purchaser Common Stock) will be in U.S. dollars. In addition, this discussion assumes that a holder who owns rights in Fr8HubFr8App shares will own a sufficient number of rights such that upon conversion of such rights, the holder will acquire only full ordinary Fr8HubFr8App shares (or shares of Purchaser Common Stock) and, thus, will not forfeit any rights or have a right to acquire a fractional share after such conversion.
Neither Hudson, Fr8Hub,Fr8App, nor Purchaser have sought, and none of them will seek, a ruling from the IRS as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER OF HUDSON SHARES OR FR8HUBFR8APP SECURITIES OR PURCHASER COMMON STOCK IN CONNECTION WITH OR FOLLOWING THE REDOMESTICATION DISPOSITION AND MERGER MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH HOLDER IS URGED TO CONSULT WITH HIS OR ITS OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE FOREGOING TRANSACTION, AND THE OWNERSHIP AND DISPOSITION OF HUDSON SHARES, FR8HUBFR8APP SECURITIES AND PURCHASER COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
TAX CONSEQUENCES TO U.S. HOLDERS
Tax Consequences of the Redomestication Merger to U.S. Holders of Hudson Shares.
The following discussion under this subsection, “Tax Consequences of the Redomestication Merger to U.S. Holders of Hudson Shares” constitutes the opinion of Sichenzia Ross Ference LLP, counsel to Hudson, as to the material U.S. federal income tax consequences of the Redomestication Merger to U.S. Holders of Hudson shares, subject to the limitations, exceptions, beliefs, assumptions, and qualifications described in such opinion and herein.
As discussed below, it is the opinion of our counsel that while the issue is not entirely free from doubt, the Redomestication Merger will qualify as a “reorganization” within the meaning of Code section 368(a)(1)(F); therefore (subject to the Section 367(b) rules and the Passive Foreign Investment Company (“PFIC”) rules (both discussed below)) U.S. Holders will not recognize gain or loss on the exchange of their Hudson shares for Purchaser Common Stock.
Code section 354 provides: “No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.” Under Code section 368(a)(1), a “reorganization” includes “(F) a mere change in identity, form, or place of organization of one corporation, however effected.” Under Code section 368(b), a “party to a reorganization” includes “(1) a corporation resulting from a reorganization, and (2) both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.” Accordingly, the Redomestication Merger, as a change in the place of organization of Hudson, constitutes a reorganization under Section 368(a)(1)(F) to which Hudson is a party, provided that the transaction otherwise qualifies under Section 368 and the regulations promulgated under Section 368.
Treasury Regulation Section (“Reg Sec.”) 1.368-2(m) provides that six requirements must be satisfied in order for a reorganization to qualify as a reorganization under Section 368(a)(1)(F). These requirements are intended to assure that, at least immediately after the reorganization, the only parties involved in the transaction are the resulting corporation and the former corporation and its shareholders, and that the only assets and liabilities, and tax attributes, transferred by the former corporation and received by the resulting corporation are those of the former corporation (and that the former corporation is wound up). The Redomestication Merger meets all of these requirements.
Treasury Regulations also require, as a general rule, that in order to qualify as a reorganization under Section 368(a)1), a transaction must meet a “continuity of interest” test (under which a substantial portion of the resulting corporation’s stock is owned by shareholders of the former corporation) and a “continuity of business enterprise” test (under which the resulting corporation carries on the historic business of the former corporation or uses a significant part of its assets in a new business). If the Redomestication Merger is viewed, under a step-transaction analysis, as part of a larger transaction that includes the Disposition and the Merger, then it doesmight not meet eitherone or both of these tests. However, Reg. Sec. 1.368-2(m)(2) provides: “A continuity of the business enterprise and a continuity of interest are not required for a potential F reorganization to qualify as a reorganization under section 368(a)(1)(F).” Moreover, the Regulations strongly imply that, in determining whether a qualified F reorganization has occurred, it is permissible to examine only the transactions constituting the reorganization itself, not events that happen after (or before) the reorganization. See Treasury Decision (T.D.) 9739, Sep. 21, 2015: “The Final Regulations adopt the [previously expressed rule] that related events preceding or following the Potential F Reorganization that constitutes a Mere Change generally would not cause that Potential F Reorganization to fail to qualify as an F reorganization.”
Reg. Sec. 1.368-2(m) is a complex regulation and, as it was only adopted in 2015, there are few IRS revenue rulings or private letter rulings, or court decisions, illustrating how it is applied to specific fact patterns. None of the examples provided in the regulation itself describe a series of transactions like those involved in this offering. Nonetheless, while the application of the Treasury regulations to a transaction such as the Redomestication Merger is not entirely free from doubt, it is the opinion of our counsel that the Redomestication Merger will qualify as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Code and that (subject to the Section 367(b) rules and the PFIC rules discussed below) U.S. Holders of Hudson shares will not recognize gain or loss on the exchange of those shares for Purchaser stock. U.S. Holders should be aware thatAs noted above Hudson has not requested and does not intend to request a ruling from the IRS with respect to the U.S. federal income tax treatment of the Redomestication Merger. There can be no assurance that the IRS will not take a contrary position to our counsel’s opinion or that a court will not agree with a contrary position of the IRS.
Subject to the discussions of the Section 367 rules and the PFIC rules, below, it is therefore the opinion of our counsel that the consequences of the Redomestication Merger exchange are as follows:
A U.S. Holder of Hudson shares will not recognize a gain or loss on the exchange of his Hudson shares for Purchaser stock.
The U.S. Holder’s tax basis in his Purchaser stock will be the same as his adjusted basis in his Hudson shares.
Following the exchange, the U.S. Holder’s holding period in his Purchaser stock will include the period of time that he held his Hudson shares.
U.S. Holders should note that if the Redomestication Merger is a qualified reorganization under Section 368(a)(1)(F), then, since a U.S. Holder retains his basis in his Hudson shares as his basis in his Purchaser stock, upon the Disposition (which is in fact a taxable transaction (as discussed more fully below under “Tax Consequences of the Disposition”)), the U.S. Holder will realize a gain in an amount equal to the excess (if any) of the fair market value of the assets received by him in the Disposition over his carryover basis in his Purchaser stock.
Effect of Section 367 on the Redomestication Merger for U.S. Holders of Hudson Shares
Code section 367(b) applies to certain non-recognition transactions involving foreign corporations, including a domestication of a foreign corporation in a transaction that qualifies as a Section 368(a)(1) reorganization. When it applies, Section 367(b) imposes income tax on certain U.S. persons in connection with transactions that would otherwise be tax-free. Section 367(b) will apply to certain U.S. Holders who exchange Hudson shares for Purchaser Common Stock as part of the Redomestication Merger.
A. “U.S. Shareholders” of Hudson
A U.S. Holder who on the day of the Redomestication Merger beneficially owns (directly, indirectly, or constructively) (i) ten percent (10%) or more of the total combined voting power of all classes of Hudson shares entitled to vote or (ii) ten percent (10%) or more of the total value of shares of all classes of Hudson shares (referred to herein as a “U.S. Shareholder”) must include in income as a dividend the “all earnings and profits amount” attributable to his shares he directly owns, within the meaning of Treasury Regulation Section 1.367(b)-2(d). Complex attribution rules apply in determining whether a U.S. Holder owns 10% or more of the total combined voting power of all classes of Hudson shares entitled to vote or 10% or more of the total value of shares of all classes of Hudson shares for U.S. federal income tax purposes, and any U.S. Holder who owns Hudson shares is urged to consult his own tax advisor with respect to these attribution rules.
A U.S. Shareholder’s all earnings and profits amount with respect to his Hudson shares is the net positive earnings and profits of the corporation (as determined under Treasury Regulation Section 1.367(b)-2(d)(2)) attributable to the Hudson shares (as determined under Treasury Regulation Section 1.367(b)-2(d)(3)) but without regard to any gain that would be realized on a sale or exchange of the Hudson shares.
Accordingly, under Treasury Regulation Section 1.367(b)-3(b)(3), a U.S. Shareholder will be required to include in income as a deemed dividend the all earnings and profits amount attributable to his Hudson shares as a result of the Redomestication Merger. Any such U.S. Shareholder that is a corporation may, under certain circumstances, effectively be exempt from taxation on a portion or all of the deemed dividend pursuant to Section 245A of the Code. However, Hudson does not expect that its cumulative earnings and profits will be greater than zero through the date of the Redomestication. If Hudson’s cumulative earnings and profits through the date of Redomestication are not greater than zero, then a U.S. Shareholder generally would not be required to include in gross income an all earnings and profits amount with respect to his Hudson shares.
However, it is possible that the amount of Hudson’s earnings and profits could be greater than expected through the date of the Redomestication Merger or could be adjusted as a result of an IRS examination. The determination of Hudson’s earnings and profits is complex and may be impacted by numerous factors, and it is possible that one or more of such factors may cause Hudson to have positive earnings and profits through the date of the Redomestication Merger. As a result, depending upon the period in which such a U.S. Shareholder held his Hudson shares, he could be required to include his share of Hudson’s all earnings and profits amount in income as a deemed dividend under Treasury Regulation Section 1.367(b)-3(b)(3) as a result of the Redomestication Merger. See below, under “Effect of PFIC Rules on the Redomestication Merger” for a discussion of whether amounts included in income under Code Section 367(b) should be reduced by amounts required to be taken into account by a U.S. Holder under the proposed Treasury Regulations under Code Section 1291(f).
B. U.S. Holders Who Own Less Than 10 Percent of Hudson
A U.S. Holder who on the day of the Redomestication Merger beneficially owns (directly, indirectly, or constructively) Hudson shares with a fair market value of $50,000 or more but less than (i) ten percent (10%) of the total combined voting power of all classes of Hudson shares entitled to vote and (ii) ten percent (10%) of the total value of shares of all classes of Hudson shares must either recognize gain with respect to the Redomestication Merger or, in the alternative, elect to recognize his share of the “all earnings and profits” amount as described below.
Unless a U.S. Holder makes the “all earnings and profits election” as described below, he generally must recognize gain (but not loss) with respect to Purchaser Common Stock received in exchange for his Hudson shares pursuant to the Redomestication Merger. Any such gain would be equal to the excess of the fair market value of the Purchaser Common Stock received over the U.S. Holder’s adjusted tax basis in the Hudson shares surrendered in exchange. Subject to the PFIC rules discussed below, such gain would be capital gain, and would be long-term capital gain if the U.S. Holder had held the Hudson shares for longer than one year.
In lieu of recognizing any gain as described in the preceding paragraph, a U.S. Holder may elect to include in income the all earnings and profits amount attributable to his Hudson shares under Section 367(b). However, there are strict conditions for making this election. This election must comply with applicable Treasury regulations and generally must include, among other things: (i) a statement that the Redomestication Merger is a Section 367(b) exchange; (ii) a complete description of the Redomestication Merger, (iii) a description of any stock, securities or other consideration transferred or received in the Redomestication Merger, (iv) a statement describing the amounts required to be taken into account for U.S. federal income tax purposes, (v) a statement that the U.S. Holder is making the election that includes (A) a copy of the information that the U.S. Holder received from Hudson establishing and substantiating the U.S. Holder’s all earnings and profits amount with respect to the U.S. Holder’s Hudson shares, and (B) a representation that the U.S. Holder has notified Hudson (or Purchaser) that the U.S. Holder is making the election, and (vi) certain other information required to be furnished with the U.S. Holder’s tax return or otherwise furnished pursuant to the Code or Treasury regulations. See Reg. Sec 1.367(b)-1(c). In addition, the election must be attached by the U.S. Holder to his timely filed U.S. federal income tax return for the year of the Redomestication Merger, and the U.S. Holder must send notice to Hudson (or Purchaser) of the election no later than the date such tax return is filed. Hudson cannot assure its U.S. Holders that it will provide the information required for them to make this election and, if it is unable to do so, the election will not be available to a U.S. Holder and he will then be required to recognize gain on the Redomestication Merger as described above.
As noted above, Hudson does not expect that its cumulative earnings and profits will be greater than zero through the date of the Redomestication Merger and it will endeavor to provide its shareholders with information establishing the absence of cumulative earnings and profits. U.S. Holders are strongly urged to consult with their own tax advisors regarding whether to make this election and if the election is determined to be advisable, the appropriate filing requirements with respect to this election.
See the discussion below, “Effect“Effect of the PFIC Rules on the Redomestication Merger” for an explanation of when amounts taken into account under Code section 367(b) should be reduced by amounts required to be taken into account under proposed Treasury regulations addressing the PFIC rules.
A U.S. Holder (who is not a U.S. Shareholder) that beneficially owns (directly, indirectly, or constructively) Hudson shares with a fair market value of less than $50,000 would not be required to recognize any gain or loss or include any part of the all earnings and profits amount in income under Section 367(b) of the Code in connection with the Redomestication Merger.
Effect of the PFIC Rules on the Redomestication Merger
Even if the Redomestication Merger qualifiesHudson’s status as a “reorganization” within the meaning of Code section 368(a)(1)(F), the Redomestication Merger may be a taxable event to U.S. Holders of Hudson shares under the passive foreign investment company, or “PFIC,” provisions of the Code, to the extent that Section 1291(f) of the Code applies.PFIC.
Code section 1291(f) requires that, to the extent provided in Treasury regulations, a U.S. person that disposes of stock of a PFIC must recognize gain, in the manner described below, notwithstanding any other provision of the Code (including the nonrecognition provisions of Section 354). No final Treasury regulations are in effect under Section 1291(f); however, the IRS has published proposed regulations, described below, that (according to the regulations as proposed) if adopted would be retroactive to the date of their publication.
If final Regulations under Code section 1291(f) were adopted as proposed, the PFIC rules would apply to a U.S. Holder of Hudson shares if Hudson has been a PFIC with respect to the U.S. Holder at any time that the U.S Holder has owned his Hudson shares.
Since Hudson isAs a foreign corporation itHudson would be a PFICPassive Foreign Investment Company (“PFIC”) with respect to a U.S. Holder if for any taxable year in which the U.S. Holder held Hudson shares (i) at least 75% of Hudson’s gross income for the taxable year was passive income, or (ii) at least 50% of the value, determined on the basis of a quarterly average, of Hudson’s assets was attributable to assets that produced, or were held for the production of, passive income.
Passive income generally includes dividends, interest, rents, certain royalties and gains from the disposition of passive assets. Once a foreign corporation is classified as a PFIC for any taxable year during which a U.S. holder owns stock in the foreign corporation, the foreign corporation generally remains thereafter classified as a PFIC with respect to that U.S. holder.
Disregarding the activities of its VIE (including the activities of the VIE’s subsidiaries), Hudson in all likelihood is and always has been a PFIC because at least 50% of its assets (the VIE which it owns through a wholly-owned subsidiary) have been held for the production of passive income (dividends). However, in determining its PFIC status, a foreign corporation which owns, directly or indirectly, at least 25% (by value) of another corporation may take into account the income and assets of that other corporation (in the same proportion in which it owns the other corporation). The wholly-owned subsidiaries of Hudson’s VIE are trading companies and, according to Hudson’s financial statements, would not be classified as PFICs under Code section 1297(a). If Hudson is treated as owning its VIE (and therefore the VIE’s subsidiaries) for purposes of U.S. federal income tax laws, then in determining its PFIC status it could take into account all of the income and assets of the subsidiaries of its VIE and, based on Hudson’s financial statements, Hudson would not be considered a PFIC.
Hudson does not own an equity interest in its VIE. Instead, through another wholly-owned subsidiary, it controls and receives the economic benefits of the VIE’s and its subsidiaries’ business operations through a series of contractual arrangements which are designed to provide Hudson with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of the VIE, including absolute control rights and the rights to the assets, property and revenue of the VIE.
There is no authority as to whether such an arrangement constitutes ownership of the VIE by Hudson for purposes of U.S. federal income tax law. While its contractual arrangements with the VIE would seem to give Hudson an ownership interest in the VIE as a practical matter, there is no assurance that the IRS or a U.S. court would determine that such ownership interest in fact exists. Accordingly, there can be no assurance that Hudson will not be treated as a PFIC.
Proposed
Effect of the PFIC rules on the Redomestication Merger
Even if the Redomestication Merger qualifies as a “reorganization�� within the meaning of Code section 368(a)(1)(F), the Redomestication Merger may be a taxable event to U.S. Holders of Hudson shares under the PFIC rules to the extent that Section 1291(f) of the Code applies.
Code section 1291(f) requires that, to the extent provided in Treasury regulations, a U.S. person that disposes of stock of a PFIC must recognize gain, in the manner described below, notwithstanding any other provision of the Code (including the nonrecognition provisions of Section 354). No final Treasury regulations are in effect under Section 1291(f) (the “Proposed Regulations)”; however, the IRS has published proposed regulations, described below, that (according to the regulations as proposed) if adopted would be retroactive to the date of their publication. If final regulations under Code section 1291(f) were adopted as proposed, the PFIC rules would apply to a U.S. Holder of Hudson shares if Hudson has been a PFIC with respect to the U.S. Holder at any time that the U.S Holder has owned his Hudson shares.
The proposed Treasury regulations were promulgated in 1992 and, as proposed, are to have a retroactive effective date (if and when they are finalized) to their publication date.1992. If finalized in their present form, and if Hudson were determined to be a PFIC with respect to any U.S. Holder, the Proposed Regulations would require taxable gain recognition from the Redomestication Merger for a U.S. Holder who had not made a certain election (described below) with respect to his Hudson shares. Any such gain would be taxed as follows: the amount of the gain would be (i) allocated ratably to each day that the U.S. Holder has held shares of Hudson’s shares and (ii) taxed as ordinary income that was earned in each of the years to which it was allocated. The rate of tax on such income would be the highest rate of tax in effect for the category of U.S. Holder during each such year. The tax imposed on income allocated to any prior taxable year would also be subject to an interest charge that would accrue from the taxable year to which the income was allocated until the date that the tax due under the PFIC rules was paid.
The Proposed Regulations also provide rules intended to coordinate the PFIC rules with the rules of Code section 367(b), discussed above under “Effect of Section 367 on the Redomestication Merger for U.S. Holders of Hudson Shares”. Under these coordinating rules, if the gain recognition rule of the Proposed Regulations applied to a disposition of PFIC stock that was also subject to the rules of Section 367(b) – because the foreign corporation had an all earnings and profit amount --– the gain realized on the transfer would first be taxable under Section 1291(f) and any gain not taxable under Section 1291(f) would then be taxable as provided under Section 367(b).
The foregoing tax effects of PFIC status on the Redomestication Merger would be different if any U.S. Holder has, during his ownership of Hudson shares, made an election (a so-called “mark-to-market” election) to include in income for each of the years that he has owned his Hudson shares an amount of income representing the increase in the value of his shares during the year. Any U.S. Holder who has made such an election should consult with his own tax advisor about the tax ramifications of having done so.
Hudson intends to take the position that it is not and has never been a PFIC with respect to any U.S. Holder but cannot provide any assurances that its position will be upheld. The PFIC rules are complex and are affected by various factors in addition to those described above. Accordingly, U.S. holders of Hudson shares are urged to consult their own tax advisors concerning the application of the PFIC rules to their shares.
Tax Consequences of the Disposition.
The Disposition will be a taxable event to the U.S. Holders of Hudson. Under Code section 301, when a corporation distributes property to its shareholders, the shareholders realize income on the distribution unless the distribution is considered non-taxable under certain other Code provisions. None of those other Code provisions apply to the Disposition.
The distribution of the Purchaser assets (the “Spin-off Entity”) to the Hudson shareholders will be treated as a dividend, and taxable as ordinary income, to a U.S. Holder to the extent of the U.S. Holder’s share of Purchaser’s current and accumulated earnings and profits. To the extent that the value of the Spin-off Entity exceeds the U.S. Holder’s share of the current and accumulated earnings and profits of the Purchaser, the U.S. Holder will first reduce his basis (but not below zero) in his Purchaser Common Stock by such excess; any amount of the distribution in excess of his adjusted basis will be taxed as a capital exchange. Since a U.S Holder’s holding period in his Hudson shares is tacked on to his holding period in the Purchaser Common Stock (see “Tax Consequences of the Redomestication Merger to U.S. Holders of Hudson Shares”, above), any capital gain realized by a U.S. Holder in the Disposition will be long-term gain if the U.S. Holder held his Hudson shares for more than one year as of the date of the Redomestication.
The U.S. Holder’s basis in the Spin-off Entity stock that he receives in the Disposition will be the fair market value of that stock as of the date of the Disposition.
The U.S. Holder’s holding period in the Spin-off Entity stock will begin on the day after the date of the Disposition.
Additional Tax on Net Investment Income
Certain U.S. holders that are individuals, estates and trusts are required to pay a 3.8 percent tax on “net investment income” (or in the case of an estate or trust, “undistributed net investment income”), which generally includes, among other items of income, dividends on, and capital gains from the sale or other disposition of, securities, subject to certain limitations and exceptions. See Code section 1411. U.S. Holders are urged to consult their own tax advisors regarding the applicability of this additional tax to the dividends and gains resulting from their ownership and disposition of Hudson Shares and their ownership of Purchaser Common Stock.
Tax Consequences of the Merger
Purchaser and Fr8HubFr8App intend that, for U.S. federal income tax purposes, the Merger should qualify as a “reorganization” within the meaning of Section 368(a) of the Code.
U.S. Holders of Fr8HubFr8App securities should generally not recognize any gain or loss as a result of the Merger. Pursuant to the Merger, U.S. Holders of Fr8HubFr8App securities will receive Purchaser Common Stock in exchange for their shares of Fr8HubFr8App common stock, Purchaser Preferred Stock in exchange for their shares of Fr8HubFr8App preferred stock, and Purchaser warrants and options (hereinafter “Purchaser Warrants”) in exchange for their Fr8HubFr8App warrants and options, respectively. Each U.S. Holder’s tax basis in the shares of Purchaser Common Stock received in the Merger should be the same as his, her or its tax basis in the shares of Fr8HubFr8App common stock surrendered in the Merger in exchange therefor, each U.S. Holder’s tax basis in the shares of Purchaser Preferred Stock received in the Merger should be the same as his, her or its tax basis in the shares of Fr8HubFr8App preferred stock surrendered in the Merger in exchange therefor, and each U.S. Holder’s tax basis in the Purchaser Warrants received in the Merger will be the same as his, her or its tax basis in the Fr8HubFr8App warrants or options, as applicable, surrendered in the Merger in exchange therefor. The holding period of the shares of Purchaser Common Stock received in the Merger by the U.S. Holder should include the holding period of the shares of Fr8HubFr8App common stock surrendered in the Merger in exchange therefor, the holding period of the shares of Purchaser Preferred Stock received in the Merger by the U.S. Holder should include the holding period of the shares of Fr8HubFr8App preferred stock surrendered in the Merger in exchange therefor, and the holding period of the Purchaser Warrants received in the Merger by the U.S. Holder should include the holding period of the Fr8HubFr8App warrants or options, as applicable, surrendered in the Merger in exchange therefor.
In addition, pursuant to the Merger Agreement, U.S. Holders of Fr8HubFr8App common stock may receive contingent consideration in the form of additional shares of Purchaser Common Stock under certain circumstances. Any additional shares of Purchaser Common Stock received by U.S. Holders pursuant to the Merger Agreement are expected to be viewed as contingent consideration in the Merger and should generally be received on a tax-free basis in the manner described above. However, the treatment of contingent consideration received in a “reorganization” within the meaning of Section 368(a) of the Code, including a U.S. Holder’s tax basis in any shares of Purchaser Common Stock received as contingent consideration, is unclear under current law, and there can be no assurance that the IRS will not take a contrary position to that described herein or that a court will not agree with a contrary position of the IRS in the event of litigation. Additionally, under Code Section 483, a portion of the value of any shares of Purchaser Common Stock received by a U.S. Holder as contingent consideration will be treated as interest for U.S. federal income tax purposes that must be accounted for in accordance with the holder’s regular method of accounting. The amount of imputed interest is equal to the excess of (1) the fair market value of the shares of Purchaser Common Stock, if any, received as contingent consideration over (2) the present value of such amount as of the effective time, discounted at the applicable federal rate in effect at the effective time. A U.S. Holder’s tax basis in any shares of Purchaser Common Stock received as contingent consideration will be increased by the amount treated as imputed interest.
All U.S. Holders are urged to consult their tax advisors as to the tax consequences to them of the Merger, including the potential receipt of contingent consideration, under such holder’s particular circumstances.
ALL U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE REDOMESTICATION MERGER THE DISPOSITION AND THE MERGER.
Tax Consequences of Ownership and Disposition of Purchaser Securities
The following discussion is a summary of certain material U.S. federal income tax consequences of the ownership and disposition of Purchaser securities to U.S. Holders who receive such Purchaser securities pursuant to the Business Combination.
Distributions on Purchaser Stock
The gross amount of any distribution on Purchaser Common Stock or Purchaser Preferred Stock (hereinafter “Purchaser Stock”) that is made out of Purchaser’s current and accumulated profits (as determined for U.S. federal income tax purposes) will generally be taxable to a U.S. Holder as ordinary dividend income on the date such distribution is actually or constructively received by such U.S. Holder. Any such dividends paid to corporate U.S. Holders generally will qualify for the dividends received deduction if the requisite holding period is satisfied. Dividends paid to a non-corporate U.S. Holder generally will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gains.
Non-corporate U.S. Holders that do not meet a minimum holding period requirement or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code (dealing with the deduction for investment interest expense) will not be eligible for the reduced rates of taxation applicable to qualified dividends. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met.
To the extent that the amount of any distribution made by Purchaser on the Purchaser Stock exceeds Purchaser’s current and accumulated earnings and profits for a taxable year (as determined under U.S. federal income tax principles), the distribution will first be treated as a tax-free return of capital, causing a reduction (but not below zero) in the adjusted basis of the U.S. Holder’s Purchaser Stock, and to the extent the amount of the distribution exceeds the U.S. Holder’s tax basis, the excess will be taxed as capital gain recognized on a sale or exchange as described below under “— Sale, Exchange, Redemption or Other Taxable Disposition of Securities.”
Sale, Exchange, Redemption or Other Taxable Disposition of Purchaser Securities
A U.S. Holder will generally recognize gain or loss on any sale, exchange, redemption, or other taxable disposition of Purchaser securities in an amount equal to the difference between the amount realized on the disposition and such U.S. Holder’s adjusted tax basis in such Purchaser securities. Any gain or loss recognized by a U.S. Holder on a taxable disposition of Purchaser securities will generally be capital gain or loss and will be long-term capital gain or loss if the holder’s holding period in the Purchaser securities exceeds one year at the time of the disposition. Preferential tax rates may apply to long-term capital gains recognized by non-corporate U.S. Holders (including individuals). The deductibility of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder on the sale or exchange of Purchaser securities will generally be treated as U.S. source gain or loss.
Exercise or Lapse of a Purchaser Warrant
Except as discussed below with respect to the cashless exercise of a Purchaser Warrant, a U.S. Holder generally will not recognize gain or loss upon the acquisition of a share of Purchaser Common Stock or Purchaser Preferred Stock on the exercise of a Purchaser Warrant for cash. A U.S. Holder’s tax basis in a share of Purchaser Common Stock or Purchaser Preferred Stock received upon exercise of the Purchaser Warrant generally will be an amount equal to the sum of the U.S. Holder’s tax basis in the Purchaser Warrant exchanged therefor and the exercise price. The U.S. Holder’s holding period for a share of Purchaser Common Stock or Purchaser Preferred Stock received upon exercise of the Purchaser Warrant will begin on the date following the date of exercise (or possibly the date of exercise) of the Purchaser Warrants and will not include the period during which the U.S. Holder held the Purchaser Warrants. If a Purchaser Warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the Purchaser Warrant.
The tax consequences of a cashless exercise of a warrant are not clear under current tax law. A cashless exercise may be tax-free, either because the exercise is not a gain realization event or because the exercise is treated as a recapitalization for U.S. federal income tax purposes. In either tax-free situation, a U.S. Holder’s basis in the Purchaser Common Stock or Purchaser Preferred Stock received would equal the holder’s basis in the Purchaser Warrant exercised therefor. If the cashless exercise were treated as not being a gain realization event, a U.S. Holder’s holding period in the Purchaser Common Stock or Purchaser Preferred Stock would be treated as commencing on the date following the date of exercise (or possibly the date of exercise) of the Purchaser Warrant. If the cashless exercise were treated as a recapitalization, the holding period of the Purchaser Common Stock or Purchaser Preferred Stock would include the holding period of the Purchaser Warrant exercised therefor.
It is also possible that a cashless exercise could be treated in part as a taxable exchange in which gain or loss would be recognized. In such event, a U.S. Holder would recognize gain or loss with respect to the portion of the exercised Purchaser Warrants treated as surrendered to pay the exercise price of the Purchaser Warrants (the “surrendered warrants”). The U.S. Holder would recognize capital gain or loss with respect to the surrendered warrants in an amount generally equal to the difference between (i) the fair market value of the Purchaser Common Stock or Purchaser Preferred Stock that would have been received with respect to the surrendered warrants in a regular exercise of the Purchaser Warrants and (ii) the sum of the U.S. Holder’s tax basis in the surrendered warrants and the aggregate cash exercise price of such warrants (if they had been exercised in a regular exercise). In this case, a U.S. Holder’s tax basis in the Purchaser Common Stock or Purchaser Preferred Stock received would equal the U.S. Holder’s tax basis in the Purchaser Warrants exercised plus (or minus) the gain (or loss) recognized with respect to the surrendered warrants. A U.S. Holder’s holding period for the Purchaser Common Stock or Purchaser Preferred Stock would commence on the date following the date of exercise (or possibly the date of exercise) of the Purchaser Warrant.
Due to the absence of authority on the U.S. federal income tax treatment of a cashless exercise, there can be no assurance which, if any, of the alternative tax consequences and holding periods described above would be adopted by the IRS or a court of law. Accordingly, U.S. Holders should consult their tax advisors regarding the tax consequences of a cashless exercise of Purchaser Warrants.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
This section applies to any owner of Hudson shares or Fr8HubFr8App securities and, after the Business Combination, Purchaser securities who is not a U.S. Holder (and who is hereinafter referred to as a “Non-U.S. Holder”).
Tax Consequences of the Redomestication Merger.
A Non-U.S. Holder that is a foreign corporation with one or more U.S. shareholders who own 10% or more of its stock will be subject to the Section 367(b) rules, discussed above under “Effect of Section 367 on the Redomestication Merger for U.S. Holders of Hudson Shares”, on the disposition of its Hudson shares and should consult its own tax advisor about the impact of those rules on it.
Tax Consequences of the Disposition.
To the extent that the Disposition constitutes a distribution out of the current or accumulated earning and profits of Purchaser (determined under U.S. federal income tax principles), the value of the assets distributed in the Disposition will constitute dividends for U.S. federal income tax purposes and, provided such dividends are not effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States, will be subject to withholding tax from the gross amount of the dividend at a rate of 30%, unless the Non-U.S. Holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E, as applicable). See Code sections 1441 and 1442.
Amounts treated as dividends paid to a Non-U.S. Holder that are effectively connected with such Non-U.S. Holder’s conduct of a trade or business within the United States (or, if a tax treaty applies, are attributable to a U.S. permanent establishment or fixed base maintained by the Non-U.S. Holder) will generally not be subject to U.S. withholding tax, provided such Non-U.S. Holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. federal income tax at the same regular U.S. federal income tax rates applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, also may be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Tax Consequences of Ownership and Disposition of Purchaser Securities
Distributions on Purchaser Stock
Distributions of cash or property (including a constructive distribution) to a Non-U.S. Holder in respect of Purchaser Stock received in the Business Combination will generally constitute dividends for U.S. federal income tax purposes to the extent paid from Purchaser’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds Purchaser’s current and accumulated earnings and profits, the excess will generally be treated first as a tax-free return of capital to the extent of the Non-U.S. Holder’s adjusted tax basis in the Purchaser Stock. Any remaining excess will be treated as capital gain and will be treated as described below under “— Sale, Exchange, Redemption or Other Taxable Disposition of Purchaser Securities.”
Dividends paid to a Non-U.S. Holder of Purchaser Stock generally will be subject to withholding of U.S. federal income tax at a 30% rate, unless such Non-U.S. Holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate as described below. However, dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment or fixed base of the Non-U.S. Holder) are not subject to such withholding tax, provided certain certification and disclosure requirements are satisfied (generally by providing an IRS FormW-8ECI). Instead, such dividends are subject to United States federal income tax on a net income basis in the same manner as if the Non-U.S. Holder were a United States person as defined under the Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
A Non-U.S. Holder of Purchaser Stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to complete the applicable IRS FormW-8 and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if the shares of Purchaser Stock are held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable United States Treasury regulations. Special certification and other requirements apply to certain Non-U.S. Holders that are pass-through entities rather than corporations or individuals.
A Non-U.S. Holder of Purchaser Stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders are urged to consult their own tax advisors regarding their entitlement to the benefits under any applicable income tax treaty.
Sale, Exchange, Redemption or Other Taxable Disposition of Purchaser Securities
Subject to the discussion of backup withholding and FATCA below, any gain realized by a Non-U.S. Holder on the taxable disposition of Purchaser securities generally will not be subject to U.S. federal income tax unless:
● | the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States (and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment or fixed base of the Non-U.S. Holder); | |
● | the Non-U.S. Holder is an individual who is present in the United States for a period or periods aggregating 183 days or more in the taxable year of the disposition, and certain other conditions are met; or | |
● | Purchaser is or has been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the Non-U.S. Holder’s holding period for such securities disposed of, and either (A) shares of Purchaser Stock are not considered to be regularly traded on an established securities market or (B) such Non-U.S. Holder has owned or is deemed to have owned, at any time during the shorter of the five-year period preceding such disposition and such Non-U.S. Holder’s holding period more than 5% of the outstanding shares of Purchaser Stock. There can be no assurance that shares of Purchaser Stock will be treated as regularly traded on an established securities market for this purpose. |
A non-corporate Non-U.S. Holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. An individual Non-U.S. Holder described in the second bullet point immediately above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by certain United States source capital losses, even though the individual is not considered a resident of the United States, provided that the individual has timely filed U.S. federal income tax returns with respect to such losses. If a Non-U.S. Holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to the branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits, subject to adjustments.
If the last bullet point immediately above applies to a Non-U.S. Holder, gain recognized by such Non-U.S. Holder on the sale, exchange or other disposition of Purchaser securities generally will be subject to tax at generally applicable U.S. federal income tax rates. In addition, a buyer of such Purchaser securities from a Non-U.S. Holder may be required to withhold U.S. income tax at a rate of 15% of the amount realized upon such disposition. Purchaser will generally be classified as a “U.S. real property holding corporation” if the fair market value of its “United States real property interests” equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes. Purchaser does not expect to be classified as a “U.S. real property holding corporation” following the Business Combination. However, such determination is factual in nature and subject to change, and no assurance can be provided as to whether Purchaser is or will be a U.S. real property holding corporation with respect to a Non-U.S. Holder following the Business Combination or at any future time.
Exercise or Lapse of a Purchaser Warrant
The U.S. federal income tax treatment of a Non-U.S. Holder’s exercise of a Purchaser Warrant, or the lapse of a Purchaser Warrant held by a Non-U.S. Holder, generally will correspond to the U.S. federal income tax treatment of the exercise or lapse of a warrant by a U.S. holder, as described under “— U.S. Holders — Exercise or Lapse of a Purchaser Warrant,” above, although to the extent a cashless exercise results in a taxable exchange, the consequences would be similar to those described under “— Sale, Exchange, Redemption or Other Taxable Disposition of Purchaser Securities,” above for a Non-U.S. Holder’s gain on the sale or other disposition of Purchaser securities.
ALL NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE REDOMESTICATION MERGER THE DISPOSITION, AND THE MERGER.
Information Reporting and Backup Withholding
Purchaser generally must report annually to the IRS and to each holder the amount of cash dividends and certain other distributions it pays to such holder on such holder’s Purchaser securities and the amount of tax, if any, withheld with respect to those distributions. In the case of a Non-U.S. Holder, copies of the information returns reporting those distributions and withholding also may be made available to the tax authorities in the country in which the Non-U.S. Holder is a resident under the provisions of an applicable income tax treaty or agreement. Information reporting is also generally required with respect to proceeds from the sales and other dispositions of Purchaser securities to or through the U.S. office (and in certain cases, the foreign office) of a broker. In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its Purchaser securities and adjustments to that tax basis and whether any gain or loss with respect to such securities is long-term or short-term also may be required to be reported to the IRS.
Moreover, backup withholding of U.S. federal income tax at a rate of 24% generally will apply to cash distributions made on Purchaser securities to, and the proceeds from sales and other dispositions of such securities by, a U.S. Holder (other than an exempt recipient) who:
● | fails to provide an accurate taxpayer identification number; | |
● | is notified by the IRS that backup withholding is required; or | |
● | in certain circumstances, fails to comply with applicable certification requirements. |
A Non-U.S. Holder generally may eliminate the requirement for information reporting (other than with respect to distributions, as described above) and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
Foreign Account Tax Compliance Act
Sections 1471 through 1474 of the Code and the Treasury Regulations and administrative guidance promulgated thereunder (commonly referred as the “Foreign Account Tax Compliance Act” or “FATCA”) generally impose withholding at a rate of 30% in certain circumstances on dividends in respect of, and (subject to the proposed Treasury Regulations discussed below) gross proceeds from the sale or other disposition of, securities (including Purchaser securities) which are held by or through certain foreign financial institutions (including investment funds), unless any such institution (i) enters into, and complies with, an agreement with the IRS to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution that are owned by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments, or (ii) if required under an intergovernmental agreement between the United States and an applicable foreign country, reports such information to its local tax authority, which will exchange such information with the U.S. authorities. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. Accordingly, the entity through which Purchaser securities are held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and (subject to the proposed Treasury Regulations discussed below) gross proceeds from the sale or other disposition of, Purchaser securities held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exceptions will generally be subject to withholding at a rate of 30%, unless such entity either (i) certifies to the applicable withholding agent that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners”, which will in turn be provided to the U.S. Department of Treasury.
Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends in respect of Purchaser Stock. While withholding under FATCA generally would also apply to payments of gross proceeds from the sale or other disposition of securities (including Purchaser securities), proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued. All holders should consult their tax advisors regarding the possible implications of FATCA on their investment in Purchaser securities.
NASDAQ Stock Market Listing
The approval by NASDAQ of (i) the continued listing of the Purchaser Common Stock on the NASDAQ Capital Market following the Effective Time and (ii) the listing of the shares of Purchaser Common Stock being issued in connection with the merger on NASDAQ at or prior to the Effective Time are conditions to the closing of the merger. Fr8HubFr8App has agreed to cooperate with Hudson to furnish to Hudson all information concerning Fr8HubFr8App and its stockholders that may be required or reasonably requested in connection with NASDAQ. If such approvals are obtained, Hudson anticipates that the Purchaser Common Stock will be listed on NASDAQ under the trading symbol “FRGT” following the closing of the merger.
Anticipated Accounting Treatment
The Merger is expected to be treated by Hudson as a reverse merger and accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). For accounting purposes, Fr8HubFr8App is considered to be acquiring Hudson in the Merger.
Appraisal Rights and Dissenters’ Rights
The BVI Act provides that any shareholder of Hudson is entitled to payment of the fair value of his shares upon dissenting from a merger, unless Hudson is the surviving company of the merger and the shareholder continues to hold the same or similar shares. The following is a summary of the position in respect of dissenters’ rights in the event of a merger under the BVI Act.
A dissenter is in most circumstances required to give to Hudson written objection to the merger, which must include a statement that the dissenter proposes to demand payment for his shares if the merger takes place. This written objection must be given before the meeting of shareholders at which the merger is submitted to a vote, or at the meeting but before the vote. However, no objection is required from a shareholder to whom Hudson did not give notice of the meeting of shareholders or where the proposed merger is authorized by written consent of the shareholders without a meeting.
Within 20 days immediately following the written consent, or the meeting at which the merger was approved, Hudson shall give written notice of the consent or resolution to each shareholder who gave written objection or from whom written objection was not required, except those shareholders who voted for, or consented in writing to, the proposed merger.
A shareholder to whom Hudson was required to give notice who elects to dissent shall, within 20 days immediately following the date on which the copy of the plan of merger or an outline of the merger is given to him, give to Hudson a written notice of his decision to elect to dissent, stating:
(a) | His name and address: | |
(b) | the number and classes of shares in respect of which he dissents (which must be all shares that he holds in Hudson); and | |
(c) | a demand for payment of the fair value of his shares. |
Upon the giving of a notice of election to dissent, the dissenter ceases to have any of the rights of a shareholder except the right to be paid the fair value of his shares, and the right to institute proceedings to obtain relief on the ground that the action is illegal. Hudson shall make a written offer to each dissenter to purchase his shares at a specified price that Hudson determines to be their fair value. Such offer must be given within 7 days immediately following the date of the expiration of the period within which shareholders may give their notices of election to dissent, or within 7 days immediately following the date on which the merger is put into effect, whichever is later.
If Hudson and the dissenter fail, within 30 days immediately following the date on which the offer is made, to agree on the price to be paid for the shares owned by the dissenter, then within 20 days:
(a) | Hudson and the dissenter shall each designate an appraiser; |
(b) | the two designated appraisers together shall designate an appraiser; |
(c) | the three appraisers shall fix the fair value of the shares owned by the dissenter as of the close of business on the day prior to the date of the meeting or the date on which the resolution was passed, excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal, and that value is binding on Hudson and the dissenter for all purposes; and |
(d) | Hudson shall pay to the dissenter the amount in money upon the surrender by him of the certificates representing his shares, and such shares shall be cancelled. |
The following is a summary of the material terms of the Merger Agreement. A copy of the Merger Agreement is attached as Annex A to this proxy statement/prospectus and is incorporated by reference into this proxy statement/prospectus. The Merger Agreement has been attached to this proxy statement/prospectus to provide you with information regarding its terms. It is not intended to provide any other factual information about Hudson, Purchaser, Merger Sub or Fr8Hub.Fr8App. The following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement. You should refer to the full text of the Merger Agreement for details of the Merger and the terms and conditions of the Merger Agreement.
The Merger Agreement contains representations and warranties that Hudson and Merger Sub, on the one hand, and Fr8Hub,Fr8App, on the other hand, have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the Merger Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Merger Agreement. While Hudson and Fr8HubFr8App do not believe that these disclosure schedules contain information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Merger Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about Hudson or Fr8Hub,Fr8App, because they were made as of specific dates, may be intended merely as a risk allocation mechanism between Hudson and Merger Sub, and Fr8HubFr8App and are modified by the disclosure schedules.
Merger; Merger Consideration
Upon the Closing of the Transactions contemplated in the Merger Agreement (and in accordance with the plan of merger and articles of merger), Hudson will be merged with and into Purchaser, its wholly-owned subsidiary, in accordance with the BVI Act and the DGCL (the “Redomestication Merger”). As a result of the Redomestication Merger, the separate existence of Hudson shall cease, and Purchaser will continue as the surviving corporation incorporated in the State of Delaware. Immediately following the effective time of the Redomestication Merger, Merger Sub will merge with and into Fr8Hub,Fr8App, resulting in Fr8HubFr8App becoming aan indirect wholly-owned subsidiary of Purchaser.
At the Effective Time, by virtue of the Merger without any further action on the part of the parties to the Merger Agreement, the following shall occur:
● | each share of | |
● | each share of each series of | |
● | each warrant of | |
● | each option of |
No certificates or scrip representing fractional shares of Purchaser Common Stock will be issued pursuant to the Merger. Immediately after the Effective Time, the Fr8HubFr8App stockholders will own approximately 85.7% of Purchaser (on a non-diluted basis) and the shareholders of Hudson will own approximately 14.3% of Purchaser (on a non-diluted basis).
Contingent Merger Consideration
After the Closing, the Fr8HubFr8App stockholders shall be entitled to receive additional shares of Purchaser based upon the achievement of certain revenue thresholds in the amount of at least $25 million, $50 million and $100 million commencing with each of the calendar years ending on December 31, 2021, December 31, 2022 and December 31, 2023, respectively. For each period if the revenue threshold is achieved, the Fr8HubFr8App stockholders shall receive (on a pro rata basis) 3.33% of the shares of Purchaser Common Stock on a fully-diluted basis as of the last day of the applicable calendar year-end (the “Contingent Merger Consideration Shares”). If, after the Closing and prior to December 31, 2023, a change of control occurs, then Purchaser shall issue on or promptly after the date of such change of control, to the Fr8HubFr8App stockholders an amount equal to 10% of the shares of Purchaser Common Stock on a fully diluted basis less the Contingent Merger Consideration Shares previously issued.
Purchaser’s Post-Closing Board of Directors
In connection with the Merger, all directors of Purchaser shall resign, and the post-closing board of directors of Purchaser shall consist of fivefour directors, all of which onewhom shall be designated by PurchaserPurchaser; and Hudson shall have the remaining directors shall be designated by Fr8Hub.right to designate an observer on the Combined Company’s board of directors.
Stockholder Approval
Prior to the consummation of the Transactions contemplated by the Merger Agreement, the holders of a majority of the voting power of Hudson ordinary shares present in person or by proxy and entitled to vote and voting at a special meeting of the holders of its ordinary share must approve the Transactions, provided there are present in person or by proxy not less than 50% of the votes of the shares entitled to vote on at the meeting.
On November 6, 2020, PX Global, a Hudson shareholder owning approximately 40% of the voting power in Hudson entered into a Support Agreement with Fr8HubFr8App and Hudson pursuant to which the shareholder agreed to vote in favor of the Transactions contemplated by the Merger Agreement at the Meeting.
The Fr8HubFr8App stockholders holding a majority of the shares of common stock entitled to vote shall be required to approve the Merger. The holders of Fr8Hub’sFr8App’s Preferred Stock shall vote together with the holders of Fr8Hub’sFr8App’s common stock as a single class and on an as-converted common stock basis.
Representations and Warranties
In the Merger Agreement, Fr8HubFr8App makes certain representations and warranties (with certain exceptions set forth in the disclosure schedule to the Merger Agreement) relating to, among other things: (a) proper corporate organization of Fr8HubFr8App and its subsidiaries and similar corporate matters; (b) authorization, execution, delivery and enforceability of the Merger Agreement and other transaction documents; (c) absence of conflicts; (d) capital structure; (e) accuracy of charter and governing documents; (f) affiliate transactions; (g) required consents and approvals; (h) financial information; (i) absence of certain changes or events; (j) title to assets and properties; (k) material contracts; (l) insurance; (m) licenses and permits; (n) compliance with laws, including those relating to foreign corrupt practices and money laundering; (o) ownership of intellectual property; (p) employment and labor matters; (q) taxes and audits; (r) environmental matters; (s) brokers and finders; and (t) other customary representations and warranties.
In the Merger Agreement, Hudson makes certain representations and warranties relating to, among other things: (a) proper corporate organization and similar corporate matters; (b) authorization, execution, delivery and enforceability of the Merger Agreement and other transaction documents; (c) brokers and finders; (d) capital structure; (e) validity of share issuance; (f) Nasdaq listing; and (g) SEC filing requirements.
Conduct Prior to Closing; Covenants
The Merger Agreement contains certain customary covenants of Fr8HubFr8App and Hudson, including, among others, the following:
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Conditions to the Closing of the Merger
General Conditions
The obligation of Hudson and Fr8HubFr8App to consummate the Merger is conditioned on, among other things, (a) the absence of the provisions of any applicable law or order shall prohibiting or imposing any condition on the consummation of the Closing; (b) the absence of action by a third-party non-Affiliate seeking to enjoin or otherwise restrict the consummation of the Closing; (c) the consummation of Redomestication Merger and filing of the applicable certificates in the appropriate jurisdictions; (d) declaration by the SEC of the effectiveness of the registration statement; (e) no stop order suspending the effectiveness of the registration statement or any part thereof shall have been issued; (f) the appointment of the post-Closing board of directors and (f) the Merger and the other transaction contemplated by the Merger Agreement shall have been approved by NASDAQ and Hudson’s stockholders.
Hudson’s Conditions to Closing
The obligations of Hudson to consummate the Transactions, in addition to the conditions described above, are conditioned upon, among other things, each of the following:
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● | No court, arbitrator or other authority shall have issued any judgment, injunction, decree or order, or have pending before it a proceeding for the issuance of any thereof, and there shall not be any provision of any applicable law restraining or prohibiting the consummation of the Closing, or the effective operation of | |
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● | The requisite shareholders of Hudson shall have approved the Transactions in accordance with the provisions of Hudson’s organizational documents and BVI Law. | |
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Fr8Hub’s Fr8App’s Conditions to Closing
The obligations of Fr8HubFr8App to consummate the transactions contemplated by the Merger Agreement, in addition to the conditions described above in the first paragraph of this section, are conditioned upon, among other things, each of the following:
● | ||
● | The | |
● | Hudson shall be in compliance with all applicable rules of NASDAQ. | |
● | Purchaser shall have adopted an option plan in form and substance satisfactory to |
Indemnification
From and after the Closing, Purchaser has agreed to indemnify and hold harmless the Fr8HubFr8App Indemnitees against and in respect of any and all Losses incurred by Fr8HubFr8App as a result of or in connection with any breach, inaccuracy or nonfulfillment of any of the representations, warranties and covenants of Hudson, Purchaser and Merger Sub set forth in the Merger or any certificate or other document delivered pursuant to the terms of the Merger Agreement.
From and after the Closing, Fr8HubFr8App has agreed to indemnify and hold harmless Hudson, Purchaser, Merger Sub, each of its Affiliates and each of its and their respective members, managers, partners, directors, officers, employees, stockholders, attorneys and agents and permitted assignees (the “Purchaser Indemnitees”), against and in respect of any and all Losses incurred or sustained by any Purchaser Indemnitee as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties and covenants of Fr8HubFr8App contained in the Merger Agreement or any certificate or other document delivered pursuant to the terms of the Merger Agreement.
Twenty percent of Hudson shares of capital stock issued and outstanding immediately after the effective time of the Merger (“Reserved Shares”), will be reserved to serve as the Company Indemnitees’ and the Purchaser Indemnitees’ sole and exclusive remedies for such parties’ obligation to indemnify each other under the Merger Agreement.
Notwithstanding anything in the Merger Agreement to the contrary:
● | ||
● | Any liability incurred by the | |
● | Neither of (i) neither the Purchaser Indemnitees nor the |
The indemnification to which each of the Company Indemnitees and Purchase Indemnitees is entitled pursuant to the Merger Agreement for Losses, expect for those related to a breach of Purchaser’s representations and warranties contained in Section 6.1 (Corporate Existence and Power), Section 6.2 (Corporate Authorization), and Section 6.5 (Finders’ Fees) of the Merger Agreement (“Purchaser Fundamental Representations”), shall be effective so long as a claim is asserted prior to the expiration of the twelve (12) month anniversary of the Closing Date (the “Survival Period”); provided, that in the event that any indemnification notice shall have been given by Fr8HubFr8App in accordance with the provisions of the Merger Agreement (each, an “Indemnification Notice”) prior to the expiration of the Survival Period and such claim has not been finally resolved by the expiration of the Survival Period, the representations, warranties, covenants, agreements or obligations that are the subject of such Indemnification Notice shall survive solely for purposes of resolving such claim until such matters are finally resolved. The indemnification to which the Company Indemnitees is entitled pursuant to a breach of the Purchaser Fundamental Representations for Losses shall be effective so long as a claim is asserted prior to the expiration 90 days post the applicable statute of limitation.
Termination
The Merger Agreement may be terminated and/or abandoned at any time prior to the closing by:
● | ||
● | ||
● | by |
● | Hudson, if |
● | the Company, if Hudson shall have breached any representation, warranty, agreement or covenant contained in the Merger Agreement to be performed on or within fifteen (15) days following receipt by |
In connection with the termination of the Merger Agreement, Hudson and Purchaser or Fr8HubFr8App may be required to pay a $500,000 breakup fee (a “Breakup Fee”). under certain circumstances pursuant to which they terminated the agreement.
Fr8Hub Fr8App would be required to pay a Breakup Fee to Hudson in the event that Hudson or Purchaser terminates the Merger Agreement as result of an uncured material breach by Fr8HubFr8App or the Stockholders of any representation, warranty, agreement or covenant contained in the Merger Agreement or as a result of Fr8Hub’sFr8App’s refusal to consummate the transactions contemplated by the Merger Agreement.
Hudson would be required to pay a Breakup Fee to Fr8HubFr8App in the event that Fr8HubFr8App terminates the Merger Agreement as result of an uncured material breach by Hudson or Purchaser of any representation, warranty, agreement or covenant contained in the Merger Agreement.
AGREEMENTS RELATED TO THE MERGER
2020 Bridge Financing
On October 7, 2020, Fr8HubFr8App entered into a Note Purchase Agreement with certain existing shareholders and investors pursuant to which Fr8HubFr8App issued 2020 Bridge Notes in the aggregate principal amount of $4,004,421 in a 2020 Bridge Financing. All 2020 Bridge Notes will mature on the date that is two years from the closing date of the 2020 Bridge Financing. Interest on the 2020 Bridge Notes will accrue at an annual rate of 5% over the two-year term of the 2020 Bridge Notes and is payable by Fr8HubFr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the 2020 Bridge Notes by Fr8HubFr8App or, (iv) in connection with any conversion of the 2020 Bridge Notes through the issuance of shares of the capital stock of Fr8HubFr8App in exchange for accrued and unpaid interest owing at the time of conversion. Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the 2020 Bridge Notes will automatically convert into the Series A3 Preferred Stock and Series A3A3-1 Warrants issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 50% of the corresponding purchase price in the Pre-Merger Financing. As the lead investor in the 2020 Bridge Financing, ATW’s affiliate, ATW Opportunities was granted the right of first refusal to participate in up to 50% of the aggregate principal amount to be raised by Fr8HubFr8App in any equity or equity-linked financing (except for the Pre-Merger Financing) occurring in the five years following the initial closing of the 2020 Bridge Financing pursuant to the Note Purchase Agreement.
January Bridge Financing
On January 29, 2021, Fr8App entered into the January Bridge Note Purchase Agreement with ATW Opportunities pursuant to which Fr8App issued the January Bridge Note. The January Bridge Note matures on October 7, 2022. Interest on the January Bridge Note accrues at an annual rate of 5% over the term and is payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the January Bridge Note by Fr8App, or, (iv) in connection with any conversion of the January Bridge Note through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The January Bridge Note is convertible into Conversion Shares at the option of ATW Opportunities pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the January Bridge Note will automatically convert into Series A3 Preferred Stock and Series A3-2 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 20% discount to the corresponding purchase price in the Pre-Merger Financing.
May Bridge Financing and July Bridge Financing
On May 24, 2021, Fr8App entered into the May Bridge Note Purchase Agreement with ATW and ATW Opportunities pursuant to which Fr8App issued May Bridge Notes in the aggregate principal amount of $1,608,842 between May and July 2021. Pursuant to the July Note Purchase Amendment, Fr8App issued to ATW Opportunities the July Bridge Note in the principal amount of $1,000,000 on July 30, 2021. The May Bridge Notes and the July Bridge Note will mature on October 7, 2022. Interest on the May Bridge Notes and the July Bridge Note will accrue at an annual rate of 5% over the maturity period and will be payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment by Fr8App or, (iv) in connection with any conversion through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The May Bridge Notes and the July Bridge Note will be convertible into Conversion Shares at the option of the holders pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the May Bridge Notes and the July Bridge Note will automatically convert into the Series A3 Preferred Stock and Series A3-3 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 25% discount to the corresponding purchase price in the Pre-Merger Financing.
Pre-Merger Financing
Concurrently
On February 9, 2021, Fr8App entered into a Securities Purchase Agreement (the “SPA”) with or prior to the Merger, Fr8Hub shall have raised gross proceeds totaling $12,013,262, which shall include the cancellation of the Bridge Notes, and which such cash portion of the proceeds shall be used by the Combined Company for working capital purposes following the Merger in a Pre-Merger Financing. As currently contemplated, ATW’s affiliate, ATW Opportunities, together with certain existing stockholders of Fr8Hub shall enter into a SPAFr8App (including ATW), pursuant to which Fr8HubFr8App shall agree to sell to the Investorsinvestors (the “Investors”) a newly designated series of preferred stock, the Series A3 preferred stock (the “Series A3 Preferred Stock”), in a private placement for $8,008,841 in aggregate gross proceeds, excluding principal and accrued and unpaid interest relating to 2020 Bridge Notes that convert at the closing of the Pre-Merger Financing. With respect to principal and accrued and unpaid interest relating to the January Bridge Note, the May Bridge Notes and the July Bridge Note, ATW and ATW Opportunities have the option to elect for all or a portion of such converting principal and accrued and unpaid interest to reduce amounts that ATW and ATW Opportunities are otherwise committed to fund in cash in respect of Series A3 Preferred Stock at the closing of the Pre-Merger Financing. If and to the extent ATW and/or ATW Opportunities exercise this option, the $8,008,841 in aggregate gross proceeds expected to be received by Fr8App would be correspondingly reduced on a private placement. Fr8Hubdollar-for-dollar basis by the amount of converted principal and accrued and unpaid interest under the January Bridge Note, the May Bridge Notes and the July Bridge Note with respect to which such option is exercised (the “Opt Out Option”). Assuming full exercise of the Opt Out Option, ATW and/or ATW Opportunities’ commitment to fund in cash under the SPA at the closing of the Pre-Merger Financing will be reduced by $3,634,137, and the Exchange Ratio will be increased to approximately 1:1.40279. For additional details, see “Unaudited Pro Forma Condensed Combined Financial Information.”
The SPA, as amended, contemplates the conversion of the 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note into Series A3 Preferred Stock, and the subsequent cancellation of the notes. Immediately prior to the closing of the Merger, Fr8App shall issue ____12,616,726 shares of Series A3 Preferred Stock to Investors, Chardan and converting holders of 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note. Such shares of Series A3 Preferred Stock shall initially be convertible into Fr8App common stock on a one-to-one basis, determined by calculating the quotient determined by dividing (x) the stated value of $3.00 per share, by (y) a conversion price of $3.00, which conversion price (the “Conversion Price”) is subject to adjustment as described elsewhere in this proxy statement/prospectus. The 12,616,726 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 55,914,267 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 55,914,267 shares of Combined Company common stock. However, only 15,975,505 shares of Series A3 Preferred Stock of the Combined Company will be initially convertible into common stock of the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining shares of Series A3 Preferred Stock of the Combined Company will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the VWAP of the Combined Company’s common stock during specified periods following the closing of the Merger. Pursuant to the Certificate of Designation of the Combined Company’s Series A3 Preferred Stock, for purposes of determining such price protection adjustments the VWAP will not be calculated to be less than $0.8571 per share. As a result, the maximum number of shares of Combined Company common stock issuable upon adjustment, if any, would be 55,914,267 shares.
The initial such upward adjustment in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the four trading days immediately following the date of the closing of the Merger. Thereafter, such additional upward adjustments in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the ten trading days immediately preceding the Trigger Date. Following the 120th trading day immediately following the closing date of the Merger, the number of Conversion Shares issuable upon conversion of the 55,914,267 shares of Combined Company Series A3 Preferred Stock will no longer be subject of any further adjustment. For the purpose of calculating the number of shares of the Series A3 Preferred Stock to be issued in connection with the Pre-Merger Financing (and, accordingly, other values and amounts that relate to, or are calculated based upon, the number of shares of Series A3 Preferred Stock actually issued by Fr8App to Investors and converting note holders under the SPA), all such share numbers disclosed in this proxy statement/prospectus have been calculated based on the assumption that the Opt Out Option will not be exercised, and that therefore, there will be no reduction on the amounts that ATW or ATW Opportunities are committed to fund in cash under the SPA at the closing of the Pre-Merger Financing.
In addition, Hudson has a post-closing obligation to cause the Combined Company to issue afour series of warrants (Series A3, Series A3 WarrantA3-1, Series A3-2 and Series A3-3) to purchase 7,272,561an aggregate of 15,975,505 shares of the Combined Company common stock for $8,008,841 in gross proceeds.stock. The sharesterms and conditions of Fr8Hub common stock underlyingeach series depends upon which of the Series A3 Preferred Stock are referred to asforegoing financings is the “Conversion Shares” and underlying the Series A3 Warrant are referred to as the “Warrant Shares.” Each share of Series A3 Preferred Stock is convertible into a number of shares of Fr8Hub common stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $____.
Escrow Shares
The SPA will also providebasis for the issuance of up to 18,181,402 Escrow Shares upon the closing ofwarrant. For further details about the Pre-Merger Financing, pursuantplease see “Agreements Related to the terms of an escrow agreement to be held by Transhare Corporation, as escrow agent, for the benefit of the Investors. In accordance with, and pursuant to the terms of the Merger Agreement, at the closing of the Merger, each Escrow Share shall be cancelled and automatically converted into the right to receive, without interest, the Applicable Per Share Merger Consideration of the Combined Company, which shall be referred to herein as the “Escrow Exchange Shares.Merger—Pre-Merger Financing”
The Escrow Exchange Shares are issuable to the Investors over time in two or more tranches upon the occurrence of the following events:
Notwithstanding the foregoing, in the event that the aggregate Subsequent Escrow Exchange Shares issuable to all of the Investors is greater than the balance of the Escrow Exchange Shares following the First Escrow Share Issuance Obligation and each prior Subsequent Escrow Share Issuance Obligation, if any, then each Investor shall receive its pro rata portion of the Escrow Exchange Shares then available for issuance. Upon full issuance of the Escrow Shares, ATW (and its affiliates) and Fr8Hub stockholders will hold approximately 43.6% and 28.6% of the Combined Company, respectively.
Right of Participationthis proxy statement/prospectus.
Pursuant to the terms of the SPA, the Investors purchasing Series A3 Preferred Stock with a Stated Value of $4.0 million or greater have a right, commencing on the date of the SPA until five years thereafter, to participate in any subsequent financing by the Company or the Combined Company, as applicable, of common stock or common stock equivalents for cash consideration, indebtedness or a combination of units thereof (a “Subsequent Financing”),Subsequent Financing in an amount equal to 50% of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing.
The Warrants
Series A3
Four series of Warrants (Series A3, Series A3-1, Series A3-2 and Series A3-3) will be issued after the closing of the Merger, the terms and conditions of each series depends upon which of the foregoing financings is the basis for the issuance of the warrant.
The Series A3 Warrants will be delivered in connection with the purchase of securities for cash under the SPA. The Series A3 Warrants are exercisable intofor 7,272,561 shares of Combined Company Common Stock for a period of seven years through _____, 202_after issuance, at an exercise price equal to $____$1.50 per share, and are subject to customary adjustments for stock splits, dividend,dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Combined Company undertakes a subsequent equity financing or financingsSubsequent Financing at an effective price per share that is less than $_____,$1.50, the exercise price of the Series A3 Warrants shall be reduced to the lower priceprice.
The Series A3-1 Warrants will be delivered in connection with the conversion and the number of shares issuable upon exercisecancellation of the 2020 Bridge Notes in the Pre-Merger Financing. The Series A3A3-1 Warrants shall be adjusted suchare exercisable for 5,529,252 shares of Combined Company Common Stock for a period of seven years after issuance, at an exercise price equal to $0.75 per share, and are subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Combined Company undertakes a Subsequent Financing at an effective price per share that is less than $0.75, the aggregate exercise price of the Series A3A3-1 Warrants following such adjustmentshall be reduced to the lower price.
The Series A3-2 Warrants will be delivered in connection with the conversion and cancellation of the January Bridge Note in the Pre-Merger Financing. The Series A3-2 Warrants are initially exercisable for 849,772 shares of Combined Company Common Stock for a period of seven years after issuance, at an exercise price equal to $1.20 per share, and are subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Combined Company undertakes a Subsequent Financing at an effective price per share that is less than $1.20, the exercise price is equalof the Series A3-2 Warrants shall be reduced to the aggregate exercise prior to such adjustment. The Series A3 Warrants will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of, the shares underlying the Series A3 Warrants.lower price.
The Series A3A3-3 Warrants have a “Beneficial Ownership Limitation” equal to 4.99%will be delivered in connection with the conversion and cancellation of the number ofMay Bridge Notes and July Bridge Note in the Pre-Merger Financing. The Series A3-3 Warrants are initially exercisable for 2,323,921 shares of the Combined Company Common Stock outstanding immediatelyfor a period of seven years after giving effectissuance, at an exercise price equal to $1.125 per share, and are subject to customary adjustments for stock splits, dividends, rights offerings, pro rata distributions and fundamental transactions. In addition, in the issuance of shares of Common Stock issuable uponevent the Combined Company undertakes a Subsequent Financing at an effective price per share that is less than $1.125, the exercise price of the Series A3 Warrants. An Investor, upon noticeA3-3 Warrants shall be reduced to the Combined Company, may increaselower price.
In the event of an Adjustment Date, the Exercise Price shall be reduced, and only reduced, on each Adjustment Date to the lesser of (a) the then Exercise Price, as adjusted, and (b) the Initial Trigger Date Conversion Price, with respect to the Initial Trigger Date, or decrease the Beneficial Ownership Limitation, as provided for in the Series A3 Warrants.applicable Trigger Date Conversion Price, with respect to each applicable Trigger Date.
Each series of Warrants:
· | has a “Beneficial Ownership Limitation” equal to 4.99% of the number of shares of the Combined Company Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of the applicable Warrant. An Investor, upon notice to the Combined Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Warrants; and | |
· | will be exercisable on a “cashless” basis only in the event there is no effective registration statement registering, or the prospectus contained therein is not available for the sale of, the shares underlying the Warrants. |
Registration Rights
It is also contemplated thatOn February 9, 2021, the Purchaser and Fr8Hub shall enterthe Investors entered into twoa registration rights agreements,agreement, whereby Purchaser shallagreed to file a registration statement onthe Pre-Merger Form S-1 to register for resale the Conversion Shares along with at least 50% of the Escrow Shares and shares held by Hudson’s affiliate, PX Global, that shall be declared effective prior toon the Closing Date (the “Pre-Merger Form S-1”).Date. Purchaser and Fr8HubFr8App have agreed to prepare and file the Pre-Merger Form S-1 no later than ten daysas soon as practicable after the completionexecution of Fr8Hub’s financial statements for the September 30, 2020 quarterly period.SPA. The Pre-Merger Form S-1 must be declared effective by the 60th day following filing or, in the event the SEC notifies Purchaser that it will “review” the Pre-Merger Form S-1, 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 60thcalendar day following the date on which an additional registration statement is required to be filed thereunder.
The second registration statement on
A Post-Closing Form S-1 shall be filed by the Combined Company to register for resale the Warrant Shares, the balance of the Escrow Shares that were not registered on the Pre-Merger Form S-1, if any, and(A) up to 21,644,0567,281,751 shares of Merger Consideration that have not been registered on the Pre-Merger Form S-1, or on the registration statement for which this prospectus/proxy statement forms a part, consisting of (i) 1,150,755969,747 shares of Combined Company Common Stock underlying the A2 Warrant, (ii) 1,252,1341,055,180 shares of Combined Company Common Stock underlying the A2 Preferred Stock, (iii) 6,085,6964,798,660 shares of Combined Company Common Stock underlying the A1-A Preferred Stock, (iv) 543,682458,164 shares of Combined Company Common Stock underlying the A1-B Preferred Stock, (v) 5,339,228and (B) 15,975,505 shares of Combined Company Common Stock underlying the warrants to be issued in the Bridge Financing, and (vi) 7,272,561 shares of Combined Company Common Stock underlying the Series A3 Warrants (the “Post-Closing Form S-1”).Pre-Merger Financing.
The Post-Closing Form S-1 must be filed no later than the 15th calendar day following the Closing Date and, with respect to any additional registration statements which may be required pursuant the Registration Rights Agreement, the earliest practical date on which the Combined Company is permitted by SEC guidance to file such additional registration statements related to the securities to be registered on the Post-Closing Form S-1. The Post-Closing Form S-1 must be declared effective by the 60th day following filing or, in the event the SEC notifies Purchaser that it will “review” the Post-Closing Form S-1, the 75th 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.
Failure to timely file or have the Pre-Closing Form S-1 or the Post-Closing Form S-1, be declared effective by the dates set forth above, including, without limitation failure to keep the Pre-Closing Form S-1 or the Post-Closing Form S-1 effective or, after the dates of effectiveness, such registration statements cease for any reason to remain continuously effective as to all securities included in such registration statements, or the Investors are otherwise not permitted to utilize the prospectus therein to resell, for more than ten (10) consecutive calendar days or more than an aggregate of fifteen (15) calendar days (which need not be consecutive calendar days) during any 12-month period, then, in addition to any other rights the Holder (as defined under the registration statement) may have under such registration statements or applicable law, on each such date and on each monthly anniversary of each such date (if not been cured by such date) until such event is cured, the Combined Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 2.0% multiplied by the aggregate purchase price paid by such Holder pursuant to the SPA. If the Combined Company fails to pay any partial liquidated damages pursuant to the applicable Registration Rights Agreement in full within seven days after the date payable, the Combined Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms thereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an event.
Lock-Up and Leak-Out Agreements
In connection with the Transactions, Hudson is expected to enter into Lock-Up and Leak-Out Agreements with all Fr8HubFr8App stockholders ,owning 3% or greater of the capital stock on a fully diluted basis, pursuant to which Fr8HubFr8App stockholders, for up to 180 daysone year after the closing of the Transactions and subject to certain exceptions, will agree not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of the Purchaser Common Stock issued in connection with the Merger, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of such shares, whether any of these transactions are to be settled by delivery of any such shares, in cash, or otherwise. However, notwithstanding the foregoing, Fr8Hubthese Fr8App stockholders will be able to sell under the Leak-Out Agreement for 180 days after the closing of the Merger any Purchaser Common Stock issued in exchange for the shares obtained from the Bridge Financing or the Pre-Merger Financing for up to 22% of the average daily trading volume of Purchaser Common Stock on the NASDAQ stock exchange.
Support Agreement
On November 6, 2020, PX Global, a Hudson shareholder owning approximately 40% of the voting power in Hudson entered into a Support Agreement with Fr8HubFr8App and Hudson pursuant to which the shareholder agreed to vote in favor of the transactions contemplated by the Merger Agreement at the Meeting.
MATTERS BEING SUBMITTED TO A VOTE OF HUDSON STOCKHOLDERS
THE MERGER PROPOSAL
The discussion in this proxy statement/prospectus of the Transactions and the principal terms of the Merger Agreement, is subject to, and is qualified in its entirety by reference to, the Merger Agreement. The full text of the Merger Agreement and the Plan of Merger is attached hereto as Annex A, which is incorporated by reference herein.
Overview
The Merger Agreement was entered into by and among Hudson, the Purchaser, Merger Sub, Fr8HubFr8App and certain other parties on October 10, 2020. Upon the terms and subject to the conditions of the Merger Agreement, and as promptly as practicable following the Redomestication Merger, Merger Sub shall be merged with and into Fr8HubFr8App in accordance with the DGCL. Upon the Merger, the separate corporate existence of Merger Sub shall cease and Fr8HubFr8App shall continue as the surviving corporation under Delaware law and as aan indirect wholly-owned subsidiary of Purchaser.
The Merger
Pursuant to the Merger Agreement, the capital stock of Fr8Hub,Fr8App, comprising of the Fr8HubFr8App Common Stock and the Fr8HubFr8App Preferred Stock issued and outstanding immediately prior to the Effective Time shall be canceled and automatically converted into the right to receive, without interest, a certain amount of shares of a corresponding class of Purchaser shares based on the Applicable Per Share Merger Consideration (as defined in the Merger Agreement). At the Effective Time, warrants to purchase shares of a particular class of Fr8HubFr8App shares that are issued and outstanding immediately prior to the Effective Time shall be canceled and automatically converted into the right to receive, without interest, an equivalent number of Purchaser warrants, as adjusted to take into effect the Merger, to purchase shares of a corresponding class of Purchaser Common Stock or Purchaser Preferred Stock, as the case may be. At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, Merger Sub, or Fr8Hub,Fr8App, the 2018 Plan and any Fr8HubFr8App option shall be terminated and all Fr8HubFr8App options not exercised prior to the Effective Time shall be cancelled and automatically converted into the right to receive an equivalent number of Purchaser options, as adjusted to take into effect the Merger, to purchase shares of Purchaser Common Stock.
After giving effect to the Transactions, the former Fr8HubFr8App shareholders will hold approximately 85.7% of the outstanding shares of Purchaser Common Stock (on a non-diluted basis), and the shareholders of Hudson will retain ownership of approximately 14.3% of the outstanding shares of Purchaser Common Stock (on a non-diluted basis).
Escrowed Amount
Fr8HubFr8App shall pay to Hudson and/or its designees on behalf of Hudson a total of $1,750,000, of which $175,000 was paid upon signing of the Merger Agreement, and the balance shall be paid at the Closing of the Merger. Hudson has deposited $175,000 (the “Escrowed Amount”) into an escrow account upon signing of the Merger Agreement, which shall be released back to Hudson and/or its designees at Closing if the Transaction is consummated. However, in the event the Merger Agreement is terminated by Fr8HubFr8App as a result of Hudson’s material breach of any of its covenants, agreements, representations and warranties contained in the Merger Agreement, or as a result of Hudson’s refusal to consummate the transactions in breach of the Merger Agreement, the Escrowed Amount shall be released to Fr8Hub.Fr8App.
Breakup Fee
If the Merger Agreement is terminated under certain circumstances and certain events occur, Hudson or Fr8HubFr8App will be required to pay the other party a breakup fee of $500,000.
What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting.
Unless marked otherwise, proxies received will be voted FOR Proposal No. 1.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE MERGER PROPOSAL.
THE REDOMESTICATION MERGER PROPOSAL
Overview
Upon the terms and subject to the conditions set forth in the Merger Agreement, Hudson will be merged with and into Purchaser, its wholly-owned subsidiary, in accordance with the BVI Act and the DGCL. As a result of this merger, which we refer to as the “Redomestication Merger,” the separate existence of Hudson shall cease, and Purchaser will continue as the surviving corporation incorporated in the State of Delaware. Following the Redomestication Merger, Purchaser, (i) shall possess all of Hudson’s and Purchaser’s assets, rights, powers and property as constituted immediately prior to the Redomestication Merger; (ii) shall continue to be subject to all of Hudson’s and Purchaser’s debts, liabilities and obligations as constituted immediately prior to the Redomestication Merger; (iii) shall be subject to all actions previously taken by the board of directors of Hudson and Purchaser prior to the Redomestication Merger; and (iv) each issued and outstanding ordinary share of Hudson shall be deemed converted into one fully paid and non-assessable share of common stock, $0.0001 par value per share of Purchaser (the “Purchaser Common Stock”). Purchaser’s name will be changed to “Freight Technologies, Inc.” as part of the Redomestication Merger.
Purpose of the Redomestication Merger Proposal
The purpose of the Redomestication Merger is to establish a Delaware corporation as the parent entity of Fr8Hub.Fr8App. As a result of the Redomestication Merger, the Hudson shareholders will no longer be shareholders of Hudson and (other than a shareholder who dissents to the Merger (the “Dissenting Shareholders”) will become stockholders of Purchaser. The principal reasons for the Redomestication Merger are to give Purchaser the greater flexibility of Delaware corporate law and the substantial body of case law interpreting that law. Hudson believes that its shareholders will benefit from the well-established principles of corporate governance that Delaware law affords. Also, Fr8HubFr8App is a Delaware corporation and requires the redomestication for these reasons and based on its favorable experience with Delaware corporate law. The Redomestication Merger is a condition to consummation of the merger and will be completed immediately prior to the merger.
Redomestication Merger
In connection with the Redomestication Merger, each Hudson ordinary share, issued and outstanding immediately prior to the effective time of the Redomestication Merger (other than any Dissenting Shares), will automatically be cancelled and cease to exist and for each Hudson ordinary share, Purchaser shall issue to each Hudson shareholder (other than the Dissenting Shareholders) one validly issued share of Purchaser Common Stock, which, unless explicitly stated herein, shall be fully paid.
Each Dissenting Share held by a Dissenting Shareholder (who has not effectively withdrawn its right to such dissent) will be cancelled in exchange for the right to receive payment resulting from the procedure in Section 179 of the BVI Act and such Dissenting Shareholders will not be entitled to receive any shares of the Purchaser Common Stock to be issued in connection with the Redomestication Merger.
Differences in Shareholder Rights
Upon completion of the Redomestication Merger, the rights of Hudson shareholders will be governed by the Purchaser’s certificate of incorporation, as amended and restated, the Purchaser bylaws, as amended and restated, and applicable Delaware law. While there will be substantial similarities between their rights after the Redomestication Merger and their rights as Hudson shareholders prior to the Redomestication Merger, there will be some differences.
The following discussion is a summary of material changes in our rights resulting from the redomestication, but does not cover all the differences between the BVI Act and DGCL affecting corporations and their shareholders or all the differences between Purchaser’s Certificate of Incorporation and bylaws and Hudson’s Amended and Restated Memorandum and Articles of Association. Please read the complete text of the relevant provisions of the BVI Act, the DGCL, Purchaser’s Certificate of Incorporation and bylaws and Hudson’s Memorandum and Articles of Association. Forms of Purchaser’s Certificate of Incorporation and bylaws are attached to this proxy statement/prospectus as Annexes B and C, respectively.
Shareholder Approval of Future Business Combinations
Purchaser
Under the DGCL, a merger or consolidation involving the corporation, a sale, lease, exchange or other disposition of all or substantially all of the property of the corporation, or a dissolution of the corporation, is generally required to be approved by the holders of a majority of the shares entitled to vote on the matter, unless the charter provides otherwise. In addition, mergers in which an acquiring corporation owns 90% or more of each class of stock of a corporation may be completed without the vote of the acquired corporation’s board of directors or shareholders.
Unless the certificate of incorporation of the surviving corporation provides otherwise, Delaware law does not require a shareholder vote of the surviving corporation in a merger if: (i) the merger agreement does not amend the existing certificate of incorporation, (ii) each share of stock of the surviving corporation outstanding immediately before the transaction is an identical outstanding share after the merger; and (iii) either (x) no shares of common stock of the surviving corporation (and no shares, securities or obligations convertible into such stock) are to be issued in the merger; or (y) the shares of common stock of the surviving corporation to be issued in the merger (including shares issuable upon conversion of any other shares, securities or obligations to be issued in the merger) do not exceed 20% of the shares of common stock of the surviving corporation outstanding immediately prior to the transaction.
Hudson
Under the BVI Act, 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 shareholders (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 articles of association so provide or if the plan of merger or consolidation contains any provisions that, if contained in a proposed amendment to the memorandum and articles of association, would entitle the class to vote on the proposed amendment as a class) or 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, consolidation or plan of merger, containing certain prescribed details. The plan of merger 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 association 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.
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 association 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 association of any surviving company are automatically amended to the extent, if any, that changes to its amended memorandum and articles of association 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 previously except in so far as the laws of the other jurisdiction otherwise provide.
Appraisal Rights
Purchaser
Under the DGCL, a shareholder of a corporation does not have appraisal rights in connection with a merger or consolidation, if, among other things:
● the corporation’s shares are listed on a national securities exchange or held of record by more than 2,000 shareholders; or
● the corporation will be the surviving corporation of the merger, and no vote of its shareholders is required to approve the merger.
Notwithstanding the above, a shareholder is entitled to appraisal rights in the case of a merger or consolidation effected under certain provisions of the DGCL if the shareholder is required to accept in exchange for the shares anything other than:
● shares of stock of the corporation surviving or resulting from the merger or consolidation; or
● shares of stock of any other corporation that on the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 shareholders.
Hudson
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 Hudson. As such, if those who control the Combined 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 Hudson are perpetrating a “fraud on the minority.”
Share Repurchases and Redemptions
Purchaser
A Delaware corporation may purchase or redeem shares of any class except when its capital is impaired or would be impaired by the purchase or redemption. A corporation may, however, purchase or redeem out of capital its own shares that are entitled upon any distribution of its assets to a preference over another class or series of its shares, or, if no shares entitled to such a preference are outstanding, any of its own shares, if such shares will be retired upon their acquisition and the capital of the corporation reduced.
Hudson
As permitted by the BVI Act and subject to Hudson’s memorandum and articles of association, shares may be repurchased, redeemed or otherwise acquired by Hudson 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, Hudson directors may need to determine that, immediately following the redemption or repurchase, Hudson will be able to satisfy its debts as they fall due and the value of its assets exceeds its liabilities. Hudson directors may only exercise this power on its 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 NASDAQ Global Market or any other stock exchange on which Hudson’s securities are listed.
Indemnification of Directors
Purchaser
Delaware law generally permits a corporation to indemnify its insiders against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, other than an action brought by or on behalf of the corporation, and against expenses actually and reasonably incurred in the defense or settlement of a derivative action, provided that there is a determination that the individual acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation. That determination must be made, in the case of an individual who is a director or officer at the time of the determination:
● by a majority of the disinterested directors, even though less than a quorum;
● by a committee of disinterested directors, designated by a majority vote of disinterested directors, even though less than a quorum;
● by independent legal counsel, if there are no disinterested directors or if the disinterested directors so direct; or
● by a majority vote of the shareholders, at a meeting at which a quorum is present.
Without court approval, however, no indemnification may be made in respect of any derivative action in which an individual is adjudged liable to the corporation.
Delaware law requires indemnification of directors and officers for expenses relating to a successful defense on the merits or otherwise of a derivative or third-party action. Delaware law permits a corporation to advance expenses relating to the defense of any proceeding to directors and officers. With respect to officers and directors, the advancement of expenses is contingent upon those individuals undertaking to repay any advances if it is ultimately determined that such person is not entitled to be indemnified by the corporation.
Purchaser’s certificate makes indemnification of directors and officers and advancement of expenses to defend claims against directors and officers mandatory on the part of Purchaser to the fullest extent permitted by law.
Hudson
In accordance with, and subject to, Hudson’s memorandum and articles of association (including the limitations detailed therein), Hudson 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 Hudson; or (b) is or was, at the request of Hudson, 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.
In accordance with, and subject to, the memorandum and articles of association (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 Hudson 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 Hudson 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 of association, 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 Hudson or that the person had reasonable cause to believe that his conduct was unlawful.
In accordance with, and subject to, our memorandum and articles of association, Hudson may purchase and maintain insurance in relation to any person who is or was a director, officer or liquidator of Hudson, or who at the request of Hudson 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 Hudson has or would have had the power to indemnify the person against the liability as provided in the articles of association.
What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the Redomestication Merger Proposal requires the affirmative vote of the holders of a majority of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting.
Unless marked otherwise, proxies received will be voted FOR Proposal No. 2.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE REDOMESTICATION PROPOSAL.
THE AMENDED AND RESTATED COI PROPOSAL
Overview
The following is a summary of the principal provisions of the amended and restated certificate of incorporation (the “Proposed Charter”), that will be adopted by the Purchaser shortly before completion of the Transactions. This summary is qualified by reference to the complete text of the Proposed Charter, a copy of which is attached to this proxy statement/prospectus as Annex B. All shareholders are encouraged to read the proposed charter in its entirety for a more complete description of its terms.
Corporate name. The Proposed Charter provides that the name of Hudson Capital Merger Sub I Inc. will be “Freight Technologies Inc.”
Authorized shares. The Proposed Charter will authorize 200,000,000400,150,000 shares, consisting of (i) 100,000,000 shares of preferred stock, par value $0.0001 per share, (ii) 150,000 shares of non-voting common stock, par value $0.0001 per share, and 100,000,000(iii) 300,000,000 shares of common stock, par value $0.0001 per share.
Dividends. Purchaser shall not declare, pay or set aside any dividends on shares of any class or series of its capital stock (other than dividends on shares of Purchaser Common Stock payable in shares of Purchaser Common Stock) unless the holders of the Series A Preferred Stock then outstanding shall simultaneously receive with the holders of Purchaser Common Stock and Series Seed Preferred Stock like dividends on an as-converted-to-Common Stock basis.
Limitation on Beneficial Ownership. To the extent that the conversion of any Purchaser Preferred Stock by a stockholder will result in such stockholder, together with its affiliate(s), beneficially owning in excess of 4.99% (or upon the election by such stockholder prior to the issuance of any Purchaser Preferred Stock, 9.99%) (the “Maximum Percentage”) of the shares of Purchaser Common Stock outstanding immediately after giving effect to such conversion, the number of shares in excess of the Maximum Percentage (the “Excess Shares”) shall be deemed null and void and shall be cancelled, and such holder of Purchaser Preferred stock shall not have the power to vote or transfer the Excess Shares.
Directors Election. The holders of record of the shares of Common Stock and of any other class or series of voting stock, (including the Series Seed Preferred Stock and the Series A Preferred Stock), voting together as a single class, shall be entitled to elect the directors of the Purchaser. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares entitled to elect such director shall constitute a quorum for the purpose of electing such director.
Indemnification of Directors. The Proposed Charter will make indemnification of directors and officers and advancement of expenses to defend claims against directors and officers mandatory on the part of Purchaser to the fullest extent permitted by law.
Liquidation, Dissolution or Winding Up. In theevent of any voluntary or involuntary liquidation, dissolution or winding up of Purchaser or any Deemed Liquidation Event (as defined below), all distributions or proceeds available for Purchaser stockholders will be distributed to all stockholders pari passu and pro rata based on the number of shares held by each stockholder (on an as-converted to Purchaser Common Stock basis). Certain mergers, consolidations, and asset sales and similar business combination transactions constituting a change of control of Purchaser and/or sale of Purchaser or substantially all of its assets shall be considered a “Deemed Liquidation Event.”
Required vote to amend the Proposed Charter.Section 3.3 of the Proposed Charter will require that at any time when shares of Series A Preferred Stock are outstanding, Purchaser shall not amend the Proposed Charter or Purchaser’s bylaws in any manner that is adverse to or negatively affects the rights of any class of Series A Preferred Stock without written consent or an affirmative vote of at least a majority of the then outstanding shares of Series A2 Preferred Stock voting together as a single class, which must include ATW.
Except as provided in Section 3.3 regarding the vote required to amend the Proposed Charter, the Proposed Charter may be amended by the affirmative vote of the holders of at least a majority of the total voting power of all the then-outstanding shares of stock of Purchaser entitled to vote generally in the election of directors, voting together as a single class.
Required vote to amend the bylaws. Subject to any additional vote required in Section 3.3 of the Proposed Charter, Purchaser’s Board of Directors will be expressly authorized to make, repeal, alter, amend and rescind any or all of the Purchaser’s bylaws.
Waiver of corporate opportunities. In the Proposed Charter, Purchaser explicitly waives corporate opportunities for the non-employee directors and any holder of Series A Preferred Stock, unless such opportunity is presented to, or acquired, created or developed by such person expressly and solely in such person’s capacity as a director of the Purchaser while such person is performing services in such capacity. Any repeal or modification of this provision of the Proposed Charter will require an affirmative vote of the holders of at least a majority of the shares of Series A2 Preferred Stock then outstanding (voting as a single class).
Exclusive Forum. The Proposed Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will with certain limited exceptions, be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of the Purchaser, (b)Combined Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the PurchaserCombined Company to the PurchaserCombined Company or the Purchaser’sCombined Company’s stockholders, (c)(iii) any action asserting a claim against the Purchaser,Combined Company, its directors, officers or employees arising pursuant to any provision of the DGCL or the charterCombined Company’s certificate of incorporation or bylaws or (d)(iv) any action asserting a claim against the Purchaser,Combined Company, its directors, officers or employees governed by the internal affairs doctrine. Subject to the provisionsdoctrine, except in each case for certain limited exceptions as set forth in the preceding sentence, theProposed Charter. The federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint, claim or proceeding asserting a cause of action arising under the Exchange Act orand the Securities Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in the Proposed Charter.
The choice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Purchaser or its directors, officers or other employees, and may result in increased costs to a stockholder who has to bring a claim in a forum that is not convenient to the stockholder, which may discourage such lawsuits. Although under Section 115 of the DGCL, exclusive forum provisions may be included in a company’s certificate of incorporation, the enforceability of similar forum provisions in other companies’ certificates or incorporation or bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the exclusive forum provision of our Proposed Charter inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.
The following table sets forth a summary of the material changes proposed to be made between Hudson’s existing memorandum and articles of association and Purchaser’s Proposed Charter:
Provision | Memorandum and Articles of Association (BVI) | Proposed Charter (DE) | ||
Name | The name of the company is Hudson Capital Inc. | The name of the Purchaser is Freight Technologies, Inc. | ||
Authorised Shares | The company is authorized to issue an unlimited number of shares of a single | The Purchaser is authorized to issue | ||
Issue of Shares | The company may issue fractional shares, and a fractional share shall have the corresponding fractional rights, obligations and liabilities of a whole share of the same class or series of shares. | The Purchaser may not issue any fractional shares. | ||
Amendments to Organizational documents | Amendments to Hudson’s memorandum and articles of association may be made by resolution of directors or resolution of the shareholders; provided that no amendment may be made resolution of directors; (a) to restrict the rights and powers of the shareholders to amend the memorandum and articles of association; (b) to change the percentage of shareholders required to pass a resolution of shareholders or amend the memorandum and articles of association; or (c) in circumstances where the memorandum and articles of association cannot be amended by the shareholders. | Section 3.3 of the Proposed Charter will require that at any time when shares of Series A Preferred Stock are outstanding, Purchaser shall not amend the Proposed Charter or Purchaser’s bylaws in any manner that is adverse to or negatively affects the rights of any class of Series A Preferred Stock without written consent or an affirmative vote of at least a majority of the then outstanding shares of Preferred Stock voting together as a single class, which must include ATW. Except as provided in Section 3.3 regarding the vote required to amend the Proposed Charter, the Proposed Charter may be amended by the affirmative vote of the holders of at least a majority of the total voting power of all the then-outstanding shares of stock of Purchaser entitled to vote generally in the election of directors. | ||
Voting Rights | Each holder of ordinary shares is entitled to one vote per share on all matters before the holders of such shares. | Each holder of Voting Common Stock is entitled to one vote for each share of Common Stock held at all meeting of stockholders. Each holder of the whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote shall vote together with the holders of Common Stock as a single class and on an as-converted to Common Stock basis. | ||
Alternation of Share Rights | The rights conferred upon the holders of the shares of any class may be altered with the consent in writing of the holders of a majority of the issued shares of that class or by a resolution approved at a duly convened meeting of the shares of that class by the affirmative vote of a majority of the votes of the shares of that class which were present at the meeting and were voted. | At any time when shares of Series A Preferred Stock are outstanding, Purchaser shall not amend the Proposed Charter or Purchaser’s bylaws in any manner that is adverse to or negatively affects the rights of any class of Series A Preferred Stock without written consent or an affirmative vote of at least a majority of the then outstanding shares of Preferred Stock voting together as a single class, which must include ATW. | ||
Distributions | Directors of the company may authorize a distribution by way of dividend at a time and of an amount they think fit. | Purchaser shall not declare, pay or set aside any dividends on shares of any class or series of its capital stock (other than dividends on shares of Purchaser Common Stock payable in shares of Purchaser Common Stock) unless the holders of the Series A Preferred Stock then outstanding shall simultaneously receive with the holders of Purchaser Common Stock and Series Seed Preferred Stock like dividends on an as-converted-to-Common Stock basis. | ||
Directors – Election/Appointment | Under the memorandum and articles of association, the directors may be elected by resolution of shareholders or directors. | The holders of record of the shares of Common Stock shall be entitled to elect the directors of the Purchaser. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares entitled to elect such director shall constitute a quorum for the purpose of electing such director. | ||
Limit on ownership | The company has no limit on ownership by any one shareholder. | To the extent that the conversion of any Purchaser Preferred Stock by a stockholder will result in such stockholder, together with its affiliate(s), beneficially owning in excess of 4.99% (or upon the election by such stockholder prior to the issuance of any Purchaser Preferred Stock, 9.99%) (the “Maximum Percentage”) of the shares of Purchaser Common Stock outstanding immediately after giving effect to such conversion, the number of shares in excess of the Maximum Percentage (the “Excess Shares”) shall be deemed null and void and shall be cancelled, and such holder of Purchaser Preferred stock shall not have the power to vote or transfer the Excess Shares. | ||
Director Indemnity | The provision for director indemnity 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 of the believe that their conduct was unlawful. | To the fullest extent permitted by applicable law, the Purchaser is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Purchaser (and any other persons to which General Corporation Law permits the Purchaser to provide indemnification), in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law. | ||
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What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the Amended and Restated COI Proposal requires the affirmative vote of the holders of a majority of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting.
Unless marked otherwise, proxies received will be voted FOR Proposal No. 3.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE AMENDED AND RESTATED COI PROPOSAL.
THE DISPOSITION PROPOSAL
Overview
As part of the Merger, Hudson intends to consolidate and spin off its existing subsidiaries and business of providing financial advisory services, commercial payment advisory services, international corporate financing advisory services and intermediary bank loan advisory services in China. We are proposing the Disposition Proposal so the Hudson Board of Directors can be authorized, and appoint any committees as it may wish, to consider, determine and effect the Disposition on terms to be determined at their sole and absolute discretion.
What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the Disposition Proposal requires the affirmative vote of the holders of a majority of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.
Unless marked otherwise, proxies received will be voted FOR Proposal No. 4.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE DISPOSITION PROPOSAL.
THE DIRECTORS PROPOSAL
Upon the Effective Time, the Combined Company’s Board of Directors will consist of fivefour members who will have terms that expire at the annual meeting of stockholders of the Combined Company, or in each case until their respective successors are duly elected and qualified, or until their earlier resignation, removal or death.
Upon completion of the Merger, the board of directors of the Combined Company will be comprised of Hon Man Yun, a director designated by Hudson, and Fr8Hub’sFr8App’s current directors who are Javier Selgas, Nicholas H. Adler, Juan Manuel TrujilloWilliam Samuels and Jerry L. Hutter.
Ho Man Yun is currently Hudson’s Chief Financial Officer. Prior Pursuant to his joiningthe Merger Agreement, Hudson in August 2020, Mr. Yun washas the Chief Financial Officeroption to designate an observer on the board of Kiwa Bio-tech Products Group Corporate, an OTC market-listed company from April 2018. From May 2017 through August 2020, he also held various positions with Kaisun Energy Group Limited, a Hong Kong GEM company ranging from Group VP & Compliance and Internal Audit Officer to Group VP & Chief Accountant and Joint Secretary. From December 2014 through May 2017, he was an associate at China Merchants Securities (Hong Kong) Co., Limited and from March 2013 through September 2014, he was the Financial Comptroller at E Lighting Group Limited, another Hong Kong GEM company. From September 2007 through December 2014, he was a corporate consultant to Smart Pine Investment Limited. From January 2008 through April 2010, he was the Chief Operating Officer and Treasurer at China INSOnline Corp., a NASDAQ-listed company. Mr. Yun holds a Master of Business Administration (2007) from the University of Western Sydney, a Higher Diploma in Business Studies (1988 - 1991) from the City Polytechnic of Hong Kong and a Diploma in Accountancy (1986 - 1988) from Morrison Hill Technical Institute. He is currently a Fellow Memberdirectors of the Chartered Accountant, The Institute of Chartered Accountants in England & Wales, a Fellow Member of The Chartered Association of Certified Accountants and a Member of The Hong Kong Institute of Certified Public Accountants.Combined Company.
For information on Fr8HubFr8App directors’ business and professional experiences, see the sections titled “Information About Fr8HubFr8App — Executive Officers of Fr8HubFr8App” ” and “Management Following the Merger” of this proxy statement/prospectus.
If the Merger Proposal and each of the other proposals contained in this proxy statement/prospectus upon which it is conditioned are approved, each of Hudson’s existing directors will resign from the Hudson Board of Directors upon the Closing. See the section titled “Management Following the Merger” of this proxy statement/prospectus for more information.
What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the Directors Proposal requires the affirmative vote of the majority of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting.
Unless marked otherwise, proxies received will be voted FOR Proposal No. 5.4.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE DIRECTORS PROPOSAL UNDER PROPOSAL NO. 54.
The NASDAQ PROPOSAL: APPROVAL OF THE ISSUANCE OF MORE THAN 20% OF THE ISSUED AND OUTSTANDING SHARES OF PURCHASER’S COMMON STOCK
Overview
We are proposing the Nasdaq Proposal in order to comply with Nasdaq Listing Rules 5635(a), (b) and (d). Under Nasdaq Listing Rule 5635(a), stockholder approval is required prior to the issuance of securities in connection with the acquisition of another company if such securities are not issued in a public offering and (A) have, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of common stock (or securities convertible into or exercisable for common stock); or (B) the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the stock or securities. Under Nasdaq Listing Rule 5635(b), stockholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control. Under Nasdaq Listing Rule 5635(d), stockholder approval is required for a transaction other than a public offering involving the sale, issuance or potential issuance by an issuer of common stock (or securities convertible into or exercisable for common stock) at a price that is less than the lower of (i) the closing price immediately preceding the signing of the binding agreement or (ii) the average closing price of the common stock for the five trading days immediately preceding the signing of the binding agreement, if the number of shares of common stock (or securities convertible into or exercisable for common stock) to be issued equals to 20% or more of the common stock, or 20% or more of the voting power, outstanding before the issuance.
Merger Consideration and Contingent Merger Consideration
Pursuant to the Merger Agreement, each share of Fr8App common stock issued and outstanding immediately prior to the Effective Time shall be canceled and automatically converted into the right to receive, without interest, an estimated 1.26622 shares of Purchaser Common Stock. Upon the Closing and based on the number of Fr8HubFr8App shares, warrants and options outstanding as of December 29, 2020,the date of this prospectus, the stockholders of Fr8App shall receive at Closing in the closing ofaggregate, the Merger, Fr8Hub stockholders will receive Merger Consideration consisting of:following (i) 1,930,769850,658 shares of Purchaser Common Stock, (ii) 18,29415,416 shares of Purchaser Series Seed Preferred Stock, (iii) 11,657,3639,823,722 shares of Purchaser Series A1-A Preferred Stock, (iv) 4,473,9423,770,215 shares of Purchaser Series A1-B Preferred Stock, (v) 2,143,9701,806,734 shares of Purchaser Series A2 Preferred Stock, (vi) the Purchaser Warrants to purchase 13,59811,459 shares of Purchaser Common Stock, 10,8559,147 shares of Purchaser Series Seed Preferred Stock and 1,150,755969,747 shares of Purchaser Series A2 Preferred Stock, (vii) 791,183 shares of Series A4 Preferred Stock, and (vii)(viii) options to purchase 1,009,4544,413,088 shares of Purchaser Common Stock.Stock (the “Merger Consideration”).
After the Closing of the Merger, the Fr8HubFr8App stockholders shall be entitled to receive additional shares of Purchaser based upon the achievement of certain revenue thresholds in the amount of at least $25 million, $50 million and $100 million commencing with each of the calendar years ending on December 31, 2021, December 31, 2022 and December 31, 2023, respectively. For each such period, if the revenue threshold is achieved, the Fr8HubFr8App stockholders shall receive (on a pro rata basis) 3.33% of the shares of Purchaser Common Stock on a fully-diluted basis as of the last day of the applicable calendar year-end (the “Contingent Merger Consideration Shares”). If, after the Closing and prior to December 31, 2023, a change of control occurs, then Purchaser shall issue on or promptly after the date of such change of control, to the stockholders an amount equal to 10% of the shares of Purchaser Common Stock on a fully diluted basis less the Contingent Merger Consideration Shares previously issued. The Merger Consideration, together with the Contingent Merger Consideration, in the aggregate would exceed 20% of the voting power or the total shares outstanding on a pre-transaction basis.
2020 Bridge Financing
On October 7, 2020, Fr8HubFr8App entered into a Note Purchase Agreement with certain existing shareholders and investors pursuant to which Fr8HubFr8App issued 2020 Bridge Notes in the aggregate principal amount of $4,004,421 in a 2020 Bridge Financing. All 2020 Bridge Notes will mature on the date that is two years from the closing date of the 2020 Bridge Financing. Interest on the 2020 Bridge Notes will accrue at an annual rate of 5% over the two-year term of the 2020 Bridge Notes and is payable by Fr8HubFr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the 2020 Bridge Notes by Fr8HubFr8App or, (iv) in connection with any conversion of the 2020 Bridge Notes through the issuance of shares of the capital stock of Fr8HubFr8App in exchange for accrued and unpaid interest owing at the time of conversion. Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the 2020 Bridge Notes will automatically convert into the Series A3 Preferred Stock and A3 Warrants issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 50% of the corresponding purchase price in the Pre-Merger Financing. As the lead investor in the 2020 Bridge Financing, ATW’s affiliate, ATW Opportunities. was granted the right of first refusal to participate in up to 50% of the aggregate principal amount to be raised by Fr8HubFr8App in any equity or equity-linked financing (except for the Pre-Merger Financing) occurring in the five years following the initial closing of the 2020 Bridge Financing pursuant to the Note Purchase Agreement.
January Bridge Financing
On January 29, 2021, Fr8App entered into a Convertible Note Purchase Agreement with ATW Opportunities (the “January Bridge Note Purchase Agreement”) pursuant to which Fr8App issued a bridge note (the “January Bridge Note”) in the principal amount of $1,000,000 (the “January Bridge Financing”). The January Bridge Note matures on October 7, 2022. Interest on the January Bridge Note will accrue at an annual rate of 5% over the maturity period and is payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the January Bridge Note by Fr8App or, (iv) in connection with any conversion of the January Bridge Note through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The January Bridge Note is convertible into Conversion Shares at the option of ATW Opportunities pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the January Bridge Note will automatically convert into the Series A3 Preferred Stock and Series A3 Warrants (defined below) issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 20% discount to the corresponding purchase price in the Pre-Merger Financing.
May Bridge Financing and July Bridge Financing
On May 24, 2021, Fr8App entered into a May Bridge Note Purchase Agreement with ATW and ATW Opportunities pursuant to which Fr8App issued May Bridge Notes in the aggregate principal amount of $1,608,842 between May and June 2021. Pursuant to the July Note Purchase Amendment, Fr8App issued to ATW Opportunities the July Bridge Note in the principal amount of $1,000,000 on July 30, 2021. The May Bridge Notes and the July Bridge Note will mature on October 7, 2022. Interest on the May Bridge Notes and the July Bridge Note will accrue at an annual rate of 5% over the maturity period and will be payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment by Fr8App or, (iv) in connection with any conversion through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The May Bridge Notes and the July Bridge Note will be convertible into Conversion Shares at the option of the holders pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the May Bridge Notes and the July Bridge Note will automatically convert into the Series A3 Preferred Stock and Series A3-3 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 25% discount to the corresponding purchase price in the Pre-Merger Financing.
Pre-Merger Financing
ConcurrentlyOn February 9, 2021, Fr8App entered into a Securities Purchase Agreement (the “SPA”) with or prior to the Merger, Fr8Hub shall have raised gross proceeds totaling $12,013,262, which shall include the cancellation of the Bridge Notes, and which such cash portion of the proceeds shall be used by the Combined Company for working capital purposes following the Merger in a Pre-Merger Financing. As currently contemplated, ATW’s affiliate, ATW Opportunities, together with certain existing stockholders of Fr8Hub shall enter into a SPAFr8App (including ATW), pursuant to which Fr8HubFr8App shall agree to sell to the Investorsinvestors (the “Investors”) a newly designated series of preferred stock, the Series A3 preferred stock (the “Series A3 Preferred Stock”), in a private placement for $8,008,841 in aggregate gross proceeds, excluding principal and accrued and unpaid interest relating to 2020 Bridge Notes that convert at the closing of the Pre-Merger Financing. With respect to principal and accrued and unpaid interest relating to the January Bridge Note, the May Bridge Notes and the July Bridge Note, ATW and ATW Opportunities have the option to elect for all or a portion of such converting principal and accrued and unpaid interest to reduce amounts that ATW and ATW Opportunities are otherwise committed to fund in cash in respect of Series A3 Preferred Stock at the closing of the Pre-Merger Financing. If and to the extent ATW and/or ATW Opportunities exercise this option, the $8,008,841 in aggregate gross proceeds expected to be received by Fr8App would be correspondingly reduced on a private placement. Fr8Hubdollar-for-dollar basis by the amount of converted principal and accrued and unpaid interest under the January Bridge Note May Bridge Notes and the July Bridge Note with respect to which such option is exercised (the “Opt Out Option”). Assuming full exercise of the Opt Out Option, ATW and/or ATW Opportunities’ commitment to fund in cash under the SPA at the closing of the Pre-Merger Financing will be reduced by $3,634,137, and the Exchange Ratio will be increased to approximately 1:1.40279. For additional details, see “Unaudited Pro Forma Condensed Combined Financial Information.”
The SPA, as amended, contemplates the conversion of the 2020 Bridge Notes, the January Bridge Note, the May Bridge Notes and the July Bridge Note into Series A3 Preferred Stock, and the subsequent cancellation of the notes. Immediately prior to the closing of the Merger, Fr8App shall issue ____12,616,726 shares of Series A3 Preferred Stock to Investors, Chardan and converting holders of 2020 Bridge Notes, the January Bridge Note, May Bridge Notes and the July Bridge Note. Such shares of Series A3 Preferred Stock shall initially be convertible into Fr8App common stock on a one-to-one basis, determined by calculating the quotient determined by dividing (x) the stated value of $3.00 per share, by (y) a conversion price of $3.00, which conversion price (the “Conversion Price”) is subject to adjustment as described elsewhere in this proxy statement/prospectus. The 12,616,726 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 55,914,267 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 55,914,267 shares of Combined Company common stock. However, only 15,975,505 shares of Series A3 Preferred Stock of the Combined Company will be initially convertible into common stock of the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining shares of Series A3 Preferred Stock of the Combined Company will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the VWAP of the Combined Company’s common stock during specified periods following the closing of the Merger. Pursuant to the Certificate of Designation of the Combined Company’s Series A3 Preferred Stock, for purposes of determining such price protection adjustments the VWAP will not be calculated to be less than $0.8571 per share. As a result, the maximum number of shares of Combined Company common stock issuable upon adjustment, if any, would be 55,914,267 shares.
The initial such upward adjustment in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the four trading days immediately following the date of the closing of the Merger. Thereafter, such additional upward adjustments in the number of Conversion Shares issuable upon conversion of Combined Company Series A3 Preferred Stock may be made based on the VWAP over the ten trading days immediately preceding the Trigger Date. Following the 120th trading day immediately following the closing date of the Merger, the number of Conversion Shares issuable upon conversion of the 55,914,267 shares of Combined Company Series A3 Preferred Stock will no longer be subject of any further adjustment. For the purpose of calculating the number of shares of the Series A3 Preferred Stock to be issued in connection with the Pre-Merger Financing (and, accordingly, other values and amounts that relate to, or are calculated based upon, the number of shares of Series A3 Preferred Stock actually issued by Fr8App to Investors and converting note holders under the SPA), all such share numbers disclosed in this proxy statement/prospectus have been calculated based on the assumption that the Opt Out Option will not be exercised, and that therefore, there will be no reduction on the amounts that ATW or ATW Opportunities are committed to fund in cash under the SPA at the closing of the Pre-Merger Financing.
In addition, Hudson has a post-closing obligation to cause the Combined Company to issue afour series of warrants (Series A3, Series A3 WarrantA3-1, Series A3-2 and Series A3-3) to purchase 7,272,561an aggregate of 15,975,505 shares of the Combined Company common stock for $8,008,841 in gross proceeds.stock. The sharesterms and conditions of Fr8Hub common stock underlyingeach series depends upon which of the Series A3 Preferred Stock are referred to asforegoing financings is the “Conversion Shares” and underlying the Series A3 Warrant are referred to as the “Warrant Shares.” Each share of Series A3 Preferred Stock is convertible into a number of shares of Fr8Hub common stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $____.
Escrow Shares
The SPA will also providebasis for the issuance of up to 18,181,402 Escrow Shares pursuant to the terms of an escrow agreement to be held by Transhare Corporation, as escrow agent, for the benefit of the Investors. In accordance with, and pursuant to the terms of the Merger Agreement, at the closing of the Merger, each Escrow Share shall be cancelled and automatically converted into the right to receive, without interest, the Applicable Per Share Merger Consideration of the Combined Company, which shall be referred to herein as the “Escrow Exchange Shares.”
The Escrow Exchange Shares are issuable to the Investors over time in two or more tranches upon the occurrence of certain events.
Because these issuances will represent more than of 20% of the issued and outstanding shares of Purchase Common Stock pursuant to the terms of the Merger Agreement and in connection with the Pre-Merger Financing, we are required to obtain stockholder approval in order to comply with NASDAQ Listing Rules 5635(a), (b) and (d).
warrant.
Effect of The NASDAQ Proposal on Current Shareholders
If the NASDAQ Proposal is adopted, Hudson would issue shares representing more than 20% of its outstanding Common Stock in connection with the Merger and the Pre-Merger Financing. The issuance of such shares would result in significant dilution to Purchaser stockholders and would afford Hudson shareholders a smaller percentage interest in the voting power, liquidation value and aggregate book value of Hudson. If the NASDAQ Proposal is adopted, Fr8HubFr8App stockholders will hold approximately 85.7% of the outstanding shares of Purchaser Common Stock (on a non-diluted basis), and the Hudson shareholders will retain ownership of approximately 14.3% of the outstanding shares of Purchaser Common Stock (on a non-diluted basis) immediately following the completion of the Transactions,
If the NASDAQ Proposal is not approved and we consummate the Transactions on their current terms, Hudson would be in violation of NASDAQ Listing Rules 5635(a) and (b) and potentially NASDAQ Listing Rule 5635 (d), which could result in the delisting of our securities from The NASDAQ Stock Market, LLC. If the NASDAQ Stock Market, LLC delists our securities from trading on its exchange, we could face significant material adverse consequences. It is a condition to Hudson’s obligation to close the Transactions that Hudson’s shares remain listed on The NASDAQ Stock Market, LLC. As a result, if the NASDAQ Proposal is not adopted, the Transactions may not be completed, and the Merger will not proceed.
If NASDAQ delists our securities from trading on its exchange, we could face significant material adverse consequences, including:
● | a limited availability of market quotations for our securities; | |
● | reduced liquidity with respect to our securities; | |
● | a determination that our shares are a “penny stock,” which will require brokers trading in our securities to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; | |
● | a limited amount of news and analyst coverage for the Combined Company; and | |
● | a decreased ability to issue additional securities or obtain additional financing in the future. |
What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the NASDAQ Proposal requires the affirmative vote of a majority of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting.
Unless marked otherwise, proxies received will be voted FOR Proposal 6.5.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE FOR THE APPROVAL OF THE NASDAQ PROPOSAL.
THE EQUITY PLAN PROPOSAL:
APPROVAL OF THE FREIGHT TECHNOLOGIES, INC. 2021 EQUITY INCENTIVE PLAN
Overview
The Hudson Board of Directors is asking its stockholders to approve the proposed Freight Technologies, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), that will be effective at the closing of the Transactions. The following summary of the 2021 Plan is qualified in its entirety by the complete text of the 2021 Plan contained in Annex D. For the purposes of this Proposal 7, please note that certain references to Purchaser and shares of Purchaser Common Stock, will mean the Combined Company and the shares of common stock of the Combined Company, assuming the Transactions are approved. Hudson and Fr8HubFr8App have agreed to adopt the 2021 Plan and have it approved by the Hudson shareholders now, so that it will be in place and effective for awards by the Combined Company immediately upon the Closing of the Transactions.
Purpose of the 2021 Plan
On [●], 2020,2021, the Hudson Board of Directors approved the 2021 Plan for submission to the stockholders at the Meeting, to be effective upon consummation of the Transactions, provided that it is approved by the Hudson shareholders. The Hudson Board of Directors is seeking to reserve 5,000,000 shares of the Combined Company’s Common Stock for issuance pursuant to the 2021 Plan. Equity compensation is an important component of the future executive, employee and director compensation programs of the Combined Company. We believe it aligns employee and director compensation with shareholder interests and motivates participants to achieve long-range goals. Shareholder approval of the 2021 Plan would permit shares of Purchaser Common Stock to be awarded as employee incentive compensation, allowing the Combined Company’s board of directors to attract and retain key employees, provide them competitive compensation, adapt to evolving compensation practices and account for the Combined Company’s growth. Upon shareholder approval, awards to participants will be made pursuant to the 2021 Plan. We are seeking shareholder approval to make shares of the Combined Company’s Common Stock available for future grants under the 2021 Plan as described below.
As described more generally above, the purpose of the 2021 Plan is to:
● | attract and retain persons eligible to participate in the 2021 Plan; | |
● | motivate eligible individuals to whom awards under the 2021 Plan will be granted, who we refer to as the “Participants,” by means of appropriate incentives, to achieve long-range goals; | |
● | provide incentive compensation opportunities that are competitive with those of other similar companies; and | |
● | further align Participants’ interests with those of our other shareholders through compensation that is based on shares of Common Stock. |
The 2021 Plan promotes the long-term financial interest of the Combined Company and its subsidiaries, including the growth in value of the Combined Company’s equity and enhancement of long-term stockholder return.
The Combined Company will use equity-based compensation granted under its long-term incentive plans as a key element of its executives’ compensation packages, and each year it will disclose the prior year grants to and other compensation of its named executive officers in its proxy statement. The 2021 Plan will assist with linking the Combined Company’s executives’ overall compensation opportunities to the enhancement of long-term stockholder return.
The 2021 Plan provides for the grant of non-qualified stock options, incentive stock options, restricted stock awards, restricted stock units, unrestricted stock awards and/or any combination of the foregoing. The flexibility inherent in the 2021 Plan permits the Combined Company’s Board of Directors to change the type, terms and conditions of awards as circumstances may change. This flexibility and the resulting ability to more affirmatively adjust the nature and amounts of executive compensation are particularly important, given the volatility of the public markets and reactions to economic and world events. Equity compensation, which aligns the interests of executives and our stockholders, is an important tool for the Combined Company’s Board of Directors.
General Terms of the 2021 Plan
The 2021 Plan will be administered by the compensation committee of the Combined Company’s Board of Directors (the “Compensation Committee” or the “Committee”), unless otherwise provided by the Combined Company’s Board of Directors. The Committee selects the Participants, the time or times of receipt of awards, the types of awards to be granted and the applicable terms, conditions, performance targets, restrictions and other provisions of such awards, to cancel or suspend awards, and to accelerate the exercisability or vesting of any award under circumstances designated by it. The Committee may delegate all or any portion of its responsibilities or powers under the 2021 Plan to persons selected by it. If the Committee does not exist or for any other reason determined by the Combined Company’s Board of Directors, and to the extent not prohibited by applicable law or the applicable rules of any stock exchange, the Combined Company’s Board of Directors may take any action under the 2021 Plan that would otherwise be the responsibility of the Committee. Subject to the terms of the 2021 Plan, the Committee also has the power to determine whether to offer to repurchase, replace or reprice a previously granted award and the terms and conditions of such offer.
Grant of Awards; Common Stock Available for Awards. The 2021 Plan provides for the grant of awards which are incentive stock options, non-qualified stock options, restricted and unrestricted stock awards, restricted stock unit awards and/or any combination of the foregoing, to employees, non-employee directors, and non-employee consultants of the Combined Company or any of its subsidiaries (however, solely the Combined Company’s employees or employees of the Combined Company’s subsidiaries are eligible for incentive stock option awards). We have reserved a total of 5,000,000 shares of Common Stock for issuance as or under awards to be made under the 2021 Plan. To the extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate, any shares of Common Stock subject to such award shall again be available for the grant of a new award. The 2021 Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Combined Company’s Board of Directors (except as to awards outstanding on that date). The Combined Company’s Board of Directors in its discretion may terminate the 2021 Plan at any time with respect to any shares of Common Stock for which awards have not theretofore been granted; provided, however, that the 2021 Plan’s termination shall not materially and adversely impair the rights of a holder, without the consent of the holder, with respect to any award previously granted. The number of shares for which awards which are options may be granted to a participant under the 2021 Plan during any calendar year is limited to 100,000.
Future new hires, non-employee directors and additional non-employee consultants are eligible to participate in the 2021 Plan as well. The number of awards to be granted to officers, non-employee directors, employees and non-employee consultants cannot be determined at this time, as the grant of awards is dependent upon various factors such as hiring requirements and job performance.
Eligibility
All employees and directors of, and consultants and other persons providing services to, the Combined Company or any of its subsidiaries (or any parent or other related company, as determined by the Committee) are eligible to become Participants in the 2021 Plan, except that non-employees may not be granted incentive stock options.
Options
The Committee may grant an incentive stock option or non-qualified stock option to purchase shares of Common Stock at an exercise price determined by the Committee. Each option shall be designated as an incentive stock option or non-qualified stock option when granted. An incentive stock option is a stock option intended to satisfy additional requirements required by federal tax rules in the United States as specified in the 2021 Plan (and any incentive stock option granted that does not satisfy such requirements shall be treated as a non-qualified stock option).
Except as described below, the exercise price for an option shall not be less than the fair market value of a share of Common Stock at the time the option is granted; provided, that the exercise price of an incentive stock option granted to any employee who owns more than 10 percent of the voting power of all classes of stock in the Combined Company or a subsidiary shall not be less than 110 percent of the fair market value of a share of Common Stock at the time of grant. The exercise price of an option may not be decreased after the date of grant nor may an option be surrendered to the Combined Company as consideration for the grant of a replacement option with a lower exercise price, except as approved by its shareholders or as adjusted for corporate transactions described above. In addition, the aggregate fair market value of the shares subject to an incentive stock option (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year under all plans of the Combined Company and any parent corporation or subsidiary corporation thereof (both as defined in Section 424 of the Code) which provide for the grant of incentive stock options may not exceed $100,000.
The option shall be exercisable in accordance with the terms established by the Committee. In the event the Participant’s termination occurs for any reason other than death, disability, retirement, or involuntary termination without cause, any unvested options will be forfeited. In the event the Participant’s termination occurs due to death, disability, retirement or involuntary termination without cause, any unvested options shall be exercisable only as determined by the Committee in its sole discretion.
The full purchase price of each share of Common Stock purchased upon the exercise of any option shall be paid at the time of exercise of an option in the manner prescribed by the Committee as set forth in the 2021 Plan and the applicable option agreement, which manner, with the consent of the Committee, may include the withholding of shares of Common Stock otherwise issuable in connection with the exercise of the option. The Committee, in its discretion, may impose such conditions, restrictions, and contingencies on shares of Common Stock acquired pursuant to the exercise of an option as the Committee determines to be desirable.
Unless otherwise provided in the option agreement, a vested option will expire on the earliest to occur of (i) the last day of the term of the option as described in the award agreement; (ii) if the Participant’s termination occurs for any reason other than death or disability, 90 days after the termination date, and (iii) if the Participant’s termination occurs by reason of the Participant’s death or disability, the one-year anniversary of such termination date.
Restricted Stock Awards
A restricted stock award is a grant or sale of shares of Common Stock to the holder, some or all of which may be subject to such restrictions on transferability, risk of forfeiture and other restrictions, as the Committee or the combined company’s Board of Directors may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee or the combined company’s Board of Directors may determine at the date of grant or purchase or thereafter. During the restricted period applicable to the restricted stock, subject to certain exceptions, the restricted stock may not be sold, transferred, pledged, exchanged, hypothecated, or otherwise disposed of by the participant.
Restricted Stock Unit Awards
A restricted stock unit award provides for a grant of shares of Common Stock or a cash payment to be made to the holder upon the satisfaction of predetermined individual service-related vesting requirements, based on the number of units awarded to the holder. The Committee shall set forth in the applicable restricted stock unit award agreement the individual service-based vesting requirements which the holder would be required to satisfy before the holder would become entitled to payment and the number of units awarded to the holder. At the time of such award, the Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions. The holder of a restricted stock unit shall be entitled to receive a cash payment equal to the fair market value of an ordinary share, or one (1) share of Common Stock, as determined in the sole discretion of the Committee and as set forth in the restricted stock unit award agreement, for each restricted stock unit subject to such restricted stock unit award, if and to the extent the holder satisfies the applicable vesting requirements. Such payment or distribution shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the calendar year in which the restricted stock unit first becomes vested, unless otherwise structured to comply with Code Section 409A.
Unrestricted Stock Awards
Pursuant to the terms of the applicable unrestricted stock award agreement, an unrestricted stock award is the award or sale of shares of Common Stock to employees, non-employee directors or non-employee consultants, which are not subject to transfer restrictions in consideration for past services rendered to the Combined Company or any of its subsidiaries or for other valid consideration.
Change in Control
A Change in Control (as defined below) shall have such effect on an award as is provided in the applicable award agreement, or, to the extent not prohibited by the 2021 Plan or the applicable award agreement, as provided by the Committee. In the event of a Change in Control, the Committee may cancel any outstanding awards in return for cash payment of the current value of the award, determined with the award fully vested at the time of payment, provided that in the case of an option, the amount of such payment will be the excess of value of the shares of Common Stock subject to the option at the time of the transaction over the exercise price (and the option will be cancelled with no payment if the value of the shares at the time of the transaction are equal to or less than the exercise price).
For the purposes of the 2021 Plan, a “Change in Control” is generally deemed to occur when:
● | any person becomes the beneficial owner of 50% or more of the combined company’s voting stock; | |
● | the consummation of a reorganization, merger, consolidation, acquisition, share exchange or other corporate transaction involving our company where, immediately after the transaction, the post-transaction company’s stockholders immediately prior to the combination hold, directly or indirectly, 50 percent or less of the voting stock of the post-transaction company; |
● | the consummation of any plan of liquidation or dissolution providing for the distribution of all or substantially all of the assets of the Combined Company and its subsidiaries or the consummation of a sale of substantially all of the assets of the Combined Company and its subsidiaries; or | |
● | at any time during any period of two consecutive years, individuals who at the beginning of such period were members of the post-closing Board of Directors, who we refer to as Incumbent Directors, cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the combined company’s stockholders, of each new director was approved by a vote of at least two-thirds of the Incumbent Directors). |
Recapitalization or Reorganization
Subject to certain restrictions, the 2021 Plan provides for the adjustment of shares of Common Stock underlying awards previously granted if, and whenever, prior to the expiration or distribution to the holder of shares of Common Stock underlying an award theretofore granted, the Combined Company shall effect a subdivision or consolidation of our shares of Common Stock or the payment of a stock dividend on shares of Common Stock without receipt of consideration by the Combined Company. If the Combined Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise or satisfaction, as applicable, of a previously granted award, the holder shall be entitled to receive (or entitled to purchase, if applicable) under such award, in lieu of the number of shares then covered by such award, the number and class of shares and securities to which the holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the holder had been the holder of record of the number of shares then covered by such award. The 2021 Plan also provides for the adjustment of shares underlying awards previously granted in the event of changes to the outstanding shares by reason of an extraordinary cash dividend, reorganization, merger, consolidation, combination, split-up, spin-off, exchange or other relevant change in capitalization occurring after the date of the grant of any award, subject to certain restrictions.
Amendment and Termination
The combined company’s Board of Directors may amend or terminate the 2021 Plan at any time, and the combined company’s Board of Directors or the Committee may amend any award granted under the 2021 Plan, but no amendment or termination may adversely affect the rights of any Participant without the Participant’s written consent. The Board of Directors may not make any material amendments to the 2021 Plan without stockholder approval. The 2021 Plan will remain in effect as long as any awards under the 2021 Plan remain outstanding, but no new awards may be granted after the tenth anniversary of the date on which the stockholders approve the 2021 Plan.
United States Income Tax Considerations
The following is a brief description of the U.S. federal income tax treatment that will generally apply to stock option awards under the 2021 Plan based on current U.S. income taxation with respect to Participants who are subject to U.S. income tax. Participants subject to taxation in other countries should consult their tax advisor.
Non-Qualified Options. The grant of a non-qualified option will not result in taxable income to the Participant. Except as described below, the Participant will realize ordinary income at the time of exercise in an amount equal to the excess of the fair market value of the combined company’s shares of common stock acquired over the exercise price for those shares. Gains or losses realized by the Participant upon disposition of such shares will be treated as capital gains and losses, with the basis in such the combined company’s shares of common stock equal to the fair market value of the shares at the time of exercise.
Incentive Stock Options. The grant of an incentive stock option will not result in taxable income to the Participant. The exercise of an incentive stock option will not result in taxable income to the Participant provided that the Participant was, without a break in service, an employee of the Combined Company or a subsidiary during the period beginning on the date of the grant of the option and ending on the date three months prior to the date of exercise (one year prior to the date of exercise if the Participant is “disabled,” as that term is defined in the Internal Revenue Code).
The excess of the fair market value of the Combined Company’s shares of common stock at the time of the exercise of an incentive stock option over the exercise price is an adjustment that is included in the calculation of the Participant’s alternative minimum taxable income for the tax year in which the incentive stock option is exercised. For purposes of determining the Participant’s alternative minimum tax liability for the year of disposition of the shares acquired pursuant to the incentive stock option exercise, the Participant will have a basis in those shares equal to the fair market value of the combined company’s shares of common stock at the time of exercise.
If the Participant does not sell or otherwise dispose of the combined company’s shares of common stock within two years from the date of the grant of the incentive stock option or within one year after the transfer of the combined company’s shares of common stock to the Participant, then, upon disposition of such combined company’s shares of common stock, any amount realized in excess of the exercise price will be taxed to the Participant as capital gain. A capital loss will be recognized to the extent that the amount realized is less than the exercise price.
If the above holding period requirements are not met, the Participant will generally realize ordinary income at the time of the disposition of the shares, in an amount equal to the lesser of (i) the excess of the fair market value of the combined company’s shares of common stock on the date of exercise over the exercise price, or (ii) the excess, if any, of the amount realized upon disposition of the shares over the exercise price. If the amount realized exceeds the value of the shares on the date of exercise, any additional amount will be capital gain. If the amount realized is less than the exercise price, the Participant will recognize no income, and a capital loss will be recognized equal to the excess of the exercise price over the amount realized upon the disposition of the shares.
Restricted Stock. A Participant who receives a restricted stock award generally recognizes ordinary compensation income equal to the excess, if any, of the fair market value of such shares of Common Stock at the time the restriction lapses over any amount paid for the ordinary shares. Alternatively, the Participant may make an election under Section 83(b) of the Code to be taxed on the fair market value of such shares of Common Stock at the time of grant. The Combined Company generally will be entitled to a deduction at the same time and in the same amount as the income that is required to be included by the Participant.
Restricted Stock Units and Unrestricted Stock Awards. A Participant generally does not recognize income on the receipt of a restricted stock unit award or unrestricted stock award until a cash payment or a distribution of shares of Common Stock is received thereunder. At such time, the Participant recognizes ordinary compensation income equal to the excess, if any, of the fair market value of the shares of Common Stock or the amount of cash received over any amount paid therefor, and the Combined Company generally will be entitled to deduct such amount at such time.
Withholding of Taxes. The Combined Company may withhold amounts from Participants to satisfy withholding tax requirements. Except as otherwise provided by the Committee, Participants may satisfy withholding requirements through cash payment, by having the combined company’s shares of common stock withheld from awards or by tendering previously owned combined company’s shares of common stock to the Combined Company to satisfy tax withholding requirements. The combined company’s shares of common stock withheld from awards may be used to satisfy not more than the maximum individual tax rate for the Participant in the applicable jurisdiction for such Participant (based on the applicable rates of the relevant tax authorities, including the Participant’s share of payroll or similar taxes, as provided in tax law, regulations, or the authority’s administrative practices, not to exceed the highest statutory rate in that jurisdiction, even if that rate exceeds the highest rate that may be applicable to the specific Participant).
Change In Control. Any acceleration of the vesting or payment of awards under the 2021 Plan in the event of a change in control in the Combined Company may cause part or all of the consideration involved to be treated as an “excess parachute payment” under the Internal Revenue Code, which may subject the Participant to a 20 percent excise tax and preclude deduction by a subsidiary.
ERISA. The 2021 Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended and is not intended to be qualified under Section 401 of the Internal Revenue Code.
Tax Advice
The preceding discussion is based on U.S. tax laws and regulations presently in effect, which are subject to change, and the discussion does not purport to be a complete description of the U.S. income tax aspects of the 2021 Plan. A Participant may also be subject to state and local taxes in connection with the grant of awards under the 2021 Plan. In addition, if a Participant resides outside the U.S., the Participant may be subject to taxation in other countries. The actual tax implications for any Participant will depend on the legislation in the relevant tax jurisdiction for that Participant and their personal circumstances.
New Plan Benefits
Because benefits under the 2021 Plan will depend on the Committee’s actions and the fair market value of the shares of Common Stock on future dates, it is not possible to determine the benefits that will be received by directors, executive officers and other employees if the 2021 Plan is approved by the Hudson shareholders.
What Happens If Stockholders Do Not Approve This Proposal?
Because of their mutual dependence, if any of the Proposals, save for the Adjournment Proposal, is not approved, then the Merger will not proceed.
Required Vote; Recommendation of the Board of Directors
Approval of the Equity Plan Proposal requires the affirmative vote of the majority of Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting.
Unless marked otherwise, proxies received will be voted FOR Proposal No.7.No.6.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE EQUITY PLAN PROPOSAL.
The ADJOURNMENT PROPOSAL
The adjournment proposal allows Hudson’s Board of Directors to submit a proposal to adjourn the Meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event, based on the tabulated votes, there are not sufficient votes at the time of the Meeting to approve the consummation of the Transactions. In no event will Hudson solicit proxies to adjourn the Meeting or consummate the Transactions beyond the date by which it may properly do so under Delaware law and its Certificate of Incorporation. The purpose of the adjournment proposal would be to provide more time for the Hudson’s stockholders to make purchases of public shares or other arrangements that would increase the likelihood of obtaining a favorable vote on each of the Proposals.
In addition to an adjournment of the Meeting upon approval of an adjournment proposal, Hudson’s Board of Directors is empowered under Delaware law to postpone the meeting at any time prior to the meeting being called to order. In such event, Hudson will issue a press release and take such other steps as it believes are necessary and practical in the circumstances to inform its stockholders of the postponement.
What Happens If Stockholders Do Not Approve This Proposal?
If an adjournment proposal is presented at the Meeting and such proposal is not approved by its stockholders, Hudson’s Board of Directors may not be able to adjourn the Meeting to a later date in the event, based on the tabulated votes, there are not sufficient votes at the time of the Meeting to approve the consummation of the Transactions. In such event, the Transactions would not be completed.
Required Vote; Recommendation of the Board of Directors
Approval of the proposal to adjourn the Meeting, whether or not a quorum is present, requires the affirmative vote of the majority of the shares of the Hudson ordinary shares as of the record date represented in person or by proxy at the Meeting and entitled to vote thereon.thereon and voting. Adoption of the Adjournment Proposal is not conditioned upon the adoption of any of the other Proposals.
Unless marked otherwise, proxies received will be voted FOR Proposal No. 8.7.
THE HUDSON BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HUDSON STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE ADJOURNMENT PROPOSAL.
Our History and Development
Our Major Corporate Milestones
Our 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 (“WFOE”) in the People’s Republic of China with a registered capital of RMB1,000,000 (approximately $150,375.94) on December 31, 2015. WFOE has entered into a series of contractual 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. Sheng Ying Xin was originally incorporated as Ding Zhi Tai Da Investment Management (Beijing) Co. Ltd and later changed its name to Sheng Ying Xin (Beijing) Management Consulting Co., Ltd on February 17, 2016. Ding Zhi Tai Da Investment Management (Beijing) Co. Ltd, as it was then known, was initially incorporated with a registered capital of RMB 45,000,000 (approximately $6,766,917.29). Its registered capital was later increased to RMB 150,000,000(approximately $22,556,390.98) on June 30, 2015 but later reduced to RMB 50,000,000 (approximately $7,518,796.99) on April 25, 2016. 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 a registered capital of RMB 5,000,000 (approximately, $726,665), which capital has to be contributed in full by December 31, 2026. The legal representative of Kashgar SYX is Mr. Shaoyong Huang, who is also a 1% nominee equity shareholder of Sheng Ying Xin on behalf of Mr. Jianxin Lin.
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 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.
Accordingly, the results of operations, assets and liabilities of WFOE and Sheng Ying Xin have been included in the accompanying consolidated financial statements.Because we are a holding company that manages Sheng Ying Xin though a series of contractual arrangements, our consolidated financial statements are essentially those of WFOE’s and Sheng Ying Xin’s as we are conferred their economic benefits.
Hudson’s shareholders do not own shares of Sheng Ying Xin. Instead they hold shares of a shell company issuer that maintains service agreements with an associated operating company. The business of Hudson Capital, Inc. (as it is known today) is that of providing management services to Sheng Ying Xin, or VIE, which in turn, is in the business of providing financial advisory services.
We presently provide almost all our financial advisory services through Sheng Ying Xin and its subsidiary, Kashgar SYX.
Also inIn 2019, we generated $949,070 in revenue from providing factoring services by Fu Hui (Shenzhen) Commercial Factoring Co., Ltd. (“FuhuiSZ”), and our newly formed subsidiary, Fuhui (Xiamen) Commercial Factoring Co., Ltd. (“FuhuiXM”).
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. Boustead Securities, LLC acted as the Lead Underwriter for the offering and Network 1 Financial Securities, Inc. participated as a Selected Dealer. Our shares began trading on NASDAQ Global Market on August 8, 2017 under the symbol “CIFS.”
On March 10, 2017, Sheng Ying Xin incorporated FuhuiSZ in the People’s Republic of China. FuhuiSZ mainly provides supply chain financing services to commercial enterprises. On September 19, 2017, Sheng Ying Xin incorporated Yingda Xincheng (Beijing) Insurance Broker Co., Ltd. (“Ying Da Xin Cheng”) in the People’s Republic of China with a registered capital of RMB 50,000,000 (approximately, $7,518,797). Ying Da Xin Cheng will mainly focus on providing insurance brokerage services.
On November 23, 2017, Sheng Ying Xin acquired Beijing Anytrust Science & Technology Co., Ltd. (“Anytrust”). Anytrust is a limited company incorporated on June 9, 2014 in the People’s Republic of China with a registered capital of RMB 7.5 million (approximately $1.19 million). Anytrust was a “big data” company providing data infrastructure design, big data access and analytics, and document automation for enterprises and government agencies with customers including Tianhong Asset Management, Yinhua Fund Management and BAIC Motor, etc.
Our acquisition of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage of growth. In early 2018, Anytrust launched the beta version of AnyInfo, a vertical search engine and big data platform covering a broad range of publicly available data of over 30 million enterprises in China. In September 2018, Anytrust launched the AnyInfo Enterprise Edition of its big data analysis and A.I. report services to promote its ability to generate customized segment/industry and company profiles to its users.
However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust was approximately only $546,303 in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3 million per month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it was technically insolvent. We had tried to stem our losses through 2018 and by then, we had only 3 employees from an original 89 when we acquired Anytrust.
We also determined it in our best interest to transfer our equity interest in Anytrust to our former Chief Executive Officer, Mr. Jianxin Lin, who had expressed interest in assuming Anytrust and rehabilitating it. In order to incentivize the transfer, we decided to write down all the debts owed by Anytrust to Sheng Ying Xin, totaling RMB 20,532,400 (approximately $3,059,970) and transferring the equity interest to Mr. Lin for no consideration because we had determined that this debt was uncollectible and irrecoverable. The equity transfer was completed on December 30, 2018.
On May 25, 2018, Hongkong Internet Financial Services Limited incorporated CIFS (Xiamen) Financial Leasing Company to provide financial leasing services and equipment purchase financing to commercial enterprises. CIFS (Xiamen) Financial Leasing Company did not have any revenue in 2018.
On May 25, 2018, Sheng Ying Xin incorporated FuhuiXM to factoring services to commercial enterprises in Xiamen. Its registered capital is RMB 28 million (approximately $4.14 million).
On July 11, 2018, Sheng Ying Xin incorporated Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd (“Zhizhen”), to provide investment research services. Zhizhen did not have any operations in 2018.
On July 25, 2018, Sheng Ying Xin formed Hangzhou Yuchuang Investment Partnership (“Hangzhou Yuchuang”), in which it owns 100% of the equity interest. Hangzhou Yuchuang is an investment vehicle for our strategic investing activities. Its registered capital is RMB 5.77 million (approximately $0.84 million).
On March 31, 2020, our former Chief Executive Officer, Mr. Jianxin Lin resigned as our Chief Executive Officer and Chairman and was replaced by Mr. Warren Wang. By April 18, 2020, all our independent directors had resigned and were replaced by new directors, namely, Mr. MingYi (Martin), Mr. Hong Chen and Ms. Xiaoyue Zhang.
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 Company, $0.001 par value per share at a per-share price of $0.40 for aggregate gross proceeds of $800,000. We closed the private placements on May 12, 2020. The private placements were exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereof and/or Rule 506 of Regulation D and Regulation S thereunder, each as promulgated by the Securities and Exchange Commission.
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.
Our securities were transferred to the Nasdaq 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 Affairs of the British Virgins Islands to effect a 5-for-1 reverse stock split (the “Reverse Split”) of our ordinary shares. As a result of the Reverse Split, every five (5) ordinary shares were automatically combined into one (1) ordinary share. In connection with the Reverse Split, our par value per share was increased from $0.001 to $0.005.
On June 23, 2020 and July 31, 2020, we closed on two registered direct offerings 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 and 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, respectively. Chardan Capital Markets LLC acted as placement agent in both offerings. The net proceeds to the Company from the offerings, after deducting placement agent fees and estimated offering expenses, were approximately $3.328 million and $1.39 million, respectively.
Below is a diagrammatic representation of our present corporate structure:
OverviewB. Business overview.
Our Mission
Our mission is to be the one-stop shop for providing financial solutions to small-to-medium sized enterprises.
Our founders started our companyCompany to champion small-to-medium sized enterprises, in the belief that the growth of such enterprises will form the backbone of and spur China’s transformation from a middle-class country to a high income economy. Meeting the capital needs of the small-to-medium sized enterprises will be integral to their growth.
Our Business
We are, through VIE, Sheng Ying Xin, in the business of providing financial advisory services to meet the financial and capital needs of our clients, which comprise largely of small-to-medium sized enterprises (“SMEs”). Otherwise, the business of Hudson Capital, Inc. (as it is known today) is that of providing management services to Sheng Ying Xin. Through our wholly-owned subsidiaries, Hongkong Internet Financial Services Limited (“HKIFS”) and Beijing Yingxin Yijia Network Technology Co., Ltd (“WFOE”) and our contractually controlled and managed company, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“Sheng Ying Xin” or “SYX”) and its wholly owned subsidiary, Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd. (“Kashgar SYX”), we offer commercial payment advisory services, international corporate financing advisory services and intermediary bank loan advisory services. Historically, we have also made direct loans to certain qualified borrowers. We do not anticipate making any more direct loans but instead, we will be depositing our funds in trust accounts with certain bank lenders, who will, in turn, make loans to borrowers. Be that as it may, we had made the “direct loans” to better utilize our excess cash on hand at that time. In view of the slowing economy, we anticipate that future “entrusted loans” will be infrequent, if at all.
Due to the COVID-19 pandemic in 2020, the People’s Republic of China was effectively in lockdown almost the entire year. We have suffered from the lockdown and have no meaningful revenue for the year 2020 as there was limited face-to-face interactions and business dealings the entire year.
We generate revenues from service fees in connection with our (i) commercial payment advisory services, (ii) international corporate financing advisory services, (iii) intermediary bank loan advisory services and (iv) factoring services. Additionally we earn interest income from our direct or entrusted lending activities. As returns from these (entrusted) loans are limited and infrequent, we do not regard such loan activities as a separate line of business. We do not expect the balance of such loans to increase significantly in the future and we may gradually cease the conduct of this form of investment when there are better investment options of our cash.
We used to provide technical services through Anytrust and generated approximately $546,303 in 2018 from the provision of technical services by Anytrust. On December 30, 2018, we disposed Anytrust to reduce our operating overheads and are no longer in the business of providing technical services.
On September 19, 2017, Sheng Ying Xin Incorporated Ying Da Xin Cheng, which will focus on providing insurance brokerage services. As of the date of this proxy statement/prospectus, no actual business has been conducted by this company.
On October 25, 2017 we expanded our service offerings with the launch of our supply chain financing services (the “SCF Services”). The SCF 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. With an initial focus on the medical supplies and medical equipment, airline catering and bulk commodity supply chains, the SCF Services will be operated through FuhuiSZ.
We presently provide all our financial advisory services though Sheng Ying Xin and Kashgar SYX although we have historically generated all our revenue through Sheng Ying Xin. We have been advised that there are no PRC regulations limiting the transition of our financial advisory services to Beijing Yingxin Yijia Network Technology Co., Ltd.
On December 18, 2015, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd received an Internet Content Provider (“ICP”) license to provide value-added Internet information services. We are now implementing our “Plus Internet” strategy by developing an online electronic platform in stages. It will at first, allow our clients to access information regarding available financial products and services and then later track their loan application status. The ICP license is a permit issued by the Chinese Ministry of Industry and Information Technology to permit China-based websites to operate in China.
Competitive StrengthsOur Strategies
Although we operate in a highly-competitive industry, we believe that the following strengths contribute to our success and are differentiating factors that set us apart from our peers.
Our Strategies
The key elements of our strategy to grow our business include:
● | Strengthen our service capabilities with a focus on higher margin commercial payment advisory service. We plan to focus on strengthening and developing factoring services as our core business which we believe is a fast growing segment and has great growth potential. In Financial Year 2019, our factoring service income increased to $949,070 from $499,187 in 2018. Further, in 2020, factoring was our only source of revenue, As a percentage of revenue, our revenue from factoring services is the largest and we believe that this segment will continue to be our main source of revenue. We plan to expand our factoring services to large state-owned enterprise | |
● | Expand geographical coverage. We aim to serve more clients from economically fast-developing areas such as Tianjin, Shandong, Hubei, Yangtze River Delta and the Pearl River Delta. When we first started operations, the bulk of our clients were from the Fujian province because of legacy relationships with their clients with management. In 2019, our client base expanded and less than 50% of them hailed from the Fujian province. We believe we have significant growth potential in these areas because (i) there are a large number of small-to-medium sized enterprises there that have greater demand for financing and alternative payment methods, and (ii) local banks based in these areas offer more diverse financial products and flexible services. |
● | Enhance our ability to attract, incentivize and retain talented professionals. We believe our success greatly depends on our ability to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive advantage in the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level personnel, including formulating a market-oriented employee compensation structure and implementing a standardized multi-level performance review mechanism. We implemented a key performance indicator, or KPI mechanism to assess the performance of departments and individuals and help determine compensation structures for each department and individual. We believe this KPI mechanism will enable us to monitor and keep track of the contributions and efforts of each employee and to help us efficiently identify and appropriately compensate our most valuable employees in the Company. |
● | Expand our service portfolio. We plan to further expand our service portfolio by merging with or acquiring entities already holding other such financial service licenses, such as factoring, microcredit, financial leasing, pawn mortgage and rural banking licenses so that we may expand into providing such services. | |
● | Enhance our IT infrastructure. We received an Internet Content Provider (“ICP”) license for value-added Internet information services on December 18, 2015. We are implementing our “Plus Internet” strategy by developing our electronic platform in stages to allow our clients to firstly access information regarding available financial products and services and then later track their loan application status. We believe this will allow us to expand client reach beyond the physical boundaries of our office(s), and to efficiently match our clients’ financing needs with financing products offered by various financial sources online |
Our Services
We currently provide financial advisory services including (i) commercial payment advisory services, (ii) international corporate financing advisory services, (iii) intermediary bank loan advisory services and (iv) supply chain financing services, or factoring services. We used to provide technical services through Anytrust and generated approximately $546,303 in 2018 from the provision of technical services by Anytrust. On December 30, 2018, we disposed Anytrust to reduce our operating overheads and are no longer in the business of providing technical services. As a result, we no longer provide technical services.
Additionally we earn interest income from our direct lending activities. Previously we made direct loans to our customers but we now make loans mainly by depositing (“entrusting”) these funds into accounts with banks, which in turn will make loans to our clients.
Such loan balance decreased in 2019, we do not expect the balance of such loans to increase significantly in the future and the interest income from such loans would not become a significant portion of our net income. We may gradually cease the conduct of this form of investment when there are better investment options of our cash. Therefore, we do not regard such loan activities as a separate line of business and instead we record the interest from these loans under “Other Income” in our financial statements.
The following table set forth our major service lines in terms of transaction value through present date:
Service Line | Revenue | Revenue | ||||||
(For the year ended December 31, 2019) | (For the year ended December 31, 2020) | |||||||
Commercial payment advisory services | $ | - | $ | - | ||||
International corporate financing advisory service | $ | - | - | |||||
Intermediary bank loan advisory services | $ | 417,347 | - | |||||
Factoring Service | $ | 949,070 | 618 | |||||
Technical service | $ | - | - | |||||
Total | $ | 1,366,417 | ß | $ | 618 |
Commercial payment advisory services
We provide commercial payment advisory services to our clients so that they may to obtain acceptance bills from banks.
A banker’s acceptance bill or banker’s acceptance, is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker’s acceptance specifies the amount of money, the date, and the person to which the payment is due. After acceptance, the draft becomes an unconditional liability of the bank. But the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit.
A banker’s acceptance starts as a time draft drawn on a bank deposit by a bank’s customer to pay money at a future date, typically within six months to one year, analogous to a post-dated check. Next, the bank accepts (guarantees) payment to the holder of the draft, analogous to a post-dated check drawn on a deposit with over-draft protection.
The party that holds the banker’s acceptance may keep the acceptance until it matures, and thereby allow the bank to make the promised payment, or it may sell the acceptance at a discount today to any party willing to wait for the face value payment of the deposit on the maturity date. The rates at which they trade, calculated from the discount prices relative to their face values, are called banker’s acceptance rates or simply discount rates. The banker’s acceptance rate with a financial institution’s commission added in is called the all-in rate.
Banker’s acceptances make a transaction between two parties who do not know each other safer, because they allow the parties to substitute the bank’s credit worthiness for that who owes the payment. They are used widely in international trade for payments that are due for a future shipment of goods and services. For example, an importer may draft a banker’s acceptance when it does not have a close relationship with and cannot obtain credit from an exporter. Once the importer and bank have completed an acceptance agreement, whereby the bank accepts liabilities of the importer and the importer deposits funds at the bank (enough for the future payment plus fees), the importer can issue a time draft to the exporter for a future payment with the bank’s guarantee.
Acceptance bills are one of the most popular means of settlement used by SMEs in China as they allow SMEs to obtain working capital at a relatively low interest rate. In addition, such acceptance bills are generally acceptable to counter parties because such instrument can be further endorsed to meet such parties’ own payment needs or presented to banks to be cashed. During the course of providing commercial payment advisory services to our clients, we are also able to forge and maintain good relationships with banks because for banks, issuance of acceptance bills is not only a way to extend credit without using cash, but also a way to increase deposits by requesting the applicants to pay initial deposits as security for issuance of acceptance bills.
The following diagram illustrates the different parties and roles in the transaction process for our commercial payment advisory services.
For the period from October 1, 2014 through December 31, 2016,2017, we had helped 27 SMEs obtain acceptance bills from banks in 28 transactions with a total transaction amount of RMB 8.3 billion (approximately $1.3 billion). For the period from January 1, 2017 through December 31, 2017, we helped 31 SMEs obtain acceptance bills from banks in 31 transactions with a total transaction amount of RMB 9,963 million (approximately $1,476 million). For the period from January 1, 2018 through December 31, 2019, we helped 22 SMEs obtain acceptance bills from banks in 22 transactions with a total transaction amount of RMB3,610 million (approximately $545 million)..We conducted no business and generated no commercial payment advisory services revenue in 2020 because of the COVID-19 pandemic.
Below are the steps in the provision of commercial payment advisory services:
Review of client application:
● | Members of our key management receive a client’s enquiry about our commercial payment advisory services. Based on initial discussions, they determine the client’s requirements for financing payments to suppliers/payees (including amount and timing for such payments) and determine, on a preliminary basis, whether there would be available financial products and services offered by banks; | |
● | The client’s contact information is given to a client manager for preliminary application review by our deputy general manager; | |
● | The client manager collects necessary materials and information from the potential borrower, as typically required by a bank for such transactions. The client manager then analyzes such materials to verify the client’s financing needs and whether the client’s credit and asset status would meet the relevant banks’ requirements for issuance of acceptance bills. Results of such analysis is given to members of our key management for their consideration; and | |
● | If members of our key management decide to accept such client and proceed to provide our commercial payment advisory services, we then enter into a financial advisory service contract with such client, specifying the subject amount of cash to be deposited with the banks or to be used for purchasing wealth management products from the banks, our service fees and other rights and obligations of such client and us, typically including scope of our services and confidentiality obligations; |
Structuring the transaction
● | Members of our key management narrow down the possible banks based on the client’s needs regarding amount and timing of payments to be made, interest rate for deposit, availability and annualized rate of return on wealth management products, costs and other considerations. Management will discuss the potential transaction with the banks and generally select two to three for further consideration; | |
● | Members of our key management counsel the client on whether to either deposit the funds with the bank or purchase the bank’s wealth management products with a similar maturity as the acceptance bill; | |
● | Members of our key management then work with the selected bank to structure the transaction for the issuance of acceptance bills to our client(including applying for lines of credit and opting to either deposit the funds and/or purchase wealth management products), and negotiate preliminary terms (including interest rate for cash deposits, availability and annualized rate of return of wealth management products and application and processing fees) with such bank; |
Application
● | A product and service advisor is then assigned to handle further communication with the bank regarding the application; | |
● | When ready, the full set of application materials for the relevant line of credit based on the client’s needs is passed to the product and service advisor for submission to the bank; | |
● | After submission of the application materials, our product and service advisor communicates with our contact at the bank on an on-going basis regarding the status of the application, and works with various departments of the bank to facilitate the transaction to closure; | |
● | After the line of credit is given, the client is able to drawdown on it on an “when-needed” basis; | |
● | The relevant client manager then further assists the client in making repayments to the bank either in the form of a cash deposit or the purchase of wealth management products. |
Our clients have typically been able to realize interest rates exceeding 4% p.a. for wealth management products, which they can immediately use, along with the principal to fulfill their payment obligations when they mature.
We charge our clients a service fee which is calculated at a percentage (typically ranging from 0.5% to 2%) of the amount of cash deposited with the bank or the value of the wealth management products purchased from the bank.
International corporate financing advisory services
We help our clients that have overseas financing needs obtain financing to support their overseas business development. We work closely with overseas and domestic banks to identify appropriate facilities for our clients or their offshore affiliates. The overseas investments we help finance are typically made through offshore affiliates of our clients.
● | After we receive a client’s enquiry about our international corporate financing advisory services, our key management team determines the client’s financing needs to support its overseas investments (including the amount needed, term of the loan, location and currency of the loan, the amount of interest the client is able to bear and what security (if any) the client can provide); | |
● | A client manager is assigned to help conduct a preliminary application examination; | |
● | The client manager collects necessary materials, as typically required by a bank for such transactions, and analyzes such materials to determine whether the client would meet the risk profile of the banks; | |
● | Results of such analysis are given to members of our key management for their consideration. If members of our key management decide to accept the client and proceed to provide our international corporate financing advisory services, we then enter into a financial advisory service contract with such client. The agreement would specify the subject amount of facilities to be obtained from the overseas bank for the client’s offshore affiliate, our service fees, and the scope of our services; | |
● | Members of our key management narrow down the banks and ultimately select one based on amount of funds needed, term of the loan sought, the amount of interest the borrowing party is able to bear and what security (if any) the client can provide. This would typically be an overseas bank or an affiliate branch of a PRC bank; |
● | Members of our key management communicate with the selected overseas bank to confirm interest rates, identify domestic banks with which it would prefer to work and the available transaction limits it has with such domestic banks; | |
● | We negotiate terms on behalf of our client’s offshore affiliate, including loan interest rate, term of loan, and guarantee required; | |
● | We facilitate the execution of a loan contract by the offshore affiliate of our client and the overseas bank; | |
● | A product and service advisor is then appointed to handle further communication with the bank regarding application materials and other aspects of the application; | |
● | The client manager continues to assist our client in preparing the full set of application materials according to the bank’s requirements. This may include obtaining its incorporation certificate, business registration certificate, articles of association and audited financial statements; | |
● | When ready, the full set application materials is passed to the product and service advisor for submission to the bank. The client manager further assists our client in transferring the agreed amount of cash to the bank either in the form of a cash deposit or purchase of wealth management products; | |
● | After submission of application materials to the banks, our product and service advisor communicates with our contacts at the banks on an on-going basis regarding the application review status, and works with various departments of the bank to facilitate the steps needed to close the financing, including the issuance of certificates of deposit or executing the wealth management purchase agreements with such client, acceptance of certificates of deposit or wealth management purchase agreement as security and issuance of letter of guarantee, acceptance of letter of guarantee, and ultimately, obtaining approval for the extending facilities to our client’s offshore affiliate. |
We charge our clients a service fee which is calculated at a percentage (typically ranging from 0.2% to 0.4%) of the amount of facilities obtained by our client’s offshore affiliate
For the period from September 16, 2014 through December 31, 2016, we had helped 6 SMEs obtain facilities from overseas banks in the amount of $550 million for their offshore affiliates. For the period from January 1, 2017 through December 31, 2017, we had helped 5 SMEs obtain facilities from overseas banks in the amount of $650 million for their offshore affiliates. For the period from January 1, 2018 through December 31, 2019, we had helped 2 SMEs obtain facilities from overseas banks in the amount of $110 million for their offshore affiliates. We conducted no business and generated no international corporate financing advisory services revenue in 2020 because of the COVID-19 pandemic.
We plan to continue providing international corporate financing advisory services to our clients to support their overseas development in various areas of the world, including Europe, the United States, South Asia and the Middle East.
The following diagram illustrates the different parties and roles in the transaction process for our international corporate financing advisory services.
Intermediary bank loan advisory services
We help our clients (typically SMEs) obtain loan financing from PRC banks. We work closely with banks to help identify and negotiate loan financing packages for such clients.
For the period from October 1, 2014 through December 31, 2016, we provided bank loan advisory services to 15 clients, comprising 11 SMEs and 4 individuals in 19 loan financings, with a total loan amount of RMB2.5 billion (approximately $379 million).
For the period from January 1, 2017 through December 31, 2017, we provided bank loan advisory services to 11 SME clients in 11 loan financings with a total loan amount of RMB 2,045 million (approximately $303 million). For the period from January 1, 2018 through December 31, 2018, we provided bank loan advisory services to 24 SME clients in 23 loan financings with a total loan amount of RMB 2,408 million (approximately $363 million). We conducted no business and generated no intermediary bank loan advisory services revenue in 2020 because of the COVID-19 pandemic.
Going forward, we intend to focus solely on SMEs and do not intend to continue to provide such services to individuals.
Because we have extensive bank loan-related information of a variety of PRC banks, including their loan interest rates, requirement for security and collateral, discount rates, loan application procedures and application materials required, we are able to expeditiously and effectively locate the most suitable bank to meet our clients’ needs.
A typical transaction involves the following steps:
● | We first communicate with our clients regarding their financing needs, including the loan amount needed, term of the loan they are seeking, amount of interest they are able to bear and what security(if any) they are able provide and what guarantors may be available; | |
● | We collect required documents as typically required by a bank for such transactions to review their credit status based on our internal requirements; | |
● | Upon their acceptance, we enter into a financial advisory service contract with our clients specifying the subject amount of the loan, our service fees and scope of our services; | |
● | Next we engage in talks with various banks to identify the most appropriate banks for our clients in terms of collateral discount rates and interest rates; | |
● | We further assist our clients in preparing application materials, coordinate with the banks in their due diligence, negotiate terms on behalf of our clients to help them obtain the best terms (typically including accelerated application processing, lower interest rates and higher discount rates) for their financings from banks; and | |
● | We track the application approval process and keep our clients updated as to their status. |
Through our bank loan advisory services, our clients are able to obtain loans on more favorable terms or in a more efficient manner. We charge our clients an introduction fee which is calculated at a percentage (typically ranging from 1% to 3%) of the loan amount when our clients successfully receive the facilities from the banks.
Technical service
We, through Anytrust, our wholly-owned subsidiary, provide data infrastructure design, big data access and analytics, and document automation for enterprises and government agencies with customers including Tianhong Asset Management, Yinhua Fund Management and BAIC Motor, etc. In 2018, we generated approximately $546,303 from the provision of technical services, which are essentially financial data services provided to financial institutions by Anytrust. To reduce operating losses, we disposed Anytrust on December 30, 2018. As a result, we no longer provide technical services.
Supply Chain Financing Services, or Factoring Services
On October 25, 2017 we expanded our service offerings with the launch of our factoring services, provided by FuhuiSZ. These 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. FuhuiSZ’s business was initially focused on the medical supplies and medical equipment, airline catering and bulk commodity supply chains. On May 25, 2018, we incorporated FuhuiXM to further grow our supply chain financing services.
As of December 31, 2018, FuhuiSZ and FuhuiXM has generated a revenue of $0.5 million.
Due to the COVID-19 pandemic in 2020, we conducted no new business in this business segment. The $618 recorded in this segment was a payment from a customer and recognized in 2020.
We charge our clients a service fee which is calculated at a percentage (typically ranging from 5% to 15%) of the amount we factor. We also collect a management fee of 0 to 3.5% of the amount we factored. As our factoring services are still in the initial stages, our service fee rate and management fee rate are still subject to review and adjustment.
A typical transaction involves the following steps:
● | We first communicate with our clients regarding their needs and then we collect and review the clients’ general information, contracts and invoices that will allow us to evaluate and determine the clients’ credit worth, authenticity of their business contracts and the collectability of receivables; | |
● | Upon their acceptance, we enter into a factoring service contract with our clients specifying the subject amount, our service fees and scope of our services; | |
● | Next we will wire the factored amount to the client’s designated party and will collect our service fee along with such wire; | |
● | At the end of each month we record the factoring service revenue based on the service fee ratio and the amount we factored. |
Other Income Sources
Entrusted loans/direct loans
In 2018, we made three direct loans amounting to $12 million with terms of from 6 and 12 months. We charged interest at from 5% to 15% per annum, and as a result, earned $1,133,407 in interest from these loans, Management assessed the collectability of loans to third parties and determined that a loan provision of $57,941,663 would have to be made as of December 31, 2019.
We are making a conscious effort to avoid making direct loans with our funds. Going forward, we plan to lend funds to our clients in the form of entrusted loans instead. Entrusted loans are commonly found in China, which restricts direct borrowing and lending between commercial enterprises. The loans offer companies with idle funds the chance to earn interest by allowing an agent bank to loan the funds out, while still letting the companies choose whom the agent bank lends the funds to. The People’s Bank of China, China’s central bank, has allowed entrusted loans since 2001. However, as revenue from these (entrusted) loans is limited and infrequent, we do not regard such loan activities as a separate line of business.
In 2019, we made a total of $34,402,684 in entrusted loans to seven clients at an interest rate of 12-16% per annum. The term of these loans was for 12 months and we earned $2,043,124 in interest for making these loans in 2019.
We made no entrusted loans/direct loans in 2020 because of the COVID-19 pandemic and accordingly, generated no revenue.
According to a report by the Wall Street Journal, entrusted loans increased by a net RMB 2.55 trillion (approximately$407.38 billion) from 2013 to 2014, equivalent to 29% of all new RMB bank loans issued during the year compared to only 16% of bank loans the year before (Source: http://blogs.wsj.com/chinarealtime/2014/05/02/a-partial-primer-to-chinas-biggest-shadow-entrusted-loans/).
We have made provisions against entrusted loans due to deteriorating credit conditions of our customers and will focus on collection of these loans. We do not expect the balance of such loans to increase significantly in the future and the interest income from such loans would not become a significant portion of our net income, we may gradually cease the conduct of this form of investment when there are better investment options of our cash.
The process with regard to how entrusted loan applications will be reviewed, processed and approved is described below:
Before granting loans:
● | Client managers conduct initial assessment of clients’ credit status, review of application materials (including, but not limited to, corporate information, licenses and permits held for their operations, capital verification reports, credit reports, audited financial statements for the recent three years, identification of management and shareholders, list of fixed assets, list of receivables and payables, land use certificate, lease contract, list of intellectual properties, tax payment proofs, material contracts and documents relating to any guarantees and pledges provided by such clients); | |
● | Client managers then submit the application materials together with the initial review results and assessment for further review by the client manager group leader to ensure completeness and compliance with internal policies; | |
● | Loan applications are then submitted to our risk management personnel for review from a risk control perspective. Special attention is paid to whether the mortgages, guarantees provided and accounts receivables pledged are sufficient to fully secure the loans; | |
● | Our product and service advisors assist in conducting thorough due diligence regarding clients’ and guarantor’s credit status, repayment capacity, production and operation conditions; | |
● | Product and service advisors then complete a client and family information form and credit assessment form based on their due diligence results, including their own opinion as to whether such client satisfies our internal requirements. This information is uploaded onto our credit management system; | |
● | The person in charge of our entrusted loan activities, our deputy general manager, conducts a final review of the application, and if he approves, he sends the application to designated personnel of commercial banks for review and processing. |
Granting of loans:
● | Our product and service advisors track the bank’s due diligence and review processes and notify our clients and their guarantors (if applicable) to come to the bank to sign the entrusted loan contracts and complete required procedures when the bank has completed its review process and approves the loan; | |
● | Product and service advisors then work with the bank to grant the loan to our client. Funds for the loans granted to our client will be transferred from us to the participating bank, and then transferred from such bank to the client’s account. |
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After granting loans:
● | Our product and service advisors conduct on-going monitoring and inspections (including initial inspection after granting loans, regular inspections and special inspections after granting the loans) of our clients’ credit status and operations status; |
● | Our product and service advisors report any potential risks or red flags uncovered through such monitoring and inspections to the person in charge of entrusted loan activities or our key management in a timely manner, and propose measures to address any of such risks or red flags; | |
● | We send repayment alerts to clients through SMS messages and telephone calls when the loans are due; | |
● | If our clients do not repay the loans when they become due, we, together with the commercial bank, on the day following the due date, contact them to inquire about the reasons repayment has not been made, and take appropriate measures, including working with guarantors to ensure prompt repayment; | |
● | If our client is still unable to repay a loan within ten days of the due date, our general policy is to, together with the bank, visit the errant client and formulate a collection and repayment plan; | |
● | After 30 days of non-payment, our general policy is to exercise our rights over the collateral or submit such disputes to the People’s Court for adjudication and enforcement. |
From the inception of the Company to the end of its fiscal year of 2019,2020, we made a total of $45,514,815, equivalent to the figure at the end of fiscal year 2019 since all loans made in 2019 were entrusted bank loans and US$ direct loans which are not subject to this PBOC restriction, in direct loans to 6 clients with interest rates from 8% to 16%. The terms of these loans were generally for six to twelve months. We earned $6,182,343 in interest for making these loans.loans in 2019.
As advised by our PRC legal counsel, Sino-Integrity Law Firm, such direct lending activities with corporate clients are not in compliance with certain provisions of the Lending General Provisions, under which, the PBOC could impose fines on us and the amount of the potential fine would be no less than one time but no more than five times the gains that we obtained from such direct lending activities. The gains from said lending activities that were subject to PBOC’S regulation were approximately $6.1 million and accordingly, the potential fine would be no less than $6.1 million and no more than $30.5 million. However, pursuant to Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, private lending contracts relating to direct private lending activities between companies (such as ours) are effective if such lending activities are not part of the ordinary business of the lender. Therefore, according to our PRC legal advisors and based on past practices and recent interpretation of the Supreme People’s Court, it is unlikely PBOC will impose any fines or penalties on us. However, we cannot assure that no such fines or other punitive actions will be taken against us.
We do not foresee interest income from entrusted loans being a major source of revenue for us. As revenue from these (entrusted) loans is historically limited and infrequent, we do not regard such loan activities as a separate line of business. We record the revenue from these loans under “Other Income” in our financial statements.
Our Clients
Our clients are mainly SMEs that need financing to either support or expand their businesses or those of their affiliates overseas. We plan to further expand our client base to large state-owned enterprises. Additionally, we plan to further expand our service portfolio by merging with or acquiring entities already holding other such financial service licenses, such as factoring, microcredit, financial leasing, pawn mortgage and rural banking licenses so that we may expand into providing such services.
During the fiscal year of 2019, less than half of our revenue was originated from clients located in Fujian province because of the relationships our key management has with these clients. Since then, our client base has diversified and presently, less than half our clients are from the Fujian province.
There were no customers contributing more than 10% to the total revenue of the Company for the year ended December 31, 2019. Three customers have outstanding accounts receivable balances that accounts for 44.01%, 19.38% and 17.95% of the total accounts receivable balance as of December 31, 2019, respectively.
Due to the COVID-19 pandemic in 2020, we had no new customers contributing to our revenue. There was only a receipt in advance and revenue recognized in 2020.
Our Relationships with Partner Banks
By facilitating financial transactions, we help banks and their personnel to their business goals (such as monthly deposit, loan and wealth management products sales targets). We believe this incentivizes banks and their employees to continue their relationship with us and even offer preferential terms to the clients we bring them. Key members of our management have therefore been able to forge and maintain strong relationships with some domestic and overseas banks, including large PRC national banks.
Seasonality
Although we have been in business for only five calendar years since October 2014 and it is difficult to determine the cyclical nature of our business with any certainty, the financial advisory services sector typically slows down towards the end of the calendar year through Chinese New Year where banks and lending institutions typically wind down their lending activities. The financial advisory services business is fairly constant the rest of the year.
IT Infrastructure
We received an ICP license for value-added Internet information services on December 18, 2015. We plan to develop an electronic online platform in stages to initially allow our clients to access to information regarding available financial products, then to track the status of their applications online. Please refer to “Our Strategies” for further information.
Marketing
When the Company first started, approximately 40% of our then existing clients were clients that had previously accepted financial advisory services from Mr. Jianxin Lin and Mr. Jinchi Xu or who had been referred to us directly by such clients. As the Company’s business grows, we are now also relying on our marketing staff to bring in new clients. We believe we are able to obtain new clients through referrals from our existing clients and banks with which we have an ongoing relationship. We intend to continue to focus on referrals as the primary method of new client development. We also intend to enhance our brand recognition and attract potential clients through a variety of marketing methods, including online publicity activities, such as posting information regarding our services and available financial products and services provided by banks on our website, and onsite promotion activities in branches of the banks with whom we work, such as placing promotional pamphlets about our services.
Competition
We operate in an increasingly competitive environment and compete for clients on the basis of service offerings and client services. According to Beijing Han Ding Century Consulting Co., Ltd, a third-party market research firm we commissioned to prepare a report about the financial advisory services in China and our market position therein. It is difficult to locate companies that are providing exactly the same services as we do. However, as a supplement to their primary businesses, many companies, including asset management companies, investment consulting services providers, commercial banks and international factoring companies also provide services similar some of our service segments.
Based on the report by Beijing Heading Century Consulting Co., Ltd, we believe the following companies are our competitors in the various service lines set forth below:
Generally
SanMei Financial Services Ltd (“SanMei”) –SanMei is a financial service platform that provides financial services such as financial product consulting, customer financial advisory, management consulting, financial information consulting and human resources services. Currently, its business model includes three main modules, namely agency service, financial institutions outsourcing and consulting services. The company mainly provides financial intermediation services to SMEs in Nanan City and small and medium banks in Quanzhou.
Guanqun Chi Cheng Investment Management (Beijing) Co., Ltd (“GCC”) – GCC operates a nationwide platform that provides internet financing, mergers and acquisitions and angel investments to SMEs. Because SMEs usually have limited resources and sales channels, GCC use a method called “combined debt and equity”, which is a combination of financing, equity investment and securitization.
Commercial Payment Advisory Service
Shanghai Lujiazui International Financial Assets Trading Market Inc. (“Lujin”) - Lujin is the only financial assets trading information service platform that runs its practice through the trading platform of the State Counsel of China. It provides investment and financing service to SMEs and individuals. As of January 2014, it had more than 5.7 million registered users. Lujin offers financial instruments beneficial rights transfer information services to financial and non-financial companies. Financial instruments beneficial rights transfer is a process in which the borrowers (usually companies) pledge their bank acceptance bills, and then transfer the beneficial interests to investors. Lujin’s role is an informational intermediary between the holders of bank acceptance bills and the investors.
Shanghai Pulan Financial Service Ltd (“Pulan”) - Pulan is the pilot entity of “financial instrument broker” appointed by the Pudong New Area government. It mainly provides financial instrument brokerage services to SMEs. It provides its clients with discount rates based on regions and banks.
Bida Holdings Group (“Bida”)–Bida invests in various areas, including money brokerage, investment banking, inter-bank bonds, factoring, and pawn shops. Bida aims to build the most efficient capital chain service to connect companies directly with the capital market. Bida has developed many online and offline financial instruments.
International Corporate Financing Advisory Services
China Export & Credit Insurance Corporation (“SinoSure”) - SinoSure is the only contract policy credit insurance business financial institution. SinoRating is SinoSure’s professional consulting entity that provides domestic and overseas clients with financial products and services. Since its establishment in 2002, SinoRating has provided its clients with various high-quality professional credit investigation reports, industry analysis reports, credit rating and risk management consulting services, and overseas investment advisory services. SinoRating uses “Stepping Out” as its service motto to launch its international investment advisory services. Its services include providing information about potential overseas projects, advising on “Stepping Out” policy, estimating risks of overseas projects, providing financing consulting services regarding overseas projects and training services for its “Stepping Out” strategy.
JRF International Factoring Ltd (“JRF”) - JRF focuses its practice on providing services such as account receivable acquisitions, trade finance, receivables collection and management, buyer credit guarantees and other comprehensive international factoring services. JRF joined the International Factors Group in 2009, and in the same year, it became a member of Commercial Finance Associate. In 2012, JRF joined Factors Chain International (FCI), becoming one of the FCI members with other 22 Chinese banks and the first Chinese commercial factoring company that is a member of FCI.
Xinyin International Commercial Factoring Company (“Xinyin”) - Xinyin mainly provides factoring services that combines trade financing, sales ledger management, accounts receivable management and collection, customer credit investigation and assessment, and credit risk guarantees.
CubeTech Global Asset Information Technology Ltd (“CubeTech”) – CubeTech’s core practice is to provide Chinese institutional investors with a one-stop solution in cross-border investments. The company now has offices in Beijing, Shanghai, New York and London. CubeTech applies mature asset management information technology to cross-border investment management by using the big data method.
Intermediary loan advisory services
The major competitors in this industry include asset management companies and investment guarantees enterprises:
Beijing Liuxing Juntong Information Technology Co., Ltd (Juntong) - Juntong focuses its practice on asset management, investment management and investment consulting services. Juntong first created the real domestic “financial supermarket” model, relying on online loans, financing, investment and financing, insurance, internet banking, as well as offline stores, franchisees, direct sales team and other systems, creating a complete integration of online and offline O2O business model.
Beijing Jiaoguang Yidai Investment Management Ltd (Yidai) -Yidai is a professional investment guarantee company that provides its clients with services such as enterprise operating fund loan, credit loan, consumption loan secured by real properties and second-hand house loan etc.
Lianrong Weiye Investment Guarantee (Beijing) Ltd (Lianrong)-Lianrong specializing in economic contract loan (not including financing loan), investment consulting and investment management services.
Entrusted Loans
We have no data on entrusted loans and who our competitors are as these are largely private loans between commercial entities through banks. These company-to-company loans, known as entrusted lending, have emerged as the fastest-growing part of China’s shadow-banking system, which provides credit outside of formal banking channels. Banks make money by charging fees to both the lending company and the borrower, and they do not record the loans on their balance sheets.
(Source: (Source: http://www.wsj.com/articles/SB10001424052702304163604579531383712290244)
Factoring Services
We are facing strong competition in the China factoring industry. According to the 2017 Development Report of the Commercial Factoring Industry in China, as of December 31, 2017, there were 8,261 registered factoring companies in China. We expect that the factoring business will continue developing fast in China in the future. Due to the COVID-19 pandemic prevailing in 2020, the risks of our factoring business may be higher than normal and not justify the returns. We expect that this will be a difficult market to maintain higher margins.
Risk Control
We place great emphasis on risk management and are committed to enhancing our risk management capabilities.
Risk Management Procedures for Commercial Payment Advisory Services, International Corporate Financing Advisory Services and Intermediary Bank Loan Advisory Services
Although we do not bear any economic risk or credit risk for the loans and/or acceptance bills issued by the bank to our clients, we may be exposed to reputation risk if the borrowers default. The domestic and international banks implement their own risk management procedures in the underwriting of the loans and acceptance bill to the borrowers. The following diagram sets forth our risk management policies and procedures relating to various stages of our commercial payment advisory services, international corporate financing advisory services, and intermediary bank loan advisory services:
Our risk management procedures primarily include the following steps:
● | Examination of preliminary applications by a client manager: A client manager is appointed to collect client materials to verify whether a potential client is in good standing and further understand its credit and asset status. The manager will determine whether such client could meet the bank’s requirements for the financing products the potential client requires. Such materials include, but are not limited to business licenses, organization code certificates, tax registration certificates, bank account opening permits, articles of association, capital verification reports, financial reports and credit report on SAIC’s system; | |
● | Review by review committee: Our review committee, led by Mr. Jinchi Xu further reviews the materials collected by the client manager to assess the client’s repayment capability and determines whether to accept the client’s application. |
Review and execution of service contract:
The client manager prepares our service contract and sends it to our risk management personnel for review from a legal compliance and risk management perspective. Special attention to made to certain provisions such as payment schedule and dispute resolution. The client manager, together with our finance department sign our service contract with the client upon approval by our deputy general manager in charge and general manager. The approval from our deputy general manager and general manager may be dispensed with if the review committee does not report any client deficiencies after two days.
Review of application materials to be submitted to banks to ensure completeness:
In order to facilitate banks’ review and approval process, a product and service advisor is appointed to assist our client in preparing and submitting application materials or any supplementary documents required by banks. The product and service advisor carefully reviews and checks such documents based on the bank’s requirements to ensure the completeness; and
Payment notification and resolution of any overdue payment:
The client manager tracks the repayment schedule, and sends repayment notices to the client before the due date. In case of any overdue payment, the client manager would contact the client to enquire about the reasons for overdue repayment, and will discuss with clients regarding possible solutions. If the client is still unable to pay our service fees and/or the principal as further agreed, we will, together with the bank, take action, including exercising our rights over collaterals or submitting the dispute to the relevant court for enforcement.
Risk Management Procedures for Loan Activities
We have adopted a set of more stringent risk management procedures for our entrusted loan activities. In addition to the procedures described above which are also applicable to our entrusted loan activities, the risk management procedures for entrusted loan activities also includes:
Registration of collateral: To ensure we are able to exercise our rights over the collateral when a client defaults on repayment of loans, our risk management personnel registers the collateral with the relevant authorities;
Compulsory enforcement notarization: We also arrange to have our entrusted loan agreement notarized so that we are entitled to immediate compulsory enforcement when the client is unable to repay our loans;
On-going monitoring and inspections of client’s credit status: A client manager is appointed to conduct on-going monitoring and inspection of our client’s credit status and use of loan proceeds to ensure timely discovery of any potential credit risks; and
Risk early-warning: The client manager will sends risk alerts to our management when a client’s credit status deteriorates, or if loan proceeds are not used in the way that has been agreed in the contract or a client fails to collect any large amount of receivables.
To control our credit risk and have a better understanding of our client’s credit and operation status, we typically ask a client applying for entrusted loans to provide more supporting documentations to be examined and reviewed by our client manager and review committee. Please see “Item 4. Information on the Company – B. Business overview – Other Income Sources” for further information.
Intellectual Property
Trademark
Our brand, trade names, trademarks, trade secrets, proprietary database and other intellectual property rights distinguish our products and services from those of our competitors and contribute to our competitive advantage in the financial advisory services industry. We rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our key employees. We are in the process of applying for three trademarks in China.
Set forth below is a detailed description of our trademarks as of the date of this proxy statement/prospectus:prospectus.
Country | Trademark | Application Number | Classes** | Status | ||||
Mainland China | 23258881 | 35 | In process | |||||
Mainland China | 20358381 | 35 | Approved | |||||
Mainland China | 16899757 | 36 | Approved | |||||
Mainland China | 16899762 | 36 | Approved | |||||
Mainland China | 27400350, 27400349, 27400348, 27400387, 27400386, 27400385, 27400384, 27400383, 27400382, 27400381, 27400380, 27400379, 27400378, 27400377, 27400376, 27400375, 27400374, 27400373, 27400372, 27400371, 27400370, 27400369, 27400368, 27400367, 27400366, 27400365, 27400364, 27400363, 27400362, 27400361, 27400360, 27400359, 27400358, 27400357, 27400356, 27400355, 27400354, 27400353, 27400352, 27400351, 27421113, 27403009, 27407443, 27414112, 27415183. | 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45. | In process | |||||
Mainland China | 21639200 | 35 | In process | |||||
Mainland China | 20358382 | 35 | In process | |||||
Mainland China | 29381503 | 35 | In process | |||||
Mainland China | 29392250 | 35 | In process | |||||
Mainland China | 29772050, 29772049 | 9, 36 | In process | |||||
Mainland China | 17728734 | 42 | Approved |
**
Class 1: | Chemical Products: Chemicals used in industry, science and photography; unprocessed artificial resins; fire extinguishing compositions, etc. |
Class 2: | Paint: paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants, etc. |
Class 3: | Cosmetics and Cleaning Preparations: bleaching preparations and other substances for laundry use, etc. |
Class4: | Lubricants and Fuels: industrial oils and greases; lubricants; dust absorbing, wetting and binding compositions, etc. |
Class 5: | Pharmaceuticals: pharmaceutical and veterinary preparations; sanitary preparations for medical purposes; dietetic substances adapted for medical use, food for babies, etc. |
Class 6: | Metal Goods: common metals and their alloys; metal building materials; transportable buildings of metal; materials of metal for railway tracks, etc. |
Class 7: | Machinery: Machines and machine tools; motors and engines (except for land vehicles); machine coupling and transmission components (except for land vehicles); agricultural implements other than hand-operated; incubators for eggs. |
Class 8: | Hand Tools: hand tools and implements (hand-operated); cutlery; side arms; razors. |
Class 9: | Electrical and Scientific Apparatus: scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signaling, checking (supervision), life-saving and teaching apparatus and instruments, etc. |
Class 10: | Medical Apparatus: surgical, medical, dental and veterinary apparatus and instruments, artificial limbs, eyes and teeth; orthopedic articles; suture materials. |
Class 11: | Environmental Control Apparatus: apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply and sanitary purposes. |
Class 12: | Vehicles: vehicles; apparatus for locomotion by land, air or water. |
Class 13: | Firearms: firearms; ammunition and projectiles; explosives; fireworks. |
Class 14: | Jewelry: precious metals and their alloys and goods in precious metals or coated therewith, not included in other classes; jewelry, precious stones; horological and chronometric instruments. |
Class 15: | Musical Instruments: musical instruments. |
Class 16: | Paper Goods and Printed Matter: Paper, cardboard and goods made from these materials, not included in other classes; printed matter, etc. |
Class 17: | Rubber Goods: Rubber, gutta-percha, gum, asbestos, mica and goods made from these materials and not included in other classes; plastics in extruded form for use in manufacture; packing, stopping and insulating materials; flexible pipes, not of metal. |
Class 18: | Leather and imitations of leather, and goods made of these materials and not included in other classes; animal skins, hides; trunks and travelling bags; umbrellas, parasols and walking sticks; whips, harness and saddlery. |
Class 19: | Nonmetallic Building Materials: building materials (non-metallic); non-metallic rigid pipes for building; asphalt, pitch and bitumen; non-metallic transportable buildings; monuments, not of metal. |
Class 20: | Furniture and Articles not Otherwise Classified: Furniture, mirrors, picture frames; goods (not included in other classes) of wood, cork, reed, cane, wicker, horn, bone, ivory, whalebone, etc. |
Class 21: | Housewares and Glass: Household or kitchen utensils and containers; combs and sponges; brushes (except paint brushes); brush-making materials; articles for cleaning purposes; steel wool, etc. |
Class 22: | Cordage and Fibers: Ropes, string, nets, tents, awnings, tarpaulins, sails, sacks and bags (not included in other classes); padding and stuffing materials (except of rubber or plastics); raw fibrous textile materials. |
Class 23: | Yarns and Threads: Yarns and threads, for textile use. |
Class 24: | Fabrics: Textiles and textile goods, not included in other classes; bed and table covers. |
Class 25: | Clothing: clothing, footwear, headgear. |
Class 26: | Fancy Goods: Lace and embroidery, ribbons and braid; buttons, hooks and eyes, pins and needles; artificial flowers. |
Class 27: | Floor Coverings: Carpets, rugs, mats and matting, linoleum and other materials for covering existing floors; wall hangings (non-textile). |
Class 28: | Toys and Sporting Goods: Games and playthings; gymnastic and sporting articles not included in other classes; decorations for Christmas trees. |
Class 29: | Meats and Processed Foods: Meat, fish, poultry and game; meat extracts; preserved, frozen, dried and cooked fruits and vegetables; jellies, jams, compotes; eggs, milk and milk products; edible oils and fats. |
Class 30: | Staple Foods: Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces (condiments); spices; ice. |
Class 31: | Natural Agricultural Products: Agricultural, horticultural and forestry products and grains not included in other classes; live animals; fresh fruits and vegetables; seeds, natural plants and flowers; foodstuffs for animals, malt. |
Class 32: | Light Beverages: Beers; mineral and aerated waters and other non-alcoholic drinks; fruit drinks and fruit juices; syrups and other preparations for making beverages. |
Class 33: | Wine and Spirits: Alcoholic beverages (except beers). |
Class 34: | Smokers’ Articles: Tobacco; smokers’ articles; matches. |
Class 35: | Advertising; business management; business administration; office functions. |
Class 36: | Insurance and Financial: Insurance; financial affairs; monetary affairs; real estate affairs. |
Class 37: | Building Construction and Repair: Building construction; repair; installation services. |
Class 38: | Telecommunications: telecommunications. |
Class 39: | Transportation and Storage: Transport; packaging and storage of goods; travel arrangement. |
Class 40: | Treatment of Materials: Treatment of materials. |
Class 41: | Education and Entertainment: Education; providing of training; entertainment; sporting and cultural activities. |
Class 42: | Computer and Scientific: Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software. |
Class 43: | Hotels and Restaurants: Services for providing food and drink; temporary accommodation. |
Class 44: | Medical, Beauty & Agricultural: Medical services; veterinary services; hygienic and beauty care for human beings or animals; agriculture, horticulture and forestry services. |
Class 45: | Personal: Legal services; security services for the protection of property and individuals; personal and social services rendered by others to meet the needs of individuals. |
Copyrights
We have registered our copyrights with the National Copyright Administration of the People’s Republic of China. Set forth below is a detailed description of our copyrights as of the date of this proxy statement/prospectus.
Country | Copyrights | Registration Number | Status | |||
Mainland China | Quantum Compass Supply Chain Financial Credit Audit System V2.0 | 2018SR403735 | Approved | |||
Mainland China | Quantum Compass Supply Chain Financial Business Support System V2.0 | 2018SR40479 | Approved | |||
Mainland China | Quantum Compass Medical Enterprise Invoicing Management System V1.0 | 2018SR405088 | Approved | |||
Mainland China | Fuhui Factoring Online Supply Chain Finance Investment and Financing Platform Computer Software V2.0 | 2018SR405073 | Approved | |||
Mainland China | Fuhui Factoring Online Supply Chain Finance Investment and Finance IOS Platform System V1.0.4 | 2018SR403752 | Approved | |||
Mainland China | Fuhui Factoring Online Supply Chain Finance Investment and Financing Android Platform System V1.0.4 | 2018SR403741 | Approved | |||
Mainland China | Sheng Yin Enterprises Public Financing Transactions Consulting Platform V1.0 | 2018SR480963 | Approved | |||
Mainland China | Fei Hai Big Data Assets Integration Commercial Platform (Fei Hai) V2.0 | 2018SR480280 | Approved | |||
Mainland China | Ying Xin STEAM Education Social Advertising Platform V2.0 | 2018SR480274 | Approved | |||
Mainland China | Ying Xin Content Publication Management Platform (Ying Xin Publication Platform) V2.0 | 2018SR478786 | Approved |
Domain Name
We have one registered domain name, www.cifsp.comwww.hudsoncapitalusa.com. We have registered our website with Beijing City Communications Control Bureau and received an ICP license (ICP Number: 151135). In addition, FuhuiSZ maintains a website at http://www.fhfactoring.cn/.
Insurance
We participate in government sponsored social security programs including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We do not maintain business interruption insurance, casualty insurance on our assets or key-man life insurance. We consider our insurance coverage to be in line with that of other financial advisory service companies of similar size in China.
We operate in an increasingly complex legal and regulatory environment. We are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include data protection and privacy, consumer protection, content regulation, intellectual property, competition, taxation, anti-money laundering and anti-corruption. See “Risk Factors — Risks Related to Our Business and Industry — the laws and regulations governing the financial advisory service industry in China are developing and evolving and subject to changes. If our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected.”
Our online commerce business is classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules and regulations restrict foreign ownership in value-added telecommunication services. As a result, we operate our online commerce business and other business in which foreign investment is restricted or prohibited through our variable interest entity, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd, which is owned by PRC citizens and holds all licenses associated with these businesses.
The applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be required to obtain additional approvals, licenses and permits and to comply with any new regulatory requirements adopted from time to time. Moreover, substantial uncertainties exist with respect to the interpretation and implementation of these PRC laws, rules and regulations. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.”
Regulation on Wholly Foreign Owned Enterprises and Foreign Investment Restrictions
The Wholly Foreign owned Enterprise Law of the PRC promulgated by the Standing Committee of the Nation People’s Congress (“SCNPC”), effective in 1986 and as amended in 2000 and 2016, and the Implementation Rules of the Wholly Foreign Owned Enterprise Law of the PRC promulgated by the State Council, effective in 1990 and as amended in 2001 and 2014, regulate the establishment, approval, registered capital and day-to-day operational matters of wholly foreign owned enterprises, such as our PRC subsidiary, WFOE.
On September 3, 2016, SCNPC promulgated the Decision on Revising the Law of the PRC on Foreign-invested Enterprises and Other Three Laws, effective on October 1, 2016. Accordingly, on October 8, 2016, the MOFCOM promulgated the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises. Pursuant to above decision and the interim measure, for establishment and change of foreign-invested enterprises (including wholly foreign owned enterprises) not involving special market entry management measures, the filing administration shall replace previous examination and approval administration.
The Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which is promulgated by the Ministry of Commerce and the National Development and Reform Commission and governs investment activities in the PRC by foreign investors. The Catalogue divides industries into three categories — “encouraged,” “restricted,” and “prohibited” for foreign investment. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, “permitted.”
Our financial advisory services fall under the permitted category. Our variable interest entity, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd holds all material approvals required for our financial advisory services operations.
However, industries such as value-added telecommunication services, including internet information services, are restricted from foreign investment. As such, our ICP license is held by our variable interest entity, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd, which is owned by Mr. Jianxin Lin and Mr. Shaoyong Huang (collectively, the “SYX Shareholders”), both of whom are PRC nationals.
The Catalogue does not apply to our companies registered and domiciled in the British Virgin Islands and Hong Kong and operate outside China.
On December 23, 2018, the State Council submitted the draft version of the Foreign Investment Law to the Standing Committee of the National People’s Congress, which was promulgated by the National People’s Congress on its official site on December 26, 2018 for public consultation until February 24, 2019. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations
Regulation of Telecommunications and Internet Information Services
Regulation of Telecommunications Services
Under the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the State Council of the PRC, a telecommunication services provider in China must obtain an operating license from the Ministry of Industry and Information Technology, or the MIIT, or its provincial counterparts. The Telecommunications Regulations categorize all telecommunication services in China as either basic telecommunications services or value-added telecommunications services. Our online electronic platform commerce business is classified as value-added telecommunications services.
Foreign investment in telecommunications businesses is governed by the State Council’s Administrative Rules for Foreign Investments in Telecommunications Enterprises, issued by the State Council on December 11, 2001 and amended on September 10, 2008, under which a foreign investor’s beneficial equity ownership in an entity providing value-added telecommunications services in China is not permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate a positive track record and experience in providing such services. The MIIT’s Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such businesses in China.
In addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable to holders of value-added telecommunications services licenses, including that license holders or their shareholders must directly own the domain names and trademarks used in their daily operations and each license holder must possess the necessary facilities for its approved business operations and maintain such facilities in the regions covered by its license, including maintaining its network and providing Internet security in accordance with the relevant regulatory standards. The MIIT or its provincial counterpart has the power to require corrective actions after it discovers any non-compliance of the license holders, and where such license holders fail to take such steps, the MIIT or its provincial counterpart has the power to revoke the value-added telecommunications services licenses.
Regulation of Internet Information Services
As a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on Internet Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January 8, 2011. “Internet information services” are defined as services that provide information to online users through the internet. Internet information services providers, also called Internet content providers, or ICPs, that provide commercial services are required to obtain an operating license from the MIIT or its provincial counterpart.
To the extent the internet information services provided relate to certain matters, including news, publication, education or medical and health care (including pharmaceutical products and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and regulations governing those industries.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT, the News Office of the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these measures specifically prohibit internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control the information posted on their websites. If any prohibited content is found, they must remove such content immediately, keep a record of it and report to the relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business operation licenses.
Regulation of Internet Security
The Decision in Relation to Protection of the Internet Security enacted by the SCNPC on December 28, 2000 provides that the following activities conducted through the Internet are subject to criminal punishment:
● | gaining improper entry into a computer or system of strategic importance; | |
● | disseminating politically disruptive information or obscenities; | |
● | leaking State secrets; | |
● | spreading false commercial information; or | |
● | infringing intellectual property rights. |
The Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security on December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State secrets or the spread of socially destabilizing content. If a value-added telecommunications services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
Regulation Relating to Privacy Protection
Under the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security authorities for such acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also prohibited from collecting any user personal information or providing any such information to third parties without the consent of a user. ICPs must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for its services. ICPs are also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People’s Congress on December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT’s Rules on Protection of Personal Information of Telecommunications and Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures to be taken by ICPs.
The PRC government retains the power and authority to order ICPs to provide an Internet user’s personal information if such user posts any prohibited content or engages in any illegal activities through the Internet.
Regulations Relating to Intellectual Property Rights
Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain names. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
Anti-counterfeiting Regulations
According to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person’s registered trademark, or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive right to use a registered trademark. The infringing party may also be held liable for damages suffered by the owner of the intellectual property rights, which will be equal to the gains obtained by the infringing party or the losses suffered by such owner as a result of the infringement, including reasonable expenses incurred by such owner in connection with enforcing its rights.
In addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of a commercial platform, we must adopt measures to ensure safe online transactions, protect consumers’ rights and prevent trademark infringement.
Regulations on Tax
PRC Enterprise Income Tax
The PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. The EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
Uncertainties exist with respect to how the EIT Law applies to our tax residence status and our offshore subsidiaries. Under the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define “de facto management body” as a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
● | the primary location of the day-to-day operational management is in the PRC; | |
● | decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; | |
● | the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in the PRC; and | |
● | 50% or more of voting board members or senior executives habitually reside in the PRC. |
We believe that we meet the conditions outlined in the immediately preceding paragraph and should be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”
In the event that we or any of our offshore subsidiaries is considered to be a PRC resident enterprise: (1) we or our offshore subsidiaries, as the case may be, may be subject to the PRC enterprise income tax at the rate of 25% on our worldwide taxable income; (2) dividend income that we or our offshore subsidiaries, as the case may be, receive from our PRC subsidiaries may be exempt from the PRC withholding tax; and (3) dividends paid to our overseas shareholders who are non-PRC resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of up to 10%, and similarly, dividends paid to our overseas shareholders who are non-PRC resident individuals, as well as gains realized by such shareholders from the transfer of our shares, may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of 20%, subject to the provision of any applicable agreement for the avoidance of double taxation.
Under SAT Circular 698 and Bulletin 7, if a non-resident enterprise transfers “PRC taxable assets” of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company without reasonable commercial purpose, the parties involved in the indirect transfer of the PRC taxable assets and the PRC resident enterprise whose equity is transferred indirectly, may report such equity transfer matter to the PRC competent tax authority of the PRC resident enterprise. The PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such disposition may be subject to a PRC withholding tax rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price which is not on an arm’s length basis and results in reducing the taxable income, the relevant tax authority has the power to make a reasonable adjustment as to the taxable income of the transaction. Circular 698 was retroactively effective on January 1, 2008. On February3, 2015, the State Administration of Taxation released SAT Bulletin 7 to amend and clarify several issues related to Circular 698. According to SAT Bulletin7, the term “PRC taxable assets” includes assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises; and when determining whether there is a “reasonable commercial purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. If Circular 698 and Bulletin 7 were determined by the tax authorities to be applicable to us, our offshore subsidiaries and our non-resident enterprise investors, we, our offshore subsidiaries and our non-resident enterprise investors might be required to expend valuable resources to comply with this circular, which may materially and adversely affect us or our non-resident enterprise investors. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company.”
Under applicable PRC laws, payers of PRC-sourced income to non-PRC residents are generally obligated to withhold PRC income taxes from the payment. In the event of a failure to withhold, the non-PRC residents are required to pay such taxes on their own. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes.
PRC Value-added Tax
Pursuant to the Pilot Measure for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Some of the Modern Service Industries, promulgated by the Ministry of Finance and the State Administration of Taxation on November 16, 2011 (the “PilotMeasure”),any entity or individual conducting business in some modern service industry, such as the service we are engaging in, is generally required to pay a value-added tax, or VAT, at the rate of 6% on the revenues generated from providing such services. A taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.
On March 30, 2016, the Ministry of Finance and the State Administration of Taxation promulgated the Notice of the Ministry of Finance and the State Administration of Taxation on Overall Implementation of the Pilot Program of Replacing Business Tax with Value-added Tax. Pursuant to this notice, from May 1, 2016, a value-added tax will generally be imposed to replace the business tax in the construction industry, real estate industry, finance industry, consumer service industry and other industries on a nationwide basis.
Regulations Relating to Foreign Exchange and Dividend Distribution
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. The Circular on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment promulgated by SAFE on February 28, 2015, or SAFE Circular 13, further abolished SAFE’s administrative examination and approval with respect to the verification and approval of foreign exchange registration under domestic direct investment and overseas direct investment. Instead, banks shall directly examine and process the said foreign exchange registration in accordance with relevant regulations issued by SAFE. Thereafter, SAFE and its branches shall indirectly administer the said foreign exchange registration via banks.
On March 30, 2015, SAFE promulgated the Circular on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises, or SAFE Circular 19, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting following purposes that the converted RMB may not be used:(i)the converted RMB cannot be used for expenditure beyond business scope of the foreign-invested enterprise or expenditure prohibited by PRC laws and regulations; (ii) the converted RMB cannot be used for investment in securities, unless otherwise prescribed by PRC laws and regulations; (iii) the converted RMB cannot be used for disbursing RMB entrusted loans (unless permitted under its business scope), repaying inter-corporate borrowings (including third-party advances) and repaying RMB bank loans that have been sub-lent to third parties; or (iv) the converted RMB cannot be used for the expenses related to the purchase of real estate not for self-use, unless the foreign-invested enterprise is a foreign-invested real estate enterprise.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to conduct the relevant procedure of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share Option Rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We will make efforts to comply with these requirements upon completion of our initial public offering.
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
M&A Rules and Overseas Listings
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, issued by six PRC governmental and regulatory agencies, including the MOFCOM and the CSRC, on August 8, 2006 and amended on June 22, 2009, require that a SPV formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC in the event that the SPV acquires equity interests in the PRC companies in exchange for the shares of offshore companies.
The application of the M&A Rules remains unclear. Our PRC counsel, Sino-Integrity Law Firm, has advised us that, under current PRC laws, rules and regulations and the M&A Rules, prior approval from the CSRC is not required under the M&A Rules for our initial public offering because (i) WFOE was established by means of direct investment, rather than by merger or acquisition of the equity interest or assets of any “Domestic Company” as defined under the M&A Rules, and (ii) no provision in the M&A Rules classifies the contractual arrangements between WFOE and Sheng Ying Xin as a type of transaction which is subject to the M&A Rules. However, as there has been no official interpretation or clarification of the M&A Rules, there is uncertainty as to how these rules will be implemented in practice. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — Any requirement to obtain prior approval under the M&A Rules and/or any other regulations promulgated by relevant PRC regulatory agencies in the future could delay this offering and failure to obtain any such approvals, if required, could have a material adverse effect on our business, operating results and reputation as well as the trading price of our ordinary shares, and could also create uncertainties for this offering.”
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law, employers in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
Organization structure. |
Organization structure
The following is a list of our principal subsidiaries and consolidated affiliated entities as of the date of this proxy statement/prospectus:
Name | Place of Formation | Relationship | ||
Hongkong Internet Financial Services Limited | Hong Kong | Wholly-owned subsidiary | ||
Beijing Yingxin Yijia Network Technology Co., Ltd | People’s Republic of China | Consolidated affiliated entity | ||
Hongkong Shengqi Technology Limited | Hong Kong | Consolidated affiliated entity | ||
Hudson Capital USA Inc. | New York | Wholly-owned subsidiary | ||
Sheng Ying Xin (Beijing) Management Consulting Co., Ltd | People’s Republic of China | Consolidated affiliated entity | ||
Kashgar Sheng Yingxin Enterprise Consulting Co., Ltd | People’s Republic of China | Consolidated affiliated entity | ||
Fu Hui (Shenzhen) Commercial Factoring Co., Ltd | People’s Republic of China | Consolidated affiliated entity | ||
CIFS (Xiamen) Financial Leasing Co., Ltd. | People’s Republic of China | |||
People’s Republic of China | Consolidated affiliated entity | |||
Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd. | People’s Republic of China | Consolidated affiliated entity | ||
Hangzhou Yuchuang Investment Partnership | People’s Republic of China | Consolidated affiliated entity | ||
Hudson Capital Merger Sub I Inc. | Delaware | Wholly-owned subsidiary | ||
Hudson Capital Merger Sub II Inc. | Delaware | Wholly-owned subsidiary | ||
Hudson Capital Holding Co. | Delaware | Indirect wholly-owned subsidiary |
We are 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 (“WFOE”) in the People’s Republic of China with a registered capital of RMB1,000,000 (approximately $150,375.94) on December 31, 2015. WFOE has entered into a series of contractual 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. Sheng Ying Xin was originally incorporated as Ding Zhi Tai Da Investment Management (Beijing) Co. Ltd and later changed its name to Sheng Ying Xin (Beijing) Management Consulting Co., Ltd on February 17, 2016. Ding Zhi Tai Da Investment Management (Beijing) Co. Ltd, as it was then known, was initially incorporated with a registered capital of RMB 45,000,000 (approximately $6,766,917.29). Its registered capital was later increased to RMB 150,000,000(approximately $22,556,390.98) on June 30, 2015 but later reduced to RMB 50,000,000 (approximately $7,518,796.99) on April 25, 2016. 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 a registered capital of RMB 5,000,000 (approximately, $726,665), which capital has to be contributed in full by December 31, 2026. The legal representative of Kashgar SYX is Mr. Shaoyong Huang, who is also a 1% nominee equity shareholder of Sheng Ying Xin on behalf of Mr. Jianxin Lin.
On March 10, 2017, Sheng Ying Xin incorporated Fu Hui (Shenzhen) Commercial Factoring Co., Ltd. (“FuhuiSZ”) in the People’s Republic of China. FuhuiSZ mainly provides supply chain financing services to commercial enterprises. On September 19, 2017, Sheng Ying Xin Incorporated Yingda Xincheng (Beijing) Insurance Broker Co., Ltd. (“Ying Da Xin Cheng”) in the People’s Republic of China with a registered capital of RMB 50,000,000 (approximately, $7,518,796.99). Ying Da Xin Cheng will mainly focus on providing insurance brokerage services.
On November 23, 2017, Sheng Ying Xin acquired Beijing Anytrust Science & Technology Co., Ltd. (“Anytrust”). Anytrust is a limited company incorporated on June 9, 2014 in the People’s Republic of China with a registered capital of RMB 7.5 million (approximately $1.19 million). Anytrust was a “big data” company providing data infrastructure design, big data access and analytics, and document automation for enterprises and government agencies with customers including Tianhong Asset Management, Yinhua Fund Management and BAIC Motor, etc.
Our acquisition of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage of growth. In early 2018, Anytrust launched the beta version of AnyInfo, a vertical search engine and big data platform covering a broad range of publicly available data of over 30 million enterprises in China. In September 2018, Anytrust launched the AnyInfo Enterprise Edition of its big data analysis and A.I. report services to promote its ability to generate customized segment/industry and company profiles to its users.
However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust was approximately only $546,303 in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3 million per month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it was technically insolvent. We had tried to stem our losses through 2018 and by then, we had only 3 employees from an original 89 when we acquired Anytrust.
We also determined it in our best interest to transfer our equity interest in Anytrust to our former Chief Executive Officer, Mr. Jianxin Lin, who had expressed interest in assuming Anytrust and rehabilitating it. In order to incentivize the transfer, we decided to write down all the debts owed by Anytrust to Sheng Ying Xin, totaling RMB 20,532,400 (approximately $3,059,970) and transferring the equity interest to Mr. Lin for no consideration because we had determined that this debt was uncollectible and irrecoverable. The equity transfer was completed December 30, 2018.
On May 25, 2018, Hongkong Internet Financial Services Limited incorporated CIFS (Xiamen) Financial Leasing Company to provide financial leasing services and equipment purchase financing to commercial enterprises. CIFS (Xiamen) Financial Leasing Company did not have any revenue in 2018.
On May 25, 2018, Sheng Ying Xin incorporated Fuhui (Xiamen) Commercial Factoring Co., Ltd. (“FuhuiXM”) to provide factoring services to commercial enterprises in Xiamen. Its registered capital is RMB28 million (approximately $4.14 million).
On July 11, 2018, Sheng Ying Xin incorporated Zhizhen Investment & Research (Beijing) Information Consulting Co., Ltd (“Zhizhen”), to provide investment research services. Zhizhen did not have any operations in 2018.
On July 25, 2018, Sheng Ying Xin formed Hangzhou Yuchuang Investment Partnership (“Hangzhou Yuchuang”), in which it owns 100% of the equity interest. Hangzhou Yuchuang is an investment vehicle for our strategic investing activities. Its registered capital is RMB 5.77 million (approximately $0.84 million).
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.
On April 9, 2020, we incorporated Hudson Capital USA Inc. in NewYork as a wholly-owned subsidiary.
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.
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.
Accordingly, the results of operations, assets and liabilities of WFOE and Sheng Ying Xin have been included in the accompanying consolidated financial statements.Because we are a holding company that manages Sheng Ying Xin though a series of contractual arrangements, our consolidated financial statements are essentially those of WFOE’s and Sheng Ying Xin’s as we are conferred their economic benefits.
Hudson’s shareholders do not own shares of Sheng Ying Xin. Instead they hold shares of a shell company issuer that maintains service agreements with an associated operating company. The business of Hudson Capital, Inc. (as it is known today) is that of providing management services to Sheng Ying Xin, VIE, which in turn, is in the business of providing financial advisory services.
In the opinion of Sino-Integrity Law firm, our PRC counsel, the ownership structures of our wholly-foreign owned enterprise and our variable interest entities in China, do not and will not violate any applicable PRC law, regulation or rule currently in effect based on the current interpretation of those law, regulation or rule; and the contractual arrangements between our wholly-foreign owned enterprise, our variable interest entities and their respective equity holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect based on the current interpretation of those law, regulation or rule. We also do not require the approval of the People’s Republic of China government to be listed on the Nasdaq Capital Market.
We presently provide almost all our financial advisory services through Sheng Ying Xin and Kashgar SYX although we have historically generated all our revenue through Sheng Ying Xin. In 2018, we generated a small portion of our total revenue (approximately $0.54 million) from the provision of technical services by Anytrust, which is basically the provision of financial data services to financial institutions, and $0.5 million from the provision of factoring services by FuhuiSZ and FuhuiXM.
On March 31, 2020, our former Chief Executive Officer, Mr. Jianxin Lin resigned as our Chief Executive Officer and Chairman and was replaced by Mr. Warren Wang. By April 18, 2020, all our independent directors had resigned and were replaced by new directors, namely, Mr. MingYi (Martin), Mr. Hong Chen and Ms. Xiaoyue Zhang.
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 15, 2020, we received notification from the NASDAQ that our application to list our ordinary shares on The Nasdaq Capital Market had been approved. Our ordinary shares began trading on the Nasdaq Capital Market at the opening of business on July 16, 2020.
On August 20, 2020, our former Chief Financial Officer and director, Mr. Jinchi Xu tendered his resignation citing personal reasons for his resignation. Our board of directors accepted his resignation with effect from August 20, 2020 and on the same day, appointed Mr. Hon Man Yun to replace him.
Contractual Arrangements among Our Wholly-foreign Owned Enterprise, Variable Interest Entity and the Variable Interest Entity Equity Holders
We are a British Virgin Islands company and our wholly owned PRC subsidiary, Beijing Yingxin Yijia Network Technology Co., Ltd is a wholly foreign-owned enterprise (“WFOE”). British Virgin Islands companies and wholly foreign owned PRC enterprises are restricted from holding certain licenses related to the online information service and conduct of value-added telecommunication services in China.
We are implementing our “Plus Internet” strategy by developing an online electronic platform in stages to allow our clients to firstly access information regarding available financial products and services and then later track their loan application status. Because this would fall under the provision of online information service and conduct of value-added telecommunication services in China, we would be subject to significant restrictions under current PRC laws and regulations. The PRC government regulates internet access, the distribution of online information in China through strict business licensing requirement and other government regulations.
Accordingly, we, through Sheng Ying Xin (Beijing) Management Consulting Co., Ltd, applied for and received an Internet Content Provider (“ICP”) license for value-added Internet information services on December 18, 2015.
The registered shareholders of Sheng Ying Xin are Mr. Jianxin Lin and Mr. Shaoyong Huang (collectively, the “SYX Shareholders”). Neither we nor our subsidiaries own any equity interest in Sheng Ying Xin. Instead, we control and receive the economic benefits of Sheng Ying Xin’s business operation through a series of contractual arrangements. WFOE, Sheng Ying Xin and its shareholders entered into a series of contractual arrangements, also known as VIE Agreements, on April 26, 2016. The VIE agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as 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. According to our Chinese counsel, Sino-Integrity Law Firm, the VIE Agreements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC. According to the Exclusive Business Cooperation Agreement, Sheng Ying Xin is obligated to pay service fees to WFOE approximately equal to the net income of Sheng Ying Xin.
Other than the ICP license and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held by our variable interest entity, Sheng Ying Xin, we hold our material assets in, and conduct our material operations through Sheng Ying Xin and generate all our revenue from it. We plan to gradually transition our financial advisory services, which is not subject to foreign ownership restrictions to WFOE over time. Presently, we rely on the VIE Agreements to capture the profits and associated cash flow from operations to transfer such cash flow from the Sheng Ying Xin to WFOE.
The following diagram is a simplified illustration of the ownership structure and contractual arrangements that we have in place for our variable interest entity:
Each of the VIE Agreements referenced on page 23 is described in detail below:
Contract that enables us to receive substantially all of the economic benefits from the variable interest entity
Exclusive Business Cooperation Agreement
Pursuant to the SYX Exclusive Business Cooperation Agreement between Sheng Ying Xin and WFOE, WFOE provides Sheng Ying Xin with technical support, financing 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 SYX 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 SYX 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 SYX Share Pledge Agreement between the 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 SYX 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 SYX Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws, and the funds collected by WFOE by enforcing the pledge will be used for satisfying all obligations secured under the SYX Share Pledge Agreement. 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 SYX Share Pledge Agreement have been registered with relevant office of the Administration for Industry and Commerce in China.
The SYX Share Pledge Agreement shall be effective until all payments due under the SYX Exclusive Business Cooperation Agreement have been paid by Sheng Ying Xin. WFOE shall cancel or terminate the SYX Share Pledge Agreement upon Sheng Ying Xin’s full payment of fees payable under the SYX Exclusive Business Cooperation Agreement.
Exclusive Option Agreement
Under the ExclusiveSYX Option Agreement,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 exercises the option, the parties shall enter into a separate equity interest transfer or similar agreement.
Power of Attorney
Under the SYX 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 SYX Power of Attorney, the term of the SYX Power of Attorney shall be the same term as the SYX Exclusive Option Agreement.
This SYX 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, unless WFOE instructs the SYX Shareholder in writing to terminate the SYX Power of Attorney in whole or in part.
In the opinion of Sino-Integrity Law Firm, our PRC legal counsel:
● | the ownership structures of our wholly-foreign owned enterprise and our variable interest entity in China currently do not and will not violate any applicable PRC law, regulation, or rule currently in effect based on current interpretation of those law, regulation or rule; and | |
● | the contractual arrangements between our wholly-foreign owned enterprise, our variable interest entity and the variable interest entity equity holders governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable PRC laws, rules, and regulations currently in effect, and will not violate any applicable PRC law, regulation, or rule currently in effect. |
However, we have been further advised by our PRC legal counsel, Sino-Integrity Law Firm, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. counsel and that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements.
We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our Internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors — Risks Related to Our Corporate Structure.”
PropertiesFacilities
We currently maintain two physical office in Beijing, China. We believe that our existing facilities are adequate for our current requirements and we will be able to enter into lease arrangements on commercially reasonable terms for future expansion.
In Beijing, we leaseleased approximately 127 square meters (approximately 1,367 square feet) of office space at Unit 1102 on the 11st Floor of No.6 Building located at Jianguo Road, Chaoyang District, Beijing. The lease started on March 5, 2019 and expired on March 04, 2020. Under this old lease, the Company paid a monthly rent of RMB 22,572.00 (approximately $3,320). The lease was terminated on August 21, 2019.
We entered into a new lease on April 4, 2019 for approximately 210 square meters (approximately 2,260 square feet) of office space at Unit 808 on the 7th Floor of No.8 Building located at Jianguo Road, Chaoyang District, Beijing. The lease will expire on September 1, 2020 and we shall pay a monthly rent of RMB 41,202 (approximately $5,976). The lease was terminated on April 3, 2019.
We also leased approximately 123 square meters (approximately 1,323 square feet) of office space at Unit 2106 on the 21st Floor of No.1 Building located at Jianguo Road, Chaoyang District, Beijing. The lease started on September 2, 2019 and expired on April 3, 2020. We paid a monthly rent of RMB 18,891 (approximately $2,740) under this lease. The lease was terminated on April 3, 2020.
Kashgar SYX leases approximately 204 square meters (approximately 2,194.55 square feet) of office space at Unit 1513-1514 of the East Tower of Global Financial Center located at No.1 East Third Ring Middle Road, Chaoyang District, Beijing. The lease started on May 24, 2017 and will expire on September 23, 2019. The rent under this lease is RMB 149,240 (approximately $22,960) per year, which was paid in full upon execution of the lease agreement. Kashgar SYX also paid a deposit of RMB 10,000 (approximately $1,538.46), which is refundable at the end of the lease, subject to certain conditions set forth in this lease agreement.
We entered into a new sublease on April 1, 2020 for approximately 303 square meters (approximately 3,258 square feet) of office space at 19 West, 44th Street, Suite 1001, New York, NY 10036. The lease will expire on April 1, 2021 and we shall pay a monthly rent of $8,500.
Each of subsidiaries has a registered office address, which is subject to renewal on a yearly basis.
Legal Proceedings
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.
HUDSON’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A. | Operating Results |
Overview
We are mainly in the business of providing financial advisory services 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, CIFS (Xiamen) Financial Leasing Co., Ltd and Beijing Yingxin Yijia Network Technology Co., Ltd and our contractually controlled and managed company, Sheng Ying Xin (Beijing) Management Consulting Co., Ltd (“SYX” or “Sheng Ying Xin”), and its 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 offer commercial payment advisory services, international corporate financing advisory services, intermediary bank loan advisory services and supply chain financing services.
We generate 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 earn interest income from our direct or entrusted lending activities. Our total net revenue was $25.12 million in 2017, $14.4 million in 2018, and reduced to $1.37 million in 2019.2019 and declined to $618 in 2020. We had a net income of $23.46 million, a net loss of $3.82 million, and a net loss of $62 million and $9 million in 2017, 2018, 2019 and 2019,2020, respectively. Our business has slowed down in recent years. The main reason is that 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 $2,429$2.429 million, $996 million and $0.42 million in financingfinancings 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 almost a year and we have only started to recover gradually in the last quarter of 2020. We used to provide technical services through our subsidiary, Beijing Anytrust Science & Technology Co., Ltd (“Anytrust)Anytrust”). In 2018, we generated $0.54 million from the provision of technical services. However, in order to reduce our operating losses, we disposed of Anytrust on December 30, 2018 and therefore we no longer provide such technical services.
We received an Internet Content Provider (“ICP”) license for value-added Internet information services in December 2015. We plan to develop our electronic platform in stages to allow our clients to firstly access information regarding available financial products and services and then later track their loan application status, and ultimately, complete the entire application and approval process online. The ICP license is a permit issued by the Chinese Ministry of Industry and Information Technology to permit China-based websites to operate in China. Due to PRC legal restrictions on foreign ownership of companies that engage in value-added telecommunication businesses and certain other businesses in China, we conduct such business through one consolidated variable interest entity. We have contractual arrangements with these entities and their shareholders that enable us to effectively control and receive substantially all of the economic benefits from the entities, which we have consolidated in our financial statements.
Key Factors Affecting Our Results of Operations
Major factors affecting our results of operations include the following:
Economic Conditions in China
The demand for financial advisory services from borrowers is dependent upon overall economic conditions in 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. This 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 advisory 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 has depended on, and 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 and intend to continue to make efforts to source loan and investment products to meet the individualized needs of our borrowers. We constantly evaluate the popularity of existing product offerings and services that cater to the ever evolving needs of our borrowers. We also seek to negotiate better terms for our customers based on our relationships with banks and lending institutions.
Over time we will continue to expand our offerings by introducing new products. We plan to expand our service portfolio by merging with or acquiring entities already holding other such financial service licenses, such as factoring, microcredit, financial leasing, pawn mortgage and rural banking licenses so that we may expand into providing such services.
From the borrower perspective, we will continue to tailor credit products to meet their specific needs.
Ability to Compete Effectively
Our business and results of operations depend on our ability to compete effectively in the markets in which we operate. The financial advisory 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 advisory 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 advisory 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 proxy statement/prospectus.
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.
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 include 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 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 starts 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 will deposit cash with the bank or purchase 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 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 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 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.
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, 2019 and 2018.
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, 2019 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.proxy statement/prospectus.
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.
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-termshort 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, 20192020 and 2018.2019.
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, 20182020 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.
Results of Operations
Results for the Year ended December 31, 2019 compared to the Year ended December 31, 2018
Operating Metrics for the year ended December 31, 2019period from January 1, 2021 to June 30, 2021.
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 growthon-going strategies and making strategic decisions.
For the Year Ended December 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
RMB | US$ | RMB | US$ | |||||||||||||
(in Million) | ||||||||||||||||
Amount of financing advised: | 153 | 22 | 7,630 | 1,153 | ||||||||||||
Commercial Payment | - | - | 3,610 | 545 | ||||||||||||
International Corporate Financing | - | - | 1,950 | 295 | ||||||||||||
Intermediary Loan | 153 | 22 | 2,070 | 313 | ||||||||||||
Amount of financing factored: | - | - | - | - | ||||||||||||
Factoring Business | 15 | 2 | 82 | 12 |
For the Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
(in US$) | ||||||||
Advisory fees billed to clients(1) | - | - | ||||||
Factoring service fee billed to clients(2) | - | 605 |
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Number of clients advised(1) | 1 | 47 | ||||||
Commercial Payment | - | 22 | ||||||
International Corporate Financing | - | 2 | ||||||
Intermediary Loan | 1 | 23 |
(1) Represent amounts net of VAT.
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
(in US$ thousands) | ||||||||
Advisory fees billed to clients(2) | 417 | 13,856 |
The amount of financing advised is calculated by summing up the actual financing amount indicated onunder the financing advisory contracts. The revenue is calculated by multiplying the service fee ratio indicated on the contract and the financing amount advised.
(2) Represent amounts net of VAT
The amount of factoring service provided is calculated by summing up actual financing amount under the factoring contracts. The revenue is calculated by multiplying the factoring service fee ratio and the interest rate indicated on the contract and the financing amount provided.
Results of Operations
Results for the Six Months ended June 30, 2021 compared to Six Months ended June 30, 2020
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 | |||||||||||||||
2019 | 2018 | Amount | % | |||||||||||||
Revenue | $ | 1,366,417 | $ | 14,402,329 | $ | (13,035,912 | ) | (90.5 | )% | |||||||
Cost of revenue | 123 | 654,979 | (654,856 | ) | (100.0 | )% | ||||||||||
Gross profit | 1,366,294 | 13,747,350 | (12,381,056 | ) | (90.1 | )% | ||||||||||
General and administrative expense | 1,893,499 | 11,664,394 | (9,770,895 | ) | (83.8 | )% | ||||||||||
Selling and distribution expense | 100,460 | 576,526 | (476,066 | ) | (82.6 | )% | ||||||||||
Research & Development Expense | - | 3,512,512 | (3,512,512 | ) | (100 | )% | ||||||||||
(Loss) income from operations | (627,665 | ) | (2,006,082 | ) | 1,378,417 | (68.7 | )% | |||||||||
Interest income on bank deposit | 666 | 16,182 | (15,516 | ) | (95.9 | )% | ||||||||||
Other expenses | (5,611,484 | ) | (510,200 | ) | (5,101,284 | ) | 999.9 | % | ||||||||
Interest income from loans to third parties | 2,191,631 | 6,465,042 | (4,273,411 | ) | (66.1 | )% | ||||||||||
Loss on disposal of a subsidiary | - | (2,062,155 | ) | 2,062,155 | (100.0 | )% | ||||||||||
Impairment loss on loans to third parties and property and equipment | (57,941,663 | ) | (7,423,651 | ) | (50,518,012 | ) | 681 | % | ||||||||
(Loss) income before income taxes | (61,988,515 | ) | (5,520,864 | ) | (56,467,651 | ) | 1023 | % | ||||||||
Income tax (benefit) expenses | 7,243 | (1,702,127 | ) | 1,709,370 | (100.4 | )% | ||||||||||
Net (loss) income | $ | (61,995,758 | ) | $ | (3,818,737 | ) | $ | (58,177,021 | ) | 1523 | % | |||||
Comprehensive loss (income) | $ | (62,361,016 | ) | $ | (6,234,656 | ) | $ | (56,126,360 | ) | 900 | % |
Six Months Ended June 30, | Variance | |||||||||||||||
2021 | 2020 | Amount | % | |||||||||||||
Revenue | $ | - | 605 | $ | (605 | ) | (100.0 | )% | ||||||||
Cost of revenue | - | - | % | |||||||||||||
Gross profit | - | 605 | (605 | ) | (100.0 | )% | ||||||||||
Selling and marketing expense | - | 10,534 | (10,534 | ) | (100.0 | )% | ||||||||||
General and administrative expense | 395,665 | 862,015 | (466,350 | ) | (54.1 | )% | ||||||||||
(Loss) Income from operations | (395,665 | ) | (871,944 | ) | (476,279 | ) | (54.6 | )% | ||||||||
Interest income on bank deposit | 4 | 14 | (10 | ) | (71.4 | )% | ||||||||||
Other income (expenses), net | 3,631 | 50,000 | (46,369 | ) | (92.7 | )% | ||||||||||
Interest income from loans to third parties | - | 181,000 | (181,000 | ) | (100.00 | )% | ||||||||||
Reversal of impairment loss (Impairment loss) on loans to third parties | - | 687 | (687 | ) | (100.00 | )% | ||||||||||
Loss before income taxes | (392,030 | ) | (640,243 | ) | (248,213 | ) | (38.8 | )% | ||||||||
Income tax (benefit) expenses | - | - | % | |||||||||||||
Net loss | $ | (392,030 | ) | $ | (640,243 | ) | $ | (248,213 | ) | (38.8 | )% | |||||
Comprehensive loss | $ | (440,842 | ) | $ | (615,118 | ) | $ | (174,242 | ) | (28.3 | )% |
Revenue
A breakdown of our revenueRevenue for the yearsix months ended December 31, 2019 versus the year ended December 31, 2018 is set forth below:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2019 | % | 2018 | % | Amount | % | |||||||||||||||||||
Intermediary Bank Loan Advisory Services | $ | 417,347 | 30.5 | % | $ | 6,091,830 | 42.3 | % | $ | (5,674,483 | ) | (93.1 | )% | |||||||||||
International Corporate Financing Advisory Services | - | - | 1,111,991 | 7.7 | % | (1,111,991 | ) | (100.0 | )% | |||||||||||||||
Commercial Payment Advisory Services | - | - | % | 6,153,018 | 42.7 | % | (6,153,018 | ) | (100.0 | )% | ||||||||||||||
Factoring Service | 949,070 | 69.5 | % | 499,187 | 3.5 | % | 449,883 | 90.1 | % | |||||||||||||||
Technical service | - | 546,303 | 3.8 | % | (546,303 | ) | (100.0 | )% | ||||||||||||||||
Total Amount | $ | 1,366,417 | 100 | % | $ | 14,402,329 | 100 | % | $ | (13,035,912 | ) | (90.5 | )% |
Net revenue for the year ended December 31, 2019June 30, 2021 decreased by 91% year-over-year100.0% period-over-period to $1,366,417$0 from $14,402,329$605 in the same period in 2018.2020.
We did not generate anyOur revenue from commercial payment advisory services in 2019 compared to $6,153,018 in 2018 on total financing amount of $545 million. Similarly, we did not generate any revenue from international corporate financing advisory services for year ended December 31, 2019 compared to $1,111,991 in the yearsix months ended December 31, 2018.June 30, 2021 was $0, comparing with the six months ended June 30, 2020 of $605, which was derived from factoring services. This is mainly due to the business influenced by the weaker economic environment and the company’s strategic adjustment in its business to focus on its factoring business.
Our acquisitionslow-down of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage of growth. However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust was approximately only $546,303 in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3 million per month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it was technically insolvent and disposed of it. Accordingly, we generated no revenue from the provision on FinTech services and products in 2019.
Approximately 30.5% of our revenue or $417,347 was derived from providing intermediary bank loan advisory services to just one customer in 2019, a 93.1% decrease from $6,091,830 in the year ended December 31, 2018.
Approximately 69.5% of our revenue or $949,070 was derived from our supply chain financing services, a 90.1% increase from $499,187 in 2018. We first announced the implementation of our supply chain financing services in 2017 through our subsidiary, FuhuiSZ. We incorporated FuhuiXM in 2018 to further grow our supply chain financing services.
Overall, our revenue decreased substantially for the year ended December 31, 2019 compared to the same period in 2018, mainly due to a reduction in business opportunitiesChina macro-economy, partly as a result of the overall economic environment inCOVID-19 pandemic and the PRCensuing containment measures both domestically and strategic adjustmentinternationally and deterioration of potential clients’ credit worthiness, which made loans to these clients unfeasible. We have suspended our domestic banking related advisory business to diversify and explore new business opportunities.lines.
Cost of Revenue
Total cost of revenue, which comprises mainly revenue-generating staffing costs, was $123$0 for the yearsix months ended December 31, 2019June 30, 2021 compared to $654,979$0 for the yearsix months ended December 31, 2018.June 30, 2020. The main reasons for the decrease in cost of revenue was the very minimal business volume in 2019.
Our cost of revenue is broken down by service lines as follows:because we have no sales staff.
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2019 | % | 2018 | % | Amount | % | |||||||||||||||||||
Intermediary Bank Loan Advisory Services | $ | - | - | % | $ | 142,784 | 21.8 | % | $ | (142,784 | ) | (100.0 | )% | |||||||||||
International Corporate Financing Advisory Services | - | - | % | 5,617 | 0.9 | % | (5,617 | ) | (100.0 | )% | ||||||||||||||
Commercial Payment Advisory Services | - | - | % | 78,562 | 12.0 | % | (78,562 | ) | (100.0 | )% | ||||||||||||||
Technical services | - | - | % | 330,995 | 50.5 | % | (330,995 | ) | (100.0 | )% | ||||||||||||||
Sales tax and surcharges | 123 | 100.0 | % | 97,021 | 14.8 | % | (96,898 | ) | (99.9 | )% | ||||||||||||||
Total Amount | $ | 123 | 100 | % | $ | 654,979 | 100 | % | $ | (654,856 | ) | (100 | )% |
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2019period from January 1, 2021 to June 30, 2021 decreased by 90%100.0% to $1,366,294$0 from $13,747,350 for$605 in the year ended December 31, 2018.same period in 2020. The decrease is in line with the revenue decrease of 91%100.0% over the same periods.
Gross margin, or gross profit as a percentage of total revenue,revenues, was 95%100% for the year ended December 31, 2018, which is a slight decreaseperiod from January 1, 2020 to June 30, 2021, compared to 97% forwith 100% in the year ended December 31, 2017.same period in 2020.
Operating Expenses
The following table sets forth the breakdown of our operating expenses for the year ended December 31, 2019 and 2018, respectively:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2019 | % | 2018 | % | Amount | % | |||||||||||||||||||
General and administrative expenses | $ | 1,893,499 | 95.0 | % | $ | 11,664,394 | 74.0 | % | $ | (9,770,895 | ) | (83.8 | )% | |||||||||||
Selling and marketing expenses | 100,460 | 5.0 | % | 576,526 | 3.7 | % | (476,066 | ) | (82.6 | )% | ||||||||||||||
Research & Development Expense | - | - | 3,512,512 | 22.3 | % | (3,512,512 | ) | (100.0 | )% | |||||||||||||||
Total Amount | $ | 1,993,959 | 100 | % | $ | 15,753,432 | 100 | % | $ | (13,759,473 | ) | (87.3 | )% |
Total operating expenses for the yearsix months ended December 31, 2019June 30, 2021 decreased 87%54.7% period-over-period to $1,993,959$395,665 from $15,753,432$872,549 in the yearsame period in 2020.
Selling and marketing expenses for the six months ended December 31, 2018.June 30, 2021 decreased 100% period-over-period to $0 from $10,534 in the comparable period in 2020, a decrease of $10,534. The period-over-period decrease is in line with the overall scaling down of our business.
General and administrative expenses consist primarily of staff costs,salaries, rental expenses and office relatedconsulting service expenses. General and administrative expenses were $1,893,499, or 139% of total revenue$395,665 for the yearsix months ended December 31, 2019,June 30, 2020, as compared to $11,664,394 or 81.0% of total revenue$862,015 in the year ended December 31, 2018, an increasesame period in 2020, a decrease of $9,770,895.$466,350 or 54.1%. The decrease in general and administrative expenses iswas mainly due to savings as a resultthe overall scaling down of laying off our staff and terminating leases in 2019.
Selling and marketing expenses for the year ended December 31, 2019 decreased by 83% to $100,460 from $576,526 in the year ended December 31, 2018. The year-over-year decrease primarily resulted from downsize in our business.
Research and development expenses which had previously consisted mainly of staffing costs incurred in the research and development of financial data software by Anytrust were nil in the year ended December 31, 2019 as we had disposed of Anytrust in December 2018.
(Loss) Income from Operations and Operating Margin
Loss from operations in the yearsix months ended December 31, 2019June 30, 2021 was $627,665,$395,665, compared with loss from operations of $2,006,082$871,944 in the year ended December 31, 2018.same period in 2020.
Operating margin, or income from operations as a percentage of total revenue, was negative 46%0% and (144,123)% for the yearsix months ended December 31, 2019, compared with negative 14% for the year ended December 31, 2018June 30, 2021 and 2020 respectively. This decrease was mainly due to the previously discussed changes.significant decrease in our revenue.
Other income/(expenses)Interest income
The following table sets forth the breakdown of our otherInterest income was $4 for the six months ended June 30, 2021, being bank interest, compared with $181,014 for the same period a year ended December 31, 2019 and the year ended December 31, 2018:ago, which was primarily derived from loans to third parties.
Other income (expenses), net
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2019 | % | 2018 | % | Amount | % | |||||||||||||||||||
Interest income on loans to third parties | $ | 2,191,631 | (3.5 | )% | $ | 6,465,042 | (183.9 | )% | $ | (4,273,411 | ) | (66.1 | )% | |||||||||||
Interest income on bank deposits | 666 | (0.0 | )% | 16,182 | (0.5 | )% | (15,516 | ) | (95.9 | )% | ||||||||||||||
Other expenses | (5,611,484 | ) | 9.1 | % | (510,200 | ) | 14.5 | % | (5,101,284 | ) | 999.9 | % | ||||||||||||
Loss on disposal of a subsidiary | - | - | (2,062,155 | ) | 58.7 | % | 2,062,155 | (100.0 | )% | |||||||||||||||
Impairment loss on loans to third parties and property and equipment | (57,941,663 | ) | 94.4 | % | (7,423,651 | ) | 211.2 | % | (50,518,012 | ) | (680.5 | )% | ||||||||||||
Total Amount | $ | (61,360,850 | ) | 100.0 | % | $ | (3,514,782 | ) | 100.0 | % | $ | (57,846,068 | ) | 1645.8 | % |
Other income principally consistswas $3,631 for the six months ended June 30, 2021, compared with other income of interest$50,000 for the same period a year ago. Other income onwas primarily from customers’ compensation for overdue services for the six months ended June 30, 2021 and other income was primarily from the disposal of expired loans to third parties was $2,191,631 and $6,465,042to an unrelated third party for the yearssix months ended December 31, 2019 and 2018, respectively, a decrease of 66% year over year. This decrease is in line with the decrease of average loan balances to third parties, which were $40.8 million and $0.2 million for the years ended December 31, 2018 and 2019, respectively.
Other expenses (which include interest expenses) for the year ended December 31, 2019 increased by $5,101,284 to $5,611,484 from $510,200 in the year ended December 31, 2018. because $4,857,164 in uncollectible interest revenue was recognized as interest expense.
Loss on disposal of a subsidiary refers to the loss incurred as a result of the disposal of Anytrust on DecemberJune 30, 2018, as a result of Anytrust incurring substantial operating losses.
Impairment loss on loans to third parties and property and equipment amounted to $57.9 million in 2019. Management assessed the collectability of its assets by the end of the year and determined that a provision of $57.9 million and $7.4 million be made against entrusted loans, direct loans and office equipment in 2019 and 2018, 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.2020.
Income tax (benefit) expense
Income tax expense was $7,243expenses were $0 for the yearsix months ended December 31, 2019,June 30, 2021, compared with income tax benefitexpenses of $1,702,127 for$0 in the year ended December 31, 2018.same period of the previous year. The income tax expenses were mainly valuation allowance made on deferred tax assets on our accounts since management believes that it is unlikely to generate any profits in the foreseeable future and determined to utilize the deferred tax assets as a result of accumulated operating losses.
Foreign Currency Translation Gain/(Loss)
Foreign currency translation loss was $365,258$48,812 in the yearsix months ended December 31, 2019,June 30, 2021, compared with a lossgain of $2,415,919$25,125 in the same period of the previous year, ended December 31, 2018 as a result of the fluctuations in the exchange rates of the Renminbi against the US dollar.
Net (Loss) IncomeLoss
Net loss for the yearsix months ended December 31, 2019June 30, 2021 was $61,995,758,$392,030, as compared to net loss of $3,818,737$640,243 recorded for the yearsix months ended December 31, 2018. The increase in net loss is mainlyJune 30, 2020. This decrease was principally due to a significant downturn inthe suspension on our domestic banking related advisory business lines, the overall scaling down of our business and an increase inno addition of impairment losses against uncollectible assets.on our direct loans and loans to third parties.
Liquidity and Capital Resources
As of December 31, 2019 and December 31, 2018, we held cash of $13,567 and $1,578,828 respectively.
The following table summarizes our cash flows for the year ended December 31, 2019 and for the same period in 2018.
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||
Net cash (used in) provided by operating activities | $ | (1,071,378 | ) | $ | (17,266,382 | ) | ||
Net cash used in investing activities | (200,000 | ) | (7,723,259 | ) | ||||
Net cash (used in) provided by financing activities | (31,201 | ) | (128,407 | ) | ||||
Effect of exchange rate change on cash and cash equivalents | (262,682 | ) | (468,386 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (1,565,261 | ) | (25,586,434 | ) | ||||
Cash and cash equivalents, beginning balance | 1,578,828 | 27,165,262 | ||||||
Cash and cash equivalents, ending balance | $ | 13,567 | $ | 1,578,828 |
Operating activities
Net cash used in operations was $1.01 million for the year ended December 31, 2019, representing a decrease of $16.26 million from cash used in operating activities of $17.3 million for the year ended December 31, 2018, though our losses increased by $55.8 million in 2019 mainly because our impairment losses were $55.5 million in 2019, an increase by $47 million than 2018.
Investing activities
Net cash used in investing activities for year ended December 31, 2019 was $0.2 million, a decrease of $7.5 million from net cash used in investing activities of $7.7 million for the year ended December 31, 2018. This is mainly due to the decrease of our loans to third parties by $7.6 million compared to 2018.
Financing activities
Net cash used in financing activities for the year ended December 31, 2019 was $0.085 million, a decrease of approximately $0.045 million from cash provided by financing activities of $0.13 million for the year ended December 31, 2018. The decrease was mainly attributable to the decrease in repayment to a related party.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
The following table sets forth the Company’s operating lease commitment as of December 31, 2019:
Office Rental | ||||
Year ending December 31, | ||||
2020 | 4,399 | |||
Total | $ | 4,399 |
For the years ended December 31, 2019, 2018 and 2017, rental expenses under operating leases were approximately $258,476, $2,516,053 and $975,868, respectively.
Results for the Year ended December 31, 2018 compared to the Year ended December 31, 2017
Operating Metrics for the year ended December 31, 2018
We regularly monitor a number of metrics in order to measure our current and projected future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
For the Year Ended December 31, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
RMB | US$ | RMB | US$ | |||||||||||||
(in Million) | ||||||||||||||||
Amount of financing advised: | 7,630 | 1,153 | 16,397 | 2,429 | ||||||||||||
Commercial Payment | 3,610 | 545 | 9,963 | 1,476 | ||||||||||||
International Corporate Financing | 1,950 | 295 | 4,389 | 650 | ||||||||||||
Intermediary Loan | 2,070 | 313 | 2,045 | 303 | ||||||||||||
Amount of financing factored: | ||||||||||||||||
Factoring Business | 82 | 12 | - | - |
For the Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Number of clients advised(1) | 47 | 47 | ||||||
Commercial Payment | 22 | 31 | ||||||
International Corporate Financing | 2 | 5 | ||||||
Intermediary Loan | 23 | 11 |
For the Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
(in US$ thousands) | ||||||||
Advisory fees billed to clients(2) | 14,402 | 25,116 |
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.
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 | |||||||||||||||
2018 | 2017 | Amount | % | |||||||||||||
Revenue | $ | 14,402,329 | $ | 25,116,139 | $ | (10,713,810 | ) | (42.7 | )% | |||||||
Cost of revenue | 654,979 | 729,752 | (74,773 | ) | (10.2 | )% | ||||||||||
Gross profit | 13,747,350 | 24,386,387 | (10,639,037 | ) | (43.6 | )% | ||||||||||
General and administrative expense | 11,664,394 | 3,169,855 | 8,494,539 | 268.0 | % | |||||||||||
Selling and distribution expense | 576,526 | 371,383 | 205,143 | 55.2 | % | |||||||||||
Research & Development Expense | 3,512,512 | 92,683 | 3,419,829 | 3,689.8 | % | |||||||||||
Donation expense | - | 148,108 | (148,108 | ) | (100.0)% | |||||||||||
(Loss) income from operations | (2,006,082 | ) | 20,604,358 | (22,610,440 | ) | (109.7 | )% | |||||||||
Interest income on bank deposit | 16,182 | 13,600 | 2,582 | 19.0 | % | |||||||||||
Other expenses | (510,200 | ) | (7,058 | ) | (503,142 | ) | 7,128.7 | % | ||||||||
Interest income from loans to third parties | 6,465,042 | 4,070,600 | 2,394,442 | 58.8 | % | |||||||||||
Loss on disposal of a subsidiary | (2,062,155 | ) | - | (2,005,514 | ) | - | ||||||||||
Impairment loss on loans to third parties and property and equipment | (7,423,651 | ) | - | (7,423,651 | ) | - | ||||||||||
(Loss) income before income taxes | (5,520,864 | ) | 24,681,499 | (30,202,363 | ) | (122.4 | )% | |||||||||
Income tax (benefit) expenses | (1,702,127 | ) | 633,315 | (2,335,442 | ) | (368.8 | )% | |||||||||
Net (loss) income | $ | (3,818,737 | ) | $ | 24,048,184 | $ | (27,866,921 | ) | (115.9 | )% | ||||||
Comprehensive loss (income) | $ | (6,234,656 | ) | $ | 26,430,672 | $ | (32,665,328 | ) | (123.6 | )% |
Revenue
A breakdown of our revenue for the year ended December 31, 2018 versus the year ended December 31, 2017 is set forth below:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2018 | % | 2017 | % | Amount | % | |||||||||||||||||||
Intermediary Bank Loan Advisory Services | $ | 6,091,830 | 42.3 | % | $ | 5,714,758 | 22.8 | % | $ | 377,072 | 6.6 | % | ||||||||||||
International Corporate Financing Advisory Services | 1,111,991 | 7.7 | % | 2,468,943 | 9.8 | % | (1,356,952 | ) | (55.0 | )% | ||||||||||||||
Commercial Payment Advisory Services | 6,153,018 | 42.7 | % | 16,868,860 | 67.2 | % | (10,715,842 | ) | (63.5 | )% | ||||||||||||||
Factoring Service | 499,187 | 3.5 | % | - | - | 499,187 | - | |||||||||||||||||
Technical service | 546,303 | 3.8 | % | 63,578 | 0.3 | % | 482,725 | 759.3 | % | |||||||||||||||
Total Amount | $ | 14,402,329 | 100 | % | $ | 25,116,139 | 100 | % | $ | (10,713,810 | ) | (42.7 | )% |
Net revenue for the year ended December 31, 2018 decreased by 43% year-over-year to $14,402,329 from $25,116,139 in the same period in 2017.
Approximately 42.7% of our revenue or $6,153,018, a decrease of 63.5% from $16,868,860 in the year ended December 31, 2017, was generated by providing commercial payment advisory services to 22 customers which we assisted in helping them obtain acceptance bills from banks with total financing of $545 million compared to $1,476 million for the same period last year, representing a decrease of 63% due to economic slowdown.
Approximately 42.3% of our revenue or $6,091,830 was derived from providing intermediary bank loan advisory services to 23 customers, a 7% increase from $5,714,758 in the year ended December 31, 2017.
Approximately 7.7% of our revenue or $1,111,991 was derived from providing international corporate financing advisory services for year ended December 31, 2018. International corporate financing advisory revenue decreased by 55% from $2,468,943 in the year ended December 31, 2017 mainly due to the decrease in financing of $355 million compared to $650 million in 2017.
Although our revenue from the provision of technical services, which are essentially financial data services provided to financial institutions by Anytrust, increased by 7.5 times in 2018, we disposed of it in December 2018 due to large losses incurred. Our acquisition of Anytrust was part of our overall strategy to focus on providing FinTech services and products in our next stage of growth. However, in spite of our efforts, revenue attributed to the provision of such products and services by Anytrust was approximately only $546,303 in 2018. By contrast, its overheads had ballooned to approximately $2.6 million and we were losing approximately $0.3 million per month in Anytrust. By December 2018, we determined that Anytrust was no longer a commercially viable entity as it was technically insolvent.
We first announced the implementation of our supply chain financing services in 2017 through our subsidiary, FuhuiSZ. We incorporated FuhuiXM in 2018 to further grow our supply chain financing services. We realized a revenue of approximately $0.5 million in 2018.
Overall, our revenue decreased substantially for the year ended December 31, 2018 compared to the same period in 2017 mainly due to a decrease in the amounts financed.
Cost of Revenue
Total cost of revenue, which comprises mainly revenue-generating staffing costs, was $654,979 for the year ended December 31, 2018 compared to $729,752 for the year ended December 31, 2017. The main reasons for the decrease in cost of revenue was the reduction of employees in the second half of 2018 as a result of the reduction in our business and revenues.
Our cost of revenue is broken down by service lines as follows:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2018 | % | 2017 | % | Amount | % | |||||||||||||||||||
Intermediary Bank Loan Advisory Services | $ | 142,784 | 21.8 | % | $ | 89,838 | 12.3 | % | $ | 52,946 | 58.9 | % | ||||||||||||
International Corporate Financing Advisory Services | 5,617 | 0.9 | % | 39,522 | 5.4 | % | (33,905 | ) | (85.8 | )% | ||||||||||||||
Commercial Payment Advisory Services | 78,562 | 12.0 | % | 260,125 | 35.6 | % | (181,563 | ) | (69.8 | )% | ||||||||||||||
Technical services | 330,995 | 50.5 | % | 147,610 | 20.2 | % | 183,385 | 124.2 | % | |||||||||||||||
Sales tax and surcharges | 97,021 | 14.8 | % | 192,657 | 26.5 | % | (95,636 | ) | (49.6 | )% | ||||||||||||||
Total Amount | $ | 654,979 | 100 | % | $ | 729,752 | 100 | % | $ | (74,773 | ) | (10.2 | )% |
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2018 decreased by 44% to $13,747,350 from $24,386,387 in the year ended December 31, 2017. The decrease is in line with the revenue decrease of 43% over the same periods.
Gross margin, or gross profit as a percentage of total revenue, was 95% for the year ended December 31, 2018, which is a slight decrease compared to 97% for the year ended December 31, 2017.
Operating Expenses
The following table sets forth the breakdown of our operating expenses for the year ended December 31, 2018 and 2017, respectively:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2018 | % | 2017 | % | Amount | % | |||||||||||||||||||
General and administrative expenses | $ | 11,664,394 | 74.0 | % | $ | 3,169,855 | 83.8 | % | $ | 8,494,539 | 268.0 | % | ||||||||||||
Selling and marketing expenses | 576,526 | 3.7 | % | 371,383 | 9.8 | % | 205,143 | 55.2 | % | |||||||||||||||
Research & Development Expense | 3,512,512 | 22.3 | % | 92,683 | 2.5 | % | 3,419,829 | 3,689.8 | % | |||||||||||||||
Donation expense | - | - | % | 148,108 | 3.9 | % | (148,108 | ) | (100.0 | )% | ||||||||||||||
Total Amount | $ | 15,753,432 | 100 | % | $ | 3,782,029 | 100 | % | $ | 11,971,403 | 316.5 | % |
Total operating expenses for the year ended December 31, 2018 increased 316.5% to $15,753,432 from $3,782,029 in the year ended December 31, 2017.
General and administrative expenses consist primarily of staff costs, rental expenses and office related expenses. General and administrative expenses were $11,664,394, or 81.0% of total revenue for the year ended December 31, 2018, as compared to $3,169,855 or 12.6% of total revenue in the year ended December 31, 2017, an increase of $8,494,539. The increase in general and administrative expenses is mainly due to an increase in rental and office related expenses and the increase of staff cost since we only began to lay off staff and terminated lease agreements towards the year’s end of 2018.
Selling and marketing expenses for the year ended December 31, 2018 increased by 55.2% to $576,526 from $371,383 in the year ended December 31, 2017. The year-over-year increase primarily resulted from an increase in marketing and advertising efforts.
Research & Development expenses mainly consist of staffing costs accrued in the process of researching and developing financial data software by Anytrust. We disposed Anytrust in December 2018 due to substantial loss incurred by Anytrust.
Donation expenses mainly include $148,108 donation to China Social Welfare Foundation in the year ended December 31, 2017.
Income from Operations and Operating Margin
Loss from operations in the year ended December 31, 2018 was $2,006,082, compared with income from operations of $20,604,358 in the year ended December 31, 2017.
Operating margin, or income from operations as a percentage of total revenue was negative 13.9% for the year ended December 31, 2018, compared with 82% for the year ended December 31, 2017 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, 2018 and the year ended December 31, 2017:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2018 | % | 2017 | % | Amount | % | |||||||||||||||||||
Interest income on loans to third parties | $ | 6,465,042 | (183.9 | )% | $ | 4,070,600 | 99.8 | % | $ | 2,394,442 | 58.8 | % | ||||||||||||
Interest income on bank deposits | 16,182 | (0.5 | )% | 13,600 | 0.4 | % | 2,582 | 19.0 | % | |||||||||||||||
Other expenses | (510,200 | ) | 14.5 | % | (7,058 | ) | (0.2 | )% | (503,143 | ) | 7,128.7 | % | ||||||||||||
Loss on disposal of a subsidiary | (2,062,155 | ) | 58.7 | % | - | - | (2,062,155 | ) | - | |||||||||||||||
Impairment loss on loans to third parties and property and equipment | (7,423,651 | ) | 211.2 | % | - | - | (7,423,651 | ) | - | |||||||||||||||
Total Amount | $ | (3,514,782 | ) | 100.0 | % | $ | 4,077,142 | 100 | % | $ | (7,591,924 | ) | (186.2 | )% |
Other income principally consist of interest income on loans to third parties which was $6,465,042 and $4,070,600 for the years ended December 31, 2018 and 2017, respectively, an increase of 58.8% year over year. This increase is in line with the increase of average loan balances to third parties, which were $40.8 million and $30.5 million for the year ended December 31, 2018 and 2017, respectively.
Loss on disposal of a subsidiary refers to the loss incurred as a result of the disposal of Anytrust on December 30, 2018, as a result of Anytrust incurring substantial operating losses.
Impairment loss on loans to third parties and property and equipment amounted to $7.4 million. Management assessed the collectability of its assets by the end of the year and determined that a provision of $7.4 million was made against entrusted loans, direct loans and office equipment.
Income tax (benefit) expense
Income tax benefit was $1,702,127 for the year ended December 31, 2018, compared with income tax expense of $633,315 for the year ended December 31, 2017.
Foreign Currency Translation Gain/(Loss)
Foreign currency translation loss was $2,415,919 in the year ended December 31, 2018, compared with a gain of $2,382,488 in the year ended December 31, 2017 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, 2018 was $3,818,737, as compared to our net income of $24,048,184 for the year ended December 31, 2017. The decrease in net income is mainly due to the decrease in our revenue, a substantial increase in operating expenses, losses arising from our disposal of Anytrust and impairment made against loans and property and equipment.
The following table summarizes our cash flows for the year ended December 31, 2018 and for the same period in 2017.
Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||
Net cash (used in) provided by operating activities | $ | (17,266,382 | ) | $ | 27,603,542 | |||
Net cash used in investing activities | (7,723,259 | ) | (22,308,207 | ) | ||||
Net cash (used in) provided by financing activities | (128,407 | ) | 19,641,129 | |||||
Effect of exchange rate change on cash and cash equivalents | (468,386 | ) | 348,373 | |||||
Net (decrease) increase in cash and cash equivalents | (25,586,434 | ) | 25,284,837 | |||||
Cash and cash equivalents, beginning balance | 27,165,262 | 1,880,425 | ||||||
Cash and cash equivalents, ending balance | $ | 1,578,828 | $ | 27,165,262 |
Operating activities
Net cash used in operations was $17.3 million for the year ended December 31, 2018, representing a decrease of $44.9 million from cash provided by operating activities of $27.6 million for the year ended December 31, 2017. The decrease was mainly because we realized a net loss of $3.8 million in 2018, and an increase of accounts receivable by $13.3 million.
Investing activities
Net cash used in investing activities for year ended December 31, 2018 was $7.7 million, a decrease of $14.6 million from net cash used in investing activities of $22.3 million for the year ended December 31, 2017. This is mainly due to the decrease of our loans to third parties by $14 million compared to 2017.
Financing activities
Net cash used in financing activities for the year ended December 31, 2018 was $0.13 million, a decrease of approximately $20 million from cash provided by financing activities of $19.6 million for the year ended December 31, 2017. The decrease was mainly attributable to proceeds from our IPO of approximately $20 million in July 2017.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
The following table sets forth the Company’s operating lease commitment as of December 31, 2018:
Office Rental | ||||
Year ending December 31, | ||||
2019 | $ | 92,366 | ||
2020 | 30,789 | |||
Total | $ | 123,155 |
For the years ended December 31, 2018, 2017 and 2016, rental expenses under operating leases were approximately $2,516,053, $975,868 and $453,667, respectively.
We are currently not a party to any legal, arbitration or administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business, financial condition or results of operations, and we are not aware of any threat of any of the above-mentioned proceedings. However, we may from time to time become a party to various legal, arbitration or administrative proceedings arising.
Dividend Policy
Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under British Virgin Islands law, namely that our company may only pay dividends if the value of the company’s assets exceed its liabilities and the company is able pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Operating Metrics for the period from January 1, 2020 to June 30, 2020.
We regularly monitor a number of metrics in order to measure our current and projected future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
For the Six Months Ended June 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
RMB | US$ | RMB | US$ | |||||||||||||
(in Million) | ||||||||||||||||
Amount of financing advised: | - | - | 213 | 31 | ||||||||||||
Intermediary Loan | - | - | 153 | 22 | ||||||||||||
Amount of factoring financing provided: | - | - | 60 | 9 |
For the Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Number of clients advised(1) | - | 5 | ||||||
Intermediary Loan | - | 1 | ||||||
Number of factoring clients served | - | 4 |
(1) The number of clients for a specified period represents the number of clients whose financing were funded during such period.
For the Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
(in US$) | ||||||||
Advisory fees billed to clients(1) | - | 424,928 | ||||||
Factoring service fee billed to clients(2) | 605 | 805,053 |
The amount of financing advised is calculated by summing up the actual financing amount under the financing advisory contracts. The revenue is calculated by multiplying the service fee ratio indicated on the contract and the financing amount advised.
(2) Represent amounts net of VAT
The amount of factoring service provided is calculated by summing up actual financing amount under the factoring contracts. The revenue is calculated by multiplying the factoring service fee ratio and the interest rate indicated on the contract and the financing amount provided.
Results of Operations for the Six Months ended June 30, 2020
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.
Six Months Ended June 30, | Variance | |||||||||||||||
2020 | 2019 | Amount | % | |||||||||||||
Revenue | $ | 605 | $ | 1,229,981 | $ | (1,229,376 | ) | (100.0 | )% | |||||||
Cost of revenue | - | 126 | (126 | ) | (100.0 | )% | ||||||||||
Gross profit | 605 | 1,229,855 | (1,229,250 | ) | (100.0 | )% | ||||||||||
General and administrative expense | 862,015 | 1,159,696 | (297,681 | ) | (25.7 | )% | ||||||||||
Selling and marketing expense | 10,534 | 43,290 | (32,756 | ) | (75.7 | )% | ||||||||||
(Loss) Income from operations | (871,944 | ) | 26,869 | (898,813 | ) | (3,345.2 | )% | |||||||||
Interest income on bank deposit | 14 | 537 | (523 | ) | (97.4 | )% | ||||||||||
Other income (expenses), net | 50,000 | (4,550,501 | ) | 4,600,501 | 101.1 | % | ||||||||||
Interest income from loans to third parties | 181,000 | 2,039,884 | (1,858,884 | ) | (91.1 | )% | ||||||||||
Reversal of impairment loss (Impairment loss) on loans to third parties | 687 | (51,563,170 | ) | 51,563,857 | 100 | % | ||||||||||
Loss before income taxes | (640,243 | ) | (54,046,381 | ) | 53,406,138 | 98.8 | % | |||||||||
Income tax (benefit) expenses | - | 1,834,911 | 1,834,911 | (100.0 | )% | |||||||||||
Net loss | $ | (640,243 | ) | $ | (55,881,292 | ) | $ | (55,241,049 | ) | (98.9 | )% | |||||
Comprehensive loss | $ | (615,118 | ) | $ | (55,390,807 | ) | $ | (54,775,689 | ) | (98.9 | )% |
Revenue
Revenue for six months ended June 30, 2020 decreased 100.0% period-over-period to $605 from $1,229,981 in the same period in 2019.
Our revenue in the second quarter of 2020 is mainly derived from supply chain financing services of $605, compared with revenue mainly derived from intermediary bank loan advisory services of $424,928 and supply chain financing services of $805,053 for the same period in 2019. This is mainly due to the slow-down of China macroeconomy, partly as a result of the Covid-19 pandemic and the ensuing containment measures both domestically and internationally and deterioration of potential clients’ credit worthiness, which made loans to these clients unfeasible. We have suspended our domestic banking related advisory business lines.
Cost of Revenue
Total cost of revenue, which comprises mainly revenue-generating staffing costs, was $0 for the six months ended June 30, 2020 compared to $126 for the six months ended June 30, 2019. The decrease in cost of revenue is basically in line with our significant decrease in revenue.
Gross Profit and Gross Margin
Gross profit for the period from January 1, 2020 to June 30, 2020 decreased 100.0% to $605 from $1,229,855 in the same period in 2019. The decrease is in line with the revenue decrease of 100.0% over the same periods.
Gross margin, or gross profit as a percentage of total revenues, was 100% for the period from January 1, 2020 to June 30, 2020, compared with 100% in the same period in 2019.
Operating Expenses
Total operating expenses for the six months ended June 30, 2020 decreased 27.5% period-over-period to $872,549 from $1,202,986 in the same period in 2019.
General and administrative expenses consist primarily of staff salaries, rental expenses and consulting service expenses. General and administrative expenses were $862,015 for the six months ended June 30, 2020, as compared to $1,159,696 in the same period in 2019, a decrease of $297,681 or 25.7%. The decrease in general and administrative expenses was mainly due to staff lay-offs.
Selling and marketing expenses for the six months ended June 30, 2020 decreased 75.7% period-over-period to $10,534 from $43,290 in the comparable period in 2019, a decrease of $32,756. The period-over-period decrease is in line with the overall scaling down of our business.
(Loss) Income from Operations and Operating Margin
Loss from operations in the six months ended June 30, 2020 was $871,944, compared with income from operations of $26,869 in the same period in 2019.
Operating margin, or income from operations as a percentage of total revenue, was (144,123)% and 2.2% for the six months ended June 30, 2020 and 2019 respectively. This decrease was mainly due to the significant decrease in our revenue.
Interest income
Interest income was $181,014 for the six months ended June 30, 2020, compared with $2,040,421 for the same period a year ago. Interest income was primarily derived from loans to third parties.
Other income (expenses), net
Other income was $50,000 for the six months ended June 30, 2020, compared with other expenses of $4,550,501 for the same period a year ago. Other income was primarily from the disposal of expired loans to third parties to an unrelated third party.
Reversal of impairment loss (Impairment loss) on loans to third parties
Reversal of impairment loss on loans to third parties amounted to $687 for the six months ended June 30, 2020, compared with $51.6 million of impairment loss on loans to third parties for the same period in 2019. Management assessed the collectability of its assets by the end of the quarter ended June 30, 2020 and determined that no impairment should be made against entrusted loans and direct loans.
Income tax expense
Income tax expenses were $0 for the six months ended June 30, 2020, compared with income tax expenses of $1,834,911 in the same period of the previous year. The income tax expenses were mainly valuation allowance made on deferred tax assets on our accounts since management believes that they are unlikely to generate any profits in the foreseeable future and determined to utilize the deferred tax assets as a result of accumulated operating losses.
Foreign Currency Translation Gain/(Loss)
Foreign currency translation gain was $25,125 in the six months ended June 30, 2020, compared with a gain of $490,485 in the same period of the previous year, as a result of the fluctuations in the exchange rates of the Renminbi against the US dollar.
Net Income
Net loss for the six months ended June 30, 2020 was $640,243, as compared to a loss of $55,881,292 recorded for the six months ended June 30, 2019. This decrease was principally due to no addition of impairment losses on our direct loans and loans to third parties.
Liquidity and Capital Resources
As of June 30, 20202021 and December 31, 2019,2020, we had $3,779,082$699,000 and $13,567$3,274,287 in cash, respectively.
Net cash used by operations for the six months ended June 30, 2021 and 2020 was $2,623,614 and 2019$710,658, respectively. The increase of net cash used by operations mainly contributed by settlement of liabilities in our PRC subsidiary and VIE amounting to $2,271,818.
Net cash provided by investing for the six months ended June 30, 2021 was $710,658$100,000 and $957,994, respectively.are proceeds from disposal of fixed assets.
Net cash provided by financing for the six months ended June 30, 2021 was $0, comparing with June 30, 2020 was $4,278,000 proceeds from two registered direct offering and issuance of ordinary shares.
Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiary and VIE only from their retained earnings, if any, determined in accordance with PRC GAAP. In addition, the Company’s subsidiary and VIE in China are required to make annual appropriations of 10% of after-tax profit to a general reserve fund or statutory reserve fund until such reserve has reached 50% of its registered capital based on the enterprise’s PRC statutory accounts. Paid-in capital of the PRC subsidiary and VIE included in the Company’s consolidated net assets are also non-distributable for dividend purposes. As a result of these PRC laws and regulations, the Company’s PRC subsidiary and VIE are restricted in their abilities to transfer net assets to the Company in the form of dividends, loans or advances. The Company is expected to focus its operations mainly in PRC for the time being and is not expected to have significant operations outside the PRC in the foreseeable future. It is not expected to have significant transfers of cash to and/or from the PRC subsidiary and VIE.
According to applicable PRC laws and regulations, a number of conditions must be met before any dividends of a wholly foreign-owned enterprise, such as our PRC subsidiary, may be distributed. In accordance with the Implementation Rules of Wholly Foreign-Owned Enterprise Law of the PRC promulgated by the State Council, prior to the payment of any dividend, our PRC subsidiary is required to (i) reserve funds from its profit of current accounting year to make up its losses for the previous accounting years, (ii) pay the income taxes pursuant to applicable tax laws of the PRC and (iii) reserve accumulated funds to improve our PRC subsidiary’s ability to withstand operation risks. Therefore, the PRC regulations could conceivably limit the amount of dividends that can be paid by our PRC subsidiary although our PRC subsidiary has historically not paid any dividends. We believe that such limitation will exist in the future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
213 |
Subsequent events
Results for the Year ended December 31, 2020 compared to the Year ended December 31, 2019
On June 15,Operating Metrics for the year ended 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, | ||||||||||||||||
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) | ||||||||
Advisory fees billed to clients(2) | - | 417 |
(2) | Represent amounts net of VAT. |
The amount of financing advised is calculated by summing up the Company received notificationfinancing 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.
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 | |||||||||||||||
2020 | 2019 | Amount | % | |||||||||||||
Revenue | $ | 618 | $ | 1,366,417 | $ | (1,365,799 | ) | (100.0 | )% | |||||||
Cost of revenue | - | 123 | (123 | ) | (100.0 | )% | ||||||||||
Gross profit | 618 | 1,366,294 | (1,365,676 | ) | (100.0 | )% | ||||||||||
General and administrative expense | 4,123,108 | 1,893,499 | 2,229,609 | 117.8 | % | |||||||||||
Selling and distribution expense | 10,748 | 100,460 | (89,712 | ) | (89.3 | )% | ||||||||||
(Loss) income from operations | (4,133,238 | ) | (627,665 | ) | 3,505,573 | 558.5 | % | |||||||||
Interest income on bank deposit | 14 | 666 | (652 | ) | (97.9 | )% | ||||||||||
Other income (expenses) | 38,870 | (5,611,484 | ) | (5,103,654 | ) | (91.0 | )% | |||||||||
Interest income from loans to third parties | 365,000 | 2,191,631 | (1,826,631 | ) | (83.3 | )% | ||||||||||
Impairment loss on loans to third parties and property and equipment | (5,345,999 | ) | (57,941,663 | ) | (53,142,364 | ) | (91.7 | )% | ||||||||
(Loss) income before income taxes | (9,075,353 | ) | (61,988,515 | ) | (52,913,162 | ) | (85.4 | )% | ||||||||
Income tax (benefit) expenses | - | 7,243 | (7,243 | ) | (100.4 | )% | ||||||||||
Net (loss) income | $ | (9,075,353 | ) | $ | (61,995,758 | ) | $ | (52,920,405 | ) | (85.4 | )% | |||||
Comprehensive loss (income) | $ | (6,388,959 | ) | $ | (62,361,016 | ) | $ | (55,972,057 | ) | (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 Advisory Services | $ | - | - | % | $ | 417,347 | 30.5 | % | $ | (417,347 | ) | (100.0 | )% | |||||||||||
Factoring Service | 618 | 100 | % | 949,070 | 69.5 | % | (948,452 | ) | (100.0 | )% | ||||||||||||||
Total Amount | $ | 618 | 100 | % | $ | 1,366,417 | 100 | % | $ | (1,365,799 | ) | (100.0 | )% |
Net revenue for the year ended December 31, 2020 decreased by 100% year-over-year to $618 from $1,366,417 in the NASDAQ that its applicationsame period in 2019.
Approximately 30.5% of our revenue or $417,347 was derived from providing intermediary bank loan advisory services to list its ordinary shares on The Nasdaq Capital Market had been approved. The Company’s securities will be transferredjust one customer in 2019, a 93.1% decrease from $6,091,830 in the year ended December 31, 2018.
Overall, our revenue decreased substantially for the year ended December 31, 2020 compared to the Capital Market atsame period in 2019, mainly due to a reduction in business opportunities as a result of the openingoverall economic environment and COVID-19 pandemic in the PRC and strategic adjustment of our business on July 16,to diversify and explore new business opportunities.
Cost of Revenue
Total cost of revenue, which comprises mainly revenue-generating staffing costs, was $123 for the year ended December 31, 2019 compared to $654,979 for the year ended December 31, 2018. The main reasons for the decrease in cost of revenue was the very minimal business volume in 2020.
On JulyOur cost of revenue is broken down by service lines as follows:
For the Year Ended December 31, | Variance | |||||||||||||||||||||||
2020 | % | 2019 | % | Amount | % | |||||||||||||||||||
Sales tax and surcharges | $ | - | - | % | $ | 123 | 100.0 | % | $ | (123 | ) | (100.0 | )% | |||||||||||
Total Amount | $ | - | - | % | $ | 123 | 100 | % | $ | (123 | ) | (100 | )% |
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2020 decreased by 100% to $618 from $1,366,294 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 the year ended December 31, 2020 and 2019, which has no significant cost of revenue for both 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 | |||||||||||||||||||||||
2020 | % | 2019 | % | Amount | % | |||||||||||||||||||
General and administrative expenses | $ | 4,123,108 | 99.7 | % | $ | 1,893,499 | 95.0 | % | $ | 2,229,609 | 117.8 | % | ||||||||||||
Selling and marketing expenses | 10,748 | 0.3 | % | 100,460 | 5.0 | % | (89,712 | ) | (89.3 | )% | ||||||||||||||
Total Amount | $ | 4,133,856 | 100 | % | $ | 1,993,959 | 100 | % | $ | 2,139,897 | ) | 107.3 | )% |
Total operating expenses for the year ended December 31, 2020 increased 107% to $4,133,856 from $1,993,959 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 $4,123,108, or as compared to $1,893,499, or 139% of total revenue for the year ended December 31, 2019, an increase of $2,229,609. 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 $10,748 from $100,460 in the year ended December 31, 2019. The year-over-year decrease primarily resulted from downsize in our business.
Income from Operations and Operating Margin
Loss from operations in the year ended December 31, 2020 was $4,133,238, compared with loss from operations of $627,665 in the year ended December 31, 2019.
Operating margin, or income from operations as a percentage of total revenue was negative 6,692 times 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 | |||||||||||||||||||||||
2020 | % | 2019 | % | Amount | % | |||||||||||||||||||
Interest income on loans to third parties | $ | 365,000 | (7.4 | )% | $ | 2,191,631 | (3.5 | )% | $ | (1,826,631 | ) | (83.3 | )% | |||||||||||
Interest income on bank deposits | 14 | (0.0 | )% | 666 | (0.0 | )% | (652 | ) | (97.9 | )% | ||||||||||||||
Other income (expenses) | 38,870 | 10.3 | % | (5,611,484 | ) | 9.1 | % | 5,103,654 | 91.0 | % | ||||||||||||||
Impairment loss on loans to third parties and property and equipment | (5,345,999 | ) | 97.1 | % | (57,941,663 | ) | 94.4 | % | 53,142,364 | 91.7 | % | |||||||||||||
Total Amount | $ | (4,942,115 | ) | 100.0 | % | $ | (61,360,850 | ) | 100.0 | % | $ | 56,418,735 | 91.9 | % |
Other income principally consists of interest income on loans to third parties was $365,000 and $2,191,631 for the years ended December 31, 2020 and 2019, respectively, a decrease of 83% year over year. This decrease is in line with the decrease of average loan balances to third parties, which were $0 and $40.8 million for the years ended December 31, 2020 and 2019, respectively.
Other income (expenses) (which include interest expenses) for the year ended December 31, 2020 increased by $5,103,654 to $38,870 of other income from $5,611,484 of other expenses in the year ended December 31, 2019 due to $4,857,164 written off accrued payroll over 2 years in 2020.
Impairment loss on loans to third parties and property and equipment amounted decreased by $52.6 million to $5.3 million in 2020 from $57.9 million in 2019. Management assessed the collectability of its assets by the end of the year and determined that a provision of $4.8 million and $57.9 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.
Income tax (benefit) expense
Income tax expense was $0 for the year ended December 31, 2020, compared with income tax benefit of $7,243 for the year ended December 31, 2019.
Foreign Currency Translation Gain/(Loss)
Foreign currency translation gain was $2,686,394 in the year ended December 31, 2020, compared with a loss of $365,258 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 $9,075,353, as compared to net loss of $61,995,758 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 $3,274,287 and $13,567, respectively.
The following table summarizes our cash flows for the year ended December 31, 2020 and for the same period in 2019.
Year ended December 31, 2020 | Year ended December 31, 2019 | |||||||
Net cash (used in) provided by operating activities | $ | (3,818,665 | ) | $ | (1,071,378 | ) | ||
Net cash used in investing activities | (108,095 | ) | (200,000 | ) | ||||
Net cash (used in) provided by financing activities | 4,278,000 | (31,201 | ) | |||||
Effect of exchange rate change on cash and cash equivalents | 2,909,480 | (262,682 | ) | |||||
Net (decrease) increase in cash and cash equivalents | 3,260,720 | (1,565,261 | ) | |||||
Cash and cash equivalents, beginning balance | 13,567 | 1,578,828 | ||||||
Cash and cash equivalents, ending balance | $ | 3,274,287 | $ | 13,567 |
Operating activities
Net cash used in operations was $3.8 million for the year ended December 31, 2020, representing a decrease of $2.7 million from cash used in operating activities of $1.07 million for the year ended December 31, 2019, though our losses of $9.1 million in 2020 mainly because our impairment losses were $4.8 million in 2020.
Investing activities
Net cash used in investing activities for year ended December 31, 2020 was $108,095, a decrease of $91,905 from net cash used in investing activities of $200,000 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 $4.3 million, an increase of approximately $4.3 million from cash used in financing activities of $0.13 million for the year ended December 31, 2019. The increase was mainly attributable to the $4.3 million net proceeds from private placements during 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
The following table sets forth the Company’s operating lease commitment as of December 31, 2020:
Office Rental | ||||
Year ending December 31, | ||||
2021 | $ | 34,000 | ||
Total | $ | 34,000 |
For the years ended December 31, 2020, 2019 and 2018, rental expenses under operating leases were approximately $82,670, $258,476 and $2,516,053, respectively.
At the year ended December 31, 2020, the Company closedhas written back an accrued payroll for the Company’s VIE amounting to $475,943 (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 direct offeringclaimant has the right to claim any outstanding wages within one year after termination of 3,555,556 sharesthe 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 VIE. Accordingly, there may be a potential claim of its$475,943 (RMB3,105,476) against the Company.
In the ordinary shares, par value $0.001 per share (the “ordinary shares”)course of business, the Company may be subject to institutional investors atlegal proceedings regarding contractual and employment relationships and a purchase pricevariety of $0.45 per share inother matters. The Company records contingent liabilities resulting from such claims, when a registered direct offeringloss is assessed to be probable and the net proceeds fromamount of the direct offering was around $1.5 million.loss is reasonably estimable. The company is not currently involved in any such claims.
Freight App, Inc. (formerly known as “FreightHub, Inc.”)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. (“FreightHub Mexico), a wholly-owned subsidiary of FreightHub, Inc., was formed. FreightHub, Inc. along with its wholly-owned subsidiary, FreightHub Mexico, are hereinafter referred to as “Fr8Hub”“Fr8App”. The first commercial version of Fr8Hub’sFr8App’s products were launched in 2017. Fr8HubFr8App 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, towardsramping up at the end of 2019 and into earlyfully launched during the second quarter of 2020. The latest generation of Fr8HubFr8App 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).
Fr8Hub’sFr8App’s product offerings includeincludes (i) a computerized platform (the “Platform”) that holds an online portal (the “Portal”)and a mobile platformApp solution (the “Platform”“App”) to provide third-party logistics (“3PL”) services to companies actively involved in the freight transportation market. Fr8Hubmarket, (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”). Fr8HubFr8App 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 Portal and Platform werewas 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 Fr8Hub’sFr8App’s Platform streamlines and simplifies cross-border shipping logistics by facilitating the matching of demand with supply. Shippers that use Fr8Hub’sFr8App’s Platform can connect with a wide network of reliable Carriers who can fulfill their logistics needs across North America. Use of Fr8Hub’sFr8App’s Platform brings the additional benefit of providing transparency on all shipment characteristics to allow for the identification of available and qualified freight capacity.
Fr8Hub’s
Fr8App’s Portal is the system’s front-end, a tool that a Fr8Hub customer usesFr8App’s customers and providers use to summarize the data on the Fr8HubFr8App Platform such that it is in a usable form from a customer’sbusiness perspective. The front-end of the Platform is usually accessed via an application or “App” or a series of instructions it uses to accessThis data on the Platform when using a browser on a computer and accessing the system via the internet. The Portal is accessed online on a computer via a browser, or through ana mobile App located on a smart telephone. Once a customer gainscustomers and providers (“Shippers” and “Carriers”) gain access to the Portal itPlatform 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 inwithin the Portal.Platform. Below are two screen-shots from the Portal for illustrative purposes:
Fr8Hub’s
Fr8App’sWeb Portal
Fr8App’s Platform is an online digital freight marketplace, broker, transportation management system (“TMS”) andhas a public automated protocol interchangeapplication programming interface (“API”), that is accessible free of charge and automateshas the ability to automate the matching of Shippers requirements (commercial freight demand) with Carrier capacities (commercial freight supply). The Platform is the primary operating system that facilitates booking of freight transactions at the Shipper and Carrier level. The matching of Shipper and Carrier can occur on the Platform automatically, without the need for human intervention. A TMS in this context is a computer information system that allows a system user to actively manage and understand the status of all of its commercial freight activities in one location, in this case, the Fr8Hub Platform. A Fr8Hub Platform user can be very involved in the process and actively control its shipments 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, Fr8Hub’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.
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 side of the translation can work with the underlying instructions. In Fr8Hub’s service offering context, an API allows one of our customer’s freight tracking system to provide information to Fr8Hub’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 tool allowing Fr8Hub to have a number of different customers, each with different operating systems, to interact with and use Fr8Hub’s Platform.
● | The Platform is 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 and Carrier 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 shipments 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. |
Shippers can use Fr8Hub’sFr8App’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 Fr8Hub’sFr8App’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 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. Fr8Hub’s Platform andFr8App’s mobile application givegives 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.
Fr8HubFr8App’s Mobile App
Users can access the Platform through an internet browser on a computer or through the mobile App in a smartphone, using the same credentials.
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, each with different operating systems, to interact with and use Fr8App’s Platform.
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 Fr8Hub’sFr8App’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. Fr8HubFr8App also gives a TMS solution user the option to source additional freight capacity or offer its over-capacity on the Fr8HubFr8App Platform. See below for a sample screen shot of Fr8App’s TMS:
Fr8App’s TMS
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’s aided by experienced users of the system and Fr8App’s in-house of experts.
Industry Overview and Market Trend
According to the U.S. Bureau of Transportation Statistics, the U.S. domestic truck freight transportation market, in 2018, was approximately $10.8$800 billion in size. Over the same period, the Mexican domestic freight market was estimated at approximately $40 billion. In 2019, the cross-border U.S.-Mexico freight transportation market grew to $429 billion while Mexico’s share of trade with the U.S. grew by 80.5%at an annual compound growth rate of approximately 7.5% between 20002009 and 2019. Fr8HubFr8App 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. Fr8HubFr8App 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.
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, Fr8HubFr8App 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. Fr8HubFr8App 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 Fr8Hub’sFr8App’s digital marketplace and facilitated by its Portal and Platform solutions. Fr8HubFr8App 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. Fr8HubFr8App 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, Fr8HubFr8App 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.
Fr8HubFr8App 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. Fr8HubFr8App 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. |
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. Fr8HubFr8App 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. Fr8HubFr8App 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. Fr8HubFr8App 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. Fr8HubFr8App 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. Fr8HubFr8App believes that an ability to respond to increasing market volatility in real-time, can become an asset contributing to a Shipper’s business success. Fr8HubFr8App believes this consideration is further exacerbated by qualified driver shortages in the U.S. and Canada. Fr8HubFr8App 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. Fr8HubFr8App continues to invest in improving its TMS technology and expects these investments to help improve its Platform as well as the range of services Fr8HubFr8App may offer to its Shippers and Carriers over time.
Fr8HubFr8App 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. Fr8HubFr8App believes there are significant complexities within the Mexican freight transportation market that give Fr8Hub,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. Fr8HubFr8App intends to gain a deep understanding of these unique processes, within the Mexican transportation industry, to gain a competitive advantage over future market entrants. Fr8HubFr8App intends to leverage this competitive advantage into opportunistically selected routes carrying traffic into the U.S. and Canada.
Fr8Hub’s 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. Fr8HubFr8App 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 Fr8HubFr8App Solution
Fr8Hub’sFr8App’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), |
● | For US or Canada Client (BCO): W-9 form for US, TD1 form for Canada, |
● | For US or Canada Broker (3PL): W-9 form for US, TD1 form for Canada, |
Fr8HubFr8App 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. Fr8HubFr8App 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 |
Once approved, Shippers can request bids for a certain service or Carriers can provide bids on Shipper requests. Fr8Hub’sFr8App’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.
Fr8Hub’sFr8App’s Platform automatically matches Shippers with Carriers within the Fr8HubFr8App 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, Fr8HubFr8App 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, Fr8HubFr8App 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 |
Fr8Hub’s Fr8App’s Customers
Fr8Hub’sFr8App’s customers consist of Shippers and Carriers across North America. A Shipper will use Fr8Hub’sFr8App’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 Fr8Hub,Fr8App, and Shippers may start shipments before submitting their payment to Fr8Hub. Fr8HubFr8App. Fr8App mitigates payment risks by pre-screening and approving all Shippers and Carriers prior to approving either party. Fr8HubFr8App 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 Fr8Hub’sFr8App’s Platform as there are no hidden fees. Shippers can count on the safety and reliability of the Platform as Fr8HubFr8App tracks cross border shipments. Lastly, Shippers can benefit by managing their logistics needs in one control center, all on Fr8Hub’sFr8App’s Platform.
Fr8HubFr8App 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 Fr8Hub’sFr8App’s Platform and avoid potentially expensive factoring companies. Lastly, Carriers can benefit from Fr8Hub’sFr8App’s Platform by using it as a tool to streamline workflows and increase overall efficiency.
Fr8Hub’s Fr8App’s Growth Strategy
Fr8Hub 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. Fr8HubFr8App 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. Fr8Hub’sFr8App’s growth strategy consists of the following:
Fr8HubFr8App 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, Fr8HubFr8App 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, Fr8HubFr8App 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, Fr8HubFr8App will actively manage margins and maintain lean operating units. By leveraging customer references and building off existing Shipper relationships, Fr8HubFr8App 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.
Fr8HubFr8App 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. Fr8HubFr8App 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, Fr8HubFr8App plans to grow its Carrier sales force to quickly respond to high volume primary loads and spot loads, as necessary.
Fr8Hub Fr8App intends to establish a very well-trained bilingual sales force and operations team and will kickstart its “Fr8Hub“Fr8App University” Program. Fr8HubFr8App 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.
Fr8HubFr8App will continue to invest in its technology to improve and differentiate its Platform, as well as, expand its TMS offerings for Shippers. Fr8HubFr8App 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: |
● | Be digital: |
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. Fr8HubFr8App understands the importance of balancing its efforts and business between primary and spot markets. As Fr8HubFr8App moves forward advances in serving the domestic with Mexico domestic and U.S.-Mexico cross-border markets opportunities, Fr8HubFr8App 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, Fr8HubFr8App will increasingly try to target higher volume, long-term contractual business directly from Shippers.
Research and Development
The first commercial version of Fr8Hub’sFr8App’s products were launched in 2017. Fr8HubFr8App 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 Fr8HubFr8App products were brought to market during the second quarter of 2020 and consist of 1)(1) the online Portal and Mobile App by itself, or 2)(2) the TMS, and (3) Fr8App’s Platform supplemented with freight brokerage support and customer service. Both
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 the PortalApp) are considered a transaction. The difference between the two products resides in the degree of active assistance provided by Fr8hubFr8App in the operation of the Platform itself. If the system user operates with the PortalPlatform without assistance, the interaction between Shipper and Carrier offerings is automatically carried out on the system with a fixed commission representing Fr8hub’sFr8App’s revenues. If the Platform is supplemented with freight brokerage support and customer service, then the Fr8HubFr8App team’s active intervention is required through the portal’sPlatform’s BackOffice, thus allowing more flexibility to the parties involved to negotiate and agree on rates. Currently, theFr8App’s offering of using its Platform supplemented with freight brokerage service withsupport and customer service with the Platform accounts for over 100% of Fr8Hub’sFr8App’s revenue. Fr8HubFr8App believes the industry is still anchored in communication through traditional channels (phone or email), and human attention is valued in the management of shipments.
Fr8App’s BackOffice
However, for traditional brokers, the Fr8hub PortalFr8App 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 Fr8HubFr8App with an additional source of revenue.
Fr8Hub’s 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”), Fr8HubFr8App 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 Fr8Hub’sFr8App’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. |
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, |
g. | Postgresql hosted in Aiven. |
3. | Security & Auditability: |
a. | No information is lost, all transactions are stored in immutable storage. |
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. |
h. | Postgresql streaming backup, i.e. WAL records. |
i. | Entire instances backed up. |
j. | Access to multiple data centers in different geographic zones |
Fr8HubFr8App 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
Fr8HubFr8App targets its product offerings to high volume contractual lanes from direct small and mid-market Shippers with $1 to $200 million in annual revenue. Fr8HubFr8App 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. Fr8HubFr8App 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.
Fr8HubFr8App has recruited a proven industry executive, Mike Flinker as its President. Mike brings with him over 40 years of industry experience to lead Fr8Hub’sFr8App’s sales and business development efforts. Fr8Hub’sFr8App’s Chief Executive Officer, Javier Selgas, initially joined Fr8HubFr8App as Chief Technology Officer and has over a dozen years of experience in developing technology and digital marketing. Fr8Hub’sFr8App’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. As of SeptemberJuly 30, 2020, Fr8Hub2021, Fr8App has a total of 7269 employees. Fr8HubFr8App 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, Fr8HubFr8App 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 Fr8HubFr8App transacts its business, are usually legal corporate entities, LLC’s, or their equivalents, in Mexico and Canada. Fr8HubFr8App 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 Fr8Hub’sFr8App’s business footprint falls on the Carriers themselves. For example, Fr8Hub’sFr8App’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 Fr8HubFr8App 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).
Consequently, the cost to comply with government regulation for Fr8HubFr8App is relatively low. Government regulations affecting the manner in which the truck freight industry operates, and more specifically on Fr8Hub,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, Fr8Hub’sFr8App’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 Fr8HubFr8App 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 Fr8HubFr8App 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 Fr8Hub’sFr8App’s business model in a material way.
Fr8Hub’sFr8App’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. Fr8HubFr8App 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 Fr8Hub’sFr8App’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 Fr8Hub.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. Fr8Hub’sFr8App’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, Fr8HubFr8App 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. Fr8HubFr8App expects continued significant competition on a national and international level. Fr8Hub’sFr8App’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 upsstartups and other companies that combine technologies with crowdsourcing to focus on local market needs, some of whom may currently be its customers.
In Mexico, Fr8HubFr8App competes with many logistics companies and freight brokers. Fr8HubFr8App 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. Fr8HubFr8App 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 Fr8Hub’sFr8App’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 Fr8HubFr8App 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 Fr8Hub’sFr8App’s 3PL services.
Intellectual Property
Fr8HubOn 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. Fr8HubFr8App 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, Fr8HubFr8App 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.
Employees
At September 30, 2020, Fr8Hub
As of August 27 , 2021, Fr8App has a total of 7266 employees, 4855 of them are based in Mexico with the remaining in the U.S. and other virtual locations. None of its employees are represented by a labor union or covered by a collective bargaining agreement. Fr8HubFr8App considers its relationship with its employees to be good.
Facilities
Fr8Hub’sFr8App’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.
Legal Proceedings
On September 6, 2018, Hub Group, Inc. (“Hub Group”) filed a Notice of Opposition against Fr8Hub’sFr8App’s U.S. Trademark Application Serial No. 87102800 (the “Trademark Application”) for its “Fr8HUB” unitary design mark (the “Mark”), seeking to have the Trademark Trial and Appeal Board (“TTAB”) reject the Trademark Application and refuse to register the Mark.
Settlement discussions between Fr8Hub On August 27, 2021 Fr8App and Hub Group have been unsuccessfulentered into a binding Settlement Agreement and Release (the “Settlement”) fully resolving the parties are currently litigating this issue in a 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.
On September 15, 2020, Fr8HubJanuary 11, 2021, BG Strategic Advisors, LLC (“BGSA”) filed a reply motioncomplaint 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, Fr8App moved the case to extend the time to respond to Hub Group’s discovery requestsDistrict Court for the Southern District of Florida. On February 25, 2021, Fr8App filed a counterclaim against BGSA and extendits affiliate for violations of the TTAB trial schedule without consent.
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 Fr8Hub’sFr8App’s business. If Hub Group obtains the relief it requests Fr8Hub may be prevented from registering the Mark. Hub Group has not commenced other legal proceedings in connection with the Mark or Fr8Hub’s use of the term “hub,” but may do so in the future. Such proceedings, if commenced, could seek monetary damages as well as limiting or preventing Fr8Hub’s unregistered use of the Mark or the term “hub.”
Fr8HubFr8App is not involved in any other litigation at this time. However, in the ordinary course of conducting its business, Fr8HubFr8App may in the future become involved in various legal actions and other claims. Fr8HubFr8App may also become involved in judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Some of these matters may involve claims of substantial amounts. These legal proceedings may be subject to many uncertainties and there can be no assurance of the outcome of any individual proceedings.
FR8APP’S FR8HUB’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus/proxy statement. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” and elsewhere in this prospectus/proxy statement.
Company Overview
Fr8HubFr8App was founded in 2015 as a Delaware corporation. Fr8HubFr8App 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”). Fr8HubFr8App serves cross-border traffic across the Mexico-U.S. borders, 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 Portal and Platform were designed to connect in real-time parties having commercial transportation needs.
Fr8Hub Fr8App has created a free online commercial freight marketplace and mobile application platform that allow for automating the connection of carriers offering freight transportation services and shippers requiring transportation services. Fr8Hub’sFr8App’s platform solution and mobile application allow trucking companies to secure transportation for their goods within the palm of their hands and in real-time, assigning their transportation needs to capable drivers instantaneously, with the click of a button. Fr8Hub’sFr8App’s cutting-edge cloud-based online portal and mobile platform were designed to simplify connections between parties requiring transportation and those offering transportation services, all the while increasing efficiencies, reducing costs and increasing revenue for shippers and carriers. Each of our portal and platform are offered in English and Spanish. We have created and offer to the market specialized technology that helps facilitate supply chain visibility, operation, reliability and sustainability.
Trends
Fr8HubFr8App 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 six months marking the second and third quarters of 2020, 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. Fr8HubFr8App believes the supply chain will continue to evolve into a more digital platform. As it does so, Fr8HubFr8App believes digital brokers, like Fr8HubFr8App can play an integral role in easing capacity constraints, opening up new lanes, and providing a benchmarking tool for shippers.
In the short-term, Fr8HubFr8App 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. Fr8HubFr8App 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.
Results of Operations
Comparison of the NineSix Months and Three Months ended SeptemberEnded June 30, 20202021, and SeptemberJune 30, 20192020
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For nine months ended | For three months ended | For six months ended | For three months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sep 30 2020 | Sep 30 20219 | Inc/(Dec) | % | Sep 30 2020 | Sep 30 2019 | Inc/(Dec) | % | Jun 30 2021 | Jun 30 2020 | Inc/(Dec) | % | Jun 30 2021 | Jun 30 2020 | Inc/(Dec) | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue | 5,415,877 | 2,945,194 | 2,470,683 | 83.9 | % | 2,706,355 | 1,137,054 | 1,569,301 | 138.0 | % | 10,666,316 | 2,709,522 | 7,956,794 | 293.7 | % | 5,866,750 | 1,188,914 | 4,677,836 | 393.5 | % | ||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue | (4,921,266 | ) | (2,691,934 | ) | (2,229,332 | ) | 82.8 | % | (2,482,261 | ) | (1,044,750 | ) | (1,437,511 | ) | 137.6 | % | (9,698,511 | ) | (2,439,005 | ) | (7,259,506 | ) | 297.6 | % | (5,378,626 | ) | (1,026,517 | ) | (4,352,109 | ) | 424.0 | % | ||||||||||||||||||||||||||||||||
Gross Profit | 494,611 | 253,260 | 241,351 | 95.3 | % | 224,094 | 92,304 | 131,790 | 142.8 | % | 967,805 | 270,517 | 697,288 | 257.8 | % | 488,124 | 162,397 | 325,727 | 200.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
Operating Expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Compensation and employee benefits | 1,387,980 | 1,060,939 | 327,041 | 30.8 | % | 657,612 | 391,650 | 265,962 | 67.9 | % | 2,034,999 | 730,368 | 1,304,631 | 178.6 | % | 1,093,489 | 334,326 | 759,163 | 227.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 1,134,840 | 621,824 | 513,016 | 82.5 | % | 539,743 | 454,446 | 85,297 | 18.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing | 18,940 | 87,355 | (68,415 | ) | -78.3 | % | 2,559 | 22,013 | (19,454 | ) | -88.4 | % | 163,929 | 16,381 | 147,548 | 900.7 | % | 99,364 | 5,243 | 94,121 | 1,795.2 | % | ||||||||||||||||||||||||||||||||||||||||||
General and administrative | 2,052,936 | 836,208 | 1,216,728 | 145.5 | % | 1,431,112 | 262,075 | 1,169,037 | 446.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 440,470 | 482,082 | (41,612 | ) | -8.6 | % | 96,966 | 169,265 | (72,299 | ) | -42.7 | % | 158,141 | 343,504 | (185,363 | ) | -54.0 | % | 75,531 | 159,220 | (83,689 | ) | -52.6 | % | ||||||||||||||||||||||||||||||||||||||||
Total Operating Expense | 3,900,326 | 2,466,584 | 1,433,742 | 58.1 | % | 2,188,249 | 845,003 | 1,343,246 | 159.0 | % | 3,491,909 | 1,712,077 | 1,779,832 | 104 | % | 1,808,127 | 953,235 | 854,892 | 89.7 | % | ||||||||||||||||||||||||||||||||||||||||||||
Operating Income (Loss) | (3,405,715 | ) | (2,213,324 | ) | (1,192,391 | ) | 53.9 | % | (1,964,155 | ) | (752,699 | ) | (1,211,456 | ) | 160.9 | % | (2,524,104 | ) | (1,441,560 | ) | (1,082,544 | ) | 75.1 | % | (1,320,003 | ) | (790,838 | ) | (529,165 | ) | 66.9 | % | ||||||||||||||||||||||||||||||||
Other income and (expenses) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest income | - | 63 | (63 | ) | -100.0 | % | - | 49 | (49 | ) | -100.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense | (224,890 | ) | (309,289 | ) | 84,399 | -27.3 | % | (23,244 | ) | (104,583 | ) | (81,339 | ) | -77.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Loss from extinguishment of debt | (784,886 | ) | - | (784,886 | ) | n/a | - | - | - | n/a | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net | (287,442 | ) | (201,646 | ) | (85,796 | ) | 42.5 | % | (151,795 | ) | (71,853 | ) | (79,942 | ) | 111.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Gain/Loss from extinguishment of debt | 115,678 | (784,886 | ) | 900,564 | -114.7 | % | - | (784,886 | ) | 784,886 | -100.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other income (expense) | (1,009,776 | ) | (309,226 | ) | (700,550 | ) | 226.5 | % | (23,244 | ) | (104,534 | ) | (993,977 | ) | -950.9 | % | (171,764 | ) | (986,532 | ) | 814,768 | -82.6 | % | (151,795 | ) | (856,739 | ) | 704,944 | -82.3 | % | ||||||||||||||||||||||||||||||||||
Income before income taxes | (4,415,491 | ) | (2,522,550 | ) | (1,892,941 | ) | 75.0 | % | (1,987,399 | ) | (857,233 | ) | (217,479 | ) | 25.4 | % | (2,695,868 | ) | (2,428,092 | ) | (267,776 | ) | 11 | % | (1,471,798 | ) | (1,647,577 | ) | 175,779 | 10.7 | % | |||||||||||||||||||||||||||||||||
Income tax expense | 13,451 | 5,700 | 7,751 | 136.0 | 5,800 | (3,307 | ) | 2,493 | 75.4 | % | 17,095 | 7,651 | 9,444 | 123.4 | % | 9,590 | 3,456 | 6,134 | 177.5 | % | ||||||||||||||||||||||||||||||||||||||||||||
Net Income (Loss) | (4,428,942 | ) | (2,528,250 | ) | (1,900,692 | ) | 75.2 | % | (1,993,199 | ) | (860,540 | ) | (219,972 | ) | 25.6 | % | (2,712,963 | ) | (2,435,743 | ) | (277,220 | ) | 11.4 | % | (1,481,388 | ) | (1,651,033 | ) | 169,645 | -10.3 | % | |||||||||||||||||||||||||||||||||
Change in redemption value of preferred stock | - | (912,687 | ) | 912,687 | 100 | % | - | (912,687 | ) | 912,687 | -100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to common stock holders | (2,712,963 | ) | (3,348,430 | ) | 635,467 | -19 | % | (1,481,388 | ) | (2,563,720 | ) | 1,082,332 | -42.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign translation adjustment | 1,357 | (2,206 | ) | 3,563 | -161.5 | % | 2,402 | 1,672 | 730 | 43.7 | % | 20,025 | (1,045 | ) | 21,070- | -2,016.3 | % | 45,982 | 4,790 | 41,192 | 860.0 | % | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss) | (4,427,585 | ) | (2,530,456 | ) | (1,897,129 | ) | 75.0 | % | (1,990,797 | ) | (858,868 | ) | (219,242 | ) | 25.5 | % | (2,692,938 | ) | (2,436,788 | ) | (256,150 | ) | 10.5 | % | (1,435,406 | ) | (1,646,243 | ) | 210,837 | 12.8 | % |
Revenues
Fr8Hub’s Fr8App’s revenues grew to $5,415,877$10,666,316 for the ninesix months ended SeptemberJune 30, 20202021 from $2,945,194$2,709,522 for the ninesix months ended SeptemberJune 30, 2019,2020, an increase of $2,470,683$7,956,794 and 83.9%293.7% on year-over-year basis. In comparison, Fr8App’s revenues grew to $5,866,750 for the three months ended SeptemberJune 30, 2020 grew to $2,706,3552021 from $1,137,054$1,188,914 for the three months ended SeptemberJune 30, 2019, or $1,569,3012020, an increase of $4,677,836 and 138.0%393.5% on a year-over-year basis. The rate of increase in quarterly revenues relative to prior year results increased by 393.5% in the second quarter of 2021 versus the prior quarter’s rate of increase of 215.6%. This year-over-year increase in the nine months and three months ended showJune 30 shows the impact of Fr8Hub’sFr8App’s restructuring in early 2020 including the incorporation of a new product offerings on its revenue growthexecutive management team, the addition of a key repeat shipper clients over the time periods compared, and the effects from a more highly trained and focused salesforce in 2020early 2021 versus 2019.in early 2020. The increase in year over year performance was also due to a more favorable environment in 2021 as restrictions related to the COVID pandemic began to abate relative to those in place in 2020.
Costs of Revenue
In parallel withSimilar to the increasepattern seen in revenues, Fr8Hub’sFr8App’s cost of revenue grew to $4,921,266$9,698,511 for the ninesix months ended SeptemberJune 30, 20202021 from $2,691,934$2,439,005 for the ninesix months ended SeptemberJune 30, 2019,2020, an increase of $2,229,332$7,259,506 and 82.8%297.6% on a year-over-year basis. In comparison,basis, while Fr8App’s cost of revenue grew to $5,378,626 for the three months ended SeptemberJune 30, 2021 from $1,026,517 for the three months ended June 30, 2020, grew to $2,482,261 from $1,044,750 or $1,437,511an increase of $4,352,109 and 137.6%424.0% on a year-over-year basis. This year-over-year increase in the nine months and three months ended June 30 moves in similar fashion and magnitude with our revenue, with some differences due to varying margins in the traffic and in the traffic mix itself from quarter-to-quarter and year-to-year. We also had some pressure on costs as the US economy appeared to return to a more normal level of activity following the significant declines from the COVID-pandemic. Freight levels in our segment are reaching all-time highs and has led to some strains on capacity. For instance, diesel fuel prices increased approximately 10% in the second quarter of 2021 relative to the first quarter of 2021 and cross-border freight traffic reached new volume highs in the second quarter, resulting in increased requests for overages from carriers which could not be passed in all instances to shippers and consequently compressed our margins during the quarter.
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Gross Profit
Fr8Hub’s Fr8App’s gross profit grew to $494,611$967,805 (9.1% of revenues) for the ninesix months ended SeptemberJune 30, 20202021 from $253,260 (8.6%$270,517 (10.0% of revenues) for the ninethree months ended SeptemberJune 30, 2019,2020, an increase of $241,351$697,288 and 95.3%257.8% on a year-over-year basis. In comparison, Fr8App’s gross marginsprofit grew to $224,094$488,124 (8.3% of revenues) for the three months ended June 30, 2021 from $92,304 (8.1%$162,397 (13.7% of revenues) or $131,790for the three months ended June 30, 2020, an increase of $325,727 and 142.8%200.6% on a year-over-year basis. This year-over-year increase in absolute gross profit was due to the overall increase in revenues over the periods compared. The sequential decrease in margin as a percentage of revenue in 2021 versus 2020 was due to the effects from the significant rebound of the US economy on cross-border freight in particular, as the repressive effects from the COVID-pandemic on the US economy began to reverse over the course of 2019 was duethe quarter in an environment with significant pent-up demand. We expect that this pressure on margins will continue over the near term as more carrier capacity reacts to the contracting of a large contract with a broker during 2019, a business we no longer actively pursue, that incurred significant accessory charges for storage that were not covered by our contract with them. This stream of business caused Fr8Hub to incur significant storage costs that were not offset by accessory chargeshigh demand levels in this segment and thus compressed our marginscomes on-line over the lifecourse of this contract. This contract ran offthe next several months/quarters. More recently, we have also shifted our sales efforts over the past several quarters towards more sustainable and repeatable revenue streams while higher margin opportunities over “spot” transactions are more difficult to conclusion duringdeliver upon in such a tight market where the first halfdynamics in the market tend to play in favor of 2020.the carriers in our segments.
Compensation and Employee Benefits
Fr8Hub’sFr8App’s compensation and employee benefits expenses were $1,387,980$2,034,999 for the ninesix months ended SeptemberJune 30, 20202021 compared to $1,060,939$730,368 for the ninesix months ended SeptemberJune 30, 2019,2020, which was a $327,041$1,304,631 or 30.8%178.6% increase on a year-over-year basis. In comparison, our employeeFr8App’s compensation and employee benefits expenses were $657,612$1,093,489 for the three months ended SeptemberJune 30, 2020 compared to $391,6502021 versus $334,326 for the three months ended SeptemberJune 30, 2019,2021, which was a $265,962$759,163 or 67.9%227.1% increase on a year-over-year basis, but nearly flat on a quarter/quarter basis. Fr8HubFr8App anticipates that its compensation and employee benefits expenses will continue to increase on a year-over-year basis as we continue to invest in the expansion of itsour sales force (both shipper and carrier) and in the support staff required for itthe company to beoperate as a publicly tradedpublicly-traded company, albeit at a lesser rate than our expected increase in revenues. We have also incorporated some variable compensation plans during early 2021 to incent management and staff efforts and activities in 2021.
Sales and Marketing
Sales and marketing expenses were $18,940$163,929 for the ninesix months ended SeptemberJune 30, 2021 compared to $16,381 for the six months ended June 30, 2020, which was an increase of $147,548 or a 900.7% increase. In comparison, sales and marketing expenses were $99,364 for the three months ended June 30, 2021 compared to $87,355$5,243 for the ninethree months ended SeptemberJune 30, 2019,2020, which was a decreasean increase of $68,415$94,121 or a 78.3% decrease.1,795.2% increase. The decreaseincrease in marketing expenses in 20202021 should continue on a similar albeit lower increasing trend and is consistent with our refocusing of salesdesign and branding efforts during 20202021 which are now developed towards more targeted efforts aimed at specific shippers and carriers fitting with the company’s target profilesectors where we offer higher levels of value added services and support to our clients, compared to less targeted efforts in the past.
General and Administrative
General and administrative expenses were $2,052,936 for the nine months ended September 30, 2020 compared to $836,208 for the nine months ended September 30, 2019, which was an increase of $1,216,728 or a 145.5% increase. This compares to an increase to $1,431,112 for the three months ended September 30, 2020 compared to $262,075 for the three months ended September 30, 2019, which was an increase of $1,169,037 or 446.1% on a year-over-year basis. The increase in expenses for the three months ended September 30, 2020 is due to payment of additional expenses for accounting and related professional services in preparation for Fr8Hub’s repositioning and in additional support and evaluation in anticipation of becoming a publicly traded entity.
Depreciation and Amortization
Depreciation and amortization expense represents the amortization of previously capitalized software development costs, as appropriate, and depreciation expenses related to Fr8Hub’s fixed assets. This expense decreased to $440,470 for the nine months ended September 30, 2020, from $482,082 for the nine months ended September 30, 2019, a decrease of $41,612 or 8.6% on a year-over-year basis and decreased to $96,966 for the three months ended September 30, 2020 from $169,265 for the three months ended September 30, 2019 or a decrease $72,299 or 42.7%. This expense pattern is consistent with the levels of investment in Fr8Hub’s software and its fixed assets over time.
Other income and expenses
Other income and expense represents the loss from extinguishment of debt recognized in the settlement of convertible notes during the three months ended September 30, 2020 in addition to the interest expenses incurred by Fr8Hub’s debt facilities, offset by a minimal amount of interest income. During the three months ended June 30, 2020, Fr8Hub settled its then convertible notes payable as further described in Notes 10 and 17 of our audited financial statements. The expenses incurred for doing so were $784,886 in loss from extinguishment of convertible notes during the same three months then ended. Interest expense, decreased to $224,890 for the nine months ended September 30, 2020, from $309,289 for the nine months ended September 30, 2019, a decrease in expenses of $84,399 or 27.3%. In comparison, interest expense for the three months ended September 30, 2020, decreased to $23,244 from $104,583 for the three months ended September 30, 2019, a decrease of $81,339 or 77.8% on a year-over-year basis. This decrease was due to settlement of convertible notes.
Net Income (Loss)
Fr8Hub’s net loss for the nine months ended September 30, 2020 increased to $4,428,942 from $2,528,250 for the nine months ended September 30, 2019 or by $1,900,692 or 75.2% on a year-over-year basis as a result of the items described above.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For twelve months ended | ||||||||||||||||
Dec 31 2019 | Dec 31 2018 | Inc/(Dec) | % | |||||||||||||
Revenue | ||||||||||||||||
Net revenue | 4,179,845 | 3,245,517 | 934,328 | 28.8 | % | |||||||||||
Cost of revenue | (3,848,776 | ) | (2,927,536 | ) | (921,240 | ) | 31.5 | % | ||||||||
Gross Profit | 331,069 | 317,981 | 13,088 | 4.1 | % | |||||||||||
Operating Expense | ||||||||||||||||
Compensation and employee benefits | 1,559,278 | 1,002,902 | 556,376 | 55.5 | % | |||||||||||
Sales and marketing | 130,641 | 20,234 | 110,407 | 545.7 | % | |||||||||||
General and administrative | 1,047,551 | 827,784 | 219,767 | 26.5 | % | |||||||||||
Depreciation and amortization | 659,961 | 534,543 | 125,418 | 23.5 | % | |||||||||||
Total Operating Expense | 3,397,431 | 2,385,463 | 1,011,968 | 42.4 | % | |||||||||||
Operating Income (Loss) | (3,066,362 | ) | (2,067,482 | ) | (998,880 | ) | 48.3 | % | ||||||||
Other income and (expenses) | ||||||||||||||||
Interest income | 90 | - | 90 | n/a | ||||||||||||
Interest expense | (428,773 | ) | (340,481 | ) | (88,292 | ) | 25.9 | % | ||||||||
Change in value of preferred stock | - | - | - | n/a | ||||||||||||
Loss from extinguishment of debt | - | - | - | n/a | ||||||||||||
Total other income (expense) | (428,683 | ) | (340,481 | ) | (88,202 | ) | 25.9 | % | ||||||||
Income before income taxes | (3,495,045 | ) | (2,407,963 | ) | (1,087,082 | ) | 45.1 | % | ||||||||
Income tax expense | 9,981 | - | 9,981 | n/a | ||||||||||||
Net Income (Loss) | (3,505,026 | ) | (2,407,963 | ) | (1,097,063 | ) | 45.6 | % | ||||||||
Foreign translation adjustment | (1,529 | ) | - | (1,529 | ) | n/a | ||||||||||
Comprehensive Income (Loss) | (3,506,555 | ) | (2,407,963 | ) | (1,098,592 | ) | 45.6 | % |
Comparison of the year ended December 31, 2019 to December 31, 2018
Revenues
Fr8Hub’s revenues grew to $4,179,845 for the year ended December 31, 2019 from $3,245,517 for the year ended December 31, 2018, an increase of $934,328 and 28.8% on a year-over-year basis. This year-over-year increase begins to show the impact of our new product offerings in the latter part of 2019 and the activity related to one large brokerage account serviced by Fr8Hub that was discontinued in early 2020.
Costs of Revenue
In parallel with the increase in revenues, our cost of revenue grew to $3,848,776 for the year ended December 31, 2019 from $2,927,536 for the year ended December 31, 2018, an increase of $921,240 and 31.5% on a year-over-year basis. This year-over-year increase in the year ended moves in similar fashion and magnitude with our revenue, with some differences due to varying margins in the traffic from period to period.
Gross Profit
Fr8Hub’s gross profit grew to $331,069 (7.9% of revenues) for the year ended December 31, 2019 from $317,981 (9.8% of revenues) for the year ended December 31, 2018, an increase of $13,088 and 4.1% on year-over-year basis. This year-over-year increase in absolute gross profit was due to the overall increase in revenues over the periods compared. The decrease in margin as a percentage of revenue over the course of 2019 was due to the contracting of a large contract with a broker, a business we no longer actively pursue, that incurred significant accessory charges for storage that were not covered by Fr8Hub’s contract with them. This stream of business caused us to incur significant storage costs that were not offset by accessory charges and thus compressed our margins over the life of this contract. This contract ran off to conclusion during the first half of 2020.
Compensation and Employee Benefits
Fr8Hub’s compensation and employee benefits expenses were $1,559,278 for the year ended December 31, 2019 compared to $1,002,902 for the year ended December 31, 2018, which was an increase of $556,376 or 55.5% on a year-over-year basis. The increase in year-over-year compensation was due to higher bonuses in 2019, higher marketing salaries and high contract expenses. Fr8Hub anticipates that its compensation and employee benefits expenses will continue to increase as we continue to invest in the expansion of our sales force and the support staff required for it to operate as a publicly traded company.
Sales and Marketing
Sales and marketing expenses were $130,641 for the year ended December 31, 2019 compared to $20,234 for the year ended December 31, 2018, which was an increase of $110,407 or 545.7% on a year-over-year basis. The increase in marketing expenses in 2019 was because of large one-time expenses incurred in for marketing and branding expenses over the course of 2019.
General and Administrative
General and administrative expenses were $1,047,551$1,134,800 for the yearsix months ended December 31, 2019June 30, 2021 compared to $827,784$621,824 for the yearsix months ended December 31, 2018,June 30, 2020, which was an increase of $219,767$513,016 or a 26.5%82.5% increase. General and administrative expenses were $539,743 for the three months ended June 30, 2021 compared to $454,446 for the three months ended June 30, 2020, which was an increase onof $85,297 or a year-over-year basis.18.8% increase. The increase in expenses for 2019the six months ended June 30, 2021 is due to paymentsthe incurrence of additional expensesprofessional fees for consultantsaudits, accounting, investor relations and advisors, headhunter feeslegal services related to the company’s efforts to become a public entity as well as additional rent expense for the company’s larger office in Monterrey and software expenses.exchange losses as the peso appreciated in value relative to the dollar during the first half of 2021. We anticipate these costs will flatten after we are able to establish our presence as a publicly traded company.
Depreciation and Amortization
Depreciation and amortization expense represents the amortization of previously capitalized software development costs, as appropriate, and depreciation expenses related to Fr8Hub’sFr8App’s fixed assets. This expense increaseddecreased to $659,961$158,141 for the yearsix months ended December 31, 2019,June 30, 2021, from $534,543, an increase$343,504 for the six months ended June 30, 2020, a decrease of $125,418$185,363 or 23.5%54.0% on a year-over-year basis. This expense decreased to $75,531 for the three months ended June 30, 2021, from $159,220 for the three months ended June 30, 2020, a decrease of $83,689 or 52.6% on a year-over-year basis. This expense pattern is consistent with the levels of investment in Fr8Hub’sFr8App’s software and its fixed assets over time.
time as these decreased by nearly 50.9% on a year-over-year basis through June 30, 2020 but have recovered by over 80.9% through June 30, 2021 since then.
Other income and expenses
Other income and expense represents the interest expenses incurred by Fr8Hub’sFr8App’s debt facilities over the course of the year, offset by a minimal amount of interest income and gains and losses from its cash on hand. Other expenses, primarily composed ofdebt settlement. During the six months ended June 30, 2021, Fr8App incurred additional interest expense increased to $428,773 for the year ended December 31, 2019, from $340,481 for the year ended December 31, 2018, and increase in expenses of $88,292 or 25.9%. The increase in interest expense over the periods compared relatesdue to a higher usageamount of borrowing by Fr8Hubdebt outstanding over the year-ago period. Fr8App also settled its PPP Loan with a gain to income of $115,678 with no such comparable activity for the six months ended June 30, 2020. During the six months ended June 30, 2020, Fr8App recognized a loss from settlement of its debt outstanding at the time for $784,886 and a change in value of preferred stock over that time period of $912,687 with no such comparable activity for the formsix months ended June 30, 2021.
During the three months ended June 30, 2021, Fr8App had interest expense of $151,795, an increase of $79,942 over prior year’s levels due to a higher amount of convertible loans and of the company’s short-term borrowing facilitynotes outstanding over the time periods compared.
Net Income (Loss)
Fr8Hub’sFr8App’s net loss for the yearsix months ended December 31, 2019June 30, 2021 increased from $2,712,963 from $2,435,743 for the six months ended June 30, 2020 or by $277,220 or 11.4% on a year-over-year basis, and its net loss for the three months ended June 30, 2021 increased to $3,505,026$1,471,798 from $2,407,963$1,647,577 for the yearthree months ended December 31, 2018June 30, 2020 or by $1,097,063 of 45.6%$175,779 or 10.7% on a year-over-year basis, as a result of the items described above.
Liquidity and Financial Position
Fr8Hub Fr8App has historically met its cash needs through a combination of cash flows from operating activities, term loans, promissory notes, bonds, convertible notes, private placement offerings and sales of equity. Fr8Hub’sFr8App’s cash requirements are generally for operating activities and debt repayments. Fr8HubFr8App funded its early operations with a combination of debt and equity and have recently positioned the company to operate on a go-forward basis with a minimal amount of debt. Fr8Hub’sFr8App’s net notes payable in the amount of $8,157,259$8,119,704 at December 31, 2019 were converted into equity during the six months ended June 30, 2020. Fr8HubFr8App raised a total of $4,865,562 in convertible notes during 2020 and an additional $1,000,000 in January 2021 and $2,608,242 in May 2021 in bridge notes, respectively. Fr8App expects to receive net proceeds at the closing of the Merger in the amount of approximately $5.5 million and incur a minimal amount of debt over the near-term butnear-term. Fr8App expects it will maintain its short-term debt facility with a third party in the amount of $2,000,000at least $3,000,000 to continue to support ongoing operations.
Fr8Hub’s Fr8App’s accounts receivable and unbilled receivable balances at SeptemberJune 30, 20202021 grew by 137.9%477.5% on a year over year comparative basis, which is consistent with the relaunching of its services atrecord quarterly revenues experienced during the end of 2019 and into the first ninethree months ended SeptemberJune 30, 2020. Fr8Hub’s2021. Fr8App’s accounts payable, short-term borrowings and accrued expenses have also increased consistentlyat a rate of 407.6% on a year-over-year comparative basis, in line with the increase in operating levels over the time periods compared. At SeptemberJune 30, 2020, Fr8Hub2021, Fr8App has an accumulated net capital deficit of $95,045$3,728,660, net long term debt of $6,596,687, and a working capital surplus of $2,341,348. Fr8App anticipates all of the debt at June 30, 2021 to convert to equity at the time of the Merger. At June 30, 2020, Fr8App had an accumulated net capital deficit of $10,680,606, redeemable preferred stock of $10,726,544, net long term debt of $432,800 and a working capital deficit of $490,394. At September 30, 2020, Fr8Hub had total long term liabilities of $114,700 and $1,065,499 of cash on hand.$77,363.
In March 2019, Fr8HubFr8App initially secured a revolving line of credit that it used to assist with short-term cash planning.managing its working capital. The maximum principal amount that may be drawn under the line of credit is $2.0 million.$2.5 million prior to the Merger, increasing to $3.0 million after the Merger. As of September 30, 2020,March 31, 2021, the outstanding principal amount borrowed is $1,221,717.$2.0 million. The initial maturity date on this facility was March 7, 2020 and was since extended by mutual written consent of the lender and Fr8Hub. On July 28, 2020, Fr8Hub extended theFr8App to a maturity date toof July 31, 2021.
2023.
Cash flows
Comparison of the NineSix Months Ended SeptemberJune 30, 20202021 and SeptemberJune 30, 20192020
The following table summarizes our sources and uses of cash for the ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019:2020:
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Net cash used in operating activities | (1,619,952 | ) | (1,586,231 | ) | (3,741,851 | ) | (915,865 | ) | ||||||||
Net cash used in investing activities | (157,904 | ) | (317,532 | ) | (190,371 | ) | (105,244 | ) | ||||||||
Net cash provided by financing activities | 2,359,360 | 1,637,824 | 3,669,381 | 749,841 | ||||||||||||
Net effect of exchange rates on cash | (6,691 | ) | (2,802 | ) | 10,590 | (2,509 | ) | |||||||||
Net decrease in cash and cash equivalents | 574,813 | (268,741 | ) | (252,251 | ) | (273,777 | ) |
Cash flows used in Operating Activities
Net cash used in operating activities represent the cash receipts and disbursements related to our activities other than investing and financing activities. We expect cash provided by operating activities to be our primary use of funds for the foreseeable future as the Company continues to fund its growing operations.
Net cash flows used in operating activities is derived by adjusting our net loss for:
● non-cash operating items such as depreciation and amortization, stock-based compensation and other non-cash income or expenses;
● changes in operating assets and liabilities reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations as well as any losses from extinguishment of debt or changes in value of preferred stock.
For the ninesix months ended SeptemberJune 30, 2020,2021, net cash used in operating activities was $1,619,952.$3,741,851. The $1,619,952$3,741,851 of net cash used in operating activities consisted of a net loss of $4,428,942$2,712,963 adjusted for non-cash charges totaling $1,906,741,$467,068, interest accrued on long term borrowings and a gain on extinguishment of debt of $114,700 and net changes in our net operating assets and liabilities amounting to $1,381,256. The non-cash charges primarily consisted of $231,191 for depreciation and amortization. The negative change in our net operating assets and liabilities was primarily due to increases in accounts receivable of $2,427,065 and prepaid and other assets of $322,317 offset by an increase in accounts payable and accrued expenses of $1,368,126. The changes in our accounts payable and accounts receivable balances are a result of the Company’s overall increase in business activities relative to earlier periods.
For the six months ended June 30, 2020, net cash used in operating activities was $915,865. The $915,865 of net cash used in operating activities consisted of a net loss of $2,435,743 adjusted for non-cash charges totaling $716,977, loss from extinguishment of debt of $784,886 and a net change in our net operating assets and liabilities of $117,363,$18,015. The non-cash charges primarily consisted of change in fair market value of preferred stock of $912,687, $348,486 for depreciation and amortization, $209,351 in services in exchange for warrants and $159,140 of accrued interest converted to equity and share-based compensation. The change in our net operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses of $37,308, decreases in accounts receivable and prepaid assets of $23,831, offset by and an increase in security deposits of $4,538. The changes in our accounts payable and accounts receivable balances are a result of the Company’s overall increase in business activities over the time periods compared.
Cash flows used in Investing Activities
For the six months ended June 30, 2021, net cash used in investing activities was $190,371. The cash flow used was driven by investment in software development and purchases of equipment.
For the six months ended June 30, 2020, net cash used in investing activities was $105,244. The cash flow used was driven by investment in software development.
Cash flows provided by Financing Activities
For the six months ended June 30, 2021, net cash provided by financing activities was $3,669,381. The cash flow provided was driven primarily by proceeds from notes payable of $2,608,842, and a net draw on borrowing facilities for $1,063,245.
For the six months ended June 30, 2020, net cash provided by financing activities was $749,841. The cash flow provided was driven primarily proceeds from notes payable of $861,112, a net repayment on borrowing facilities for $225,971 and proceeds from a PPP loan of $114,700.
Comparison of the Year ended December 31, 2020 and December 31, 2019
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For year ended | ||||||||||||||||
Dec 31. 2020 | Dec 31, 2019 | Inc/(Dec) | % | |||||||||||||
Revenue | ||||||||||||||||
Net revenue | 9,205,941 | 4,179,845 | 5, 026,096 | 120.2 | % | |||||||||||
Cost of revenue | (8,411,570 | ) | (3,848,776 | ) | (4,562,794 | ) | 118.6 | % | ||||||||
Gross Profit | 794,371 | 331,069 | 463,302 | 139.9 | % | |||||||||||
Operating Expense | ||||||||||||||||
Compensation and employee benefits | 2,212,407 | 1,559,278 | 653,129 | 41.9 | % | |||||||||||
Sales and marketing | 23,622 | 130,641 | (107,019 | ) | -81.9 | % | ||||||||||
General and administrative | 2,737,184 | 1,047,551 | 1, 689,633 | 161.3 | % | |||||||||||
Depreciation and amortization | 531,027 | 659,961 | (128,934 | ) | -19.5 | % | ||||||||||
Total Operating Expense | 5,504,240 | 3,397,431 | 2,106,809 | 62.0 | % | |||||||||||
Operating Income (Loss) | (4,709,869 | ) | (3,066,362 | ) | (1,643,507 | ) | 53.6 | % | ||||||||
Other income and (expenses) | ||||||||||||||||
Interest income | - | 90 | (90 | ) | -100.0 | % | ||||||||||
Interest expense | (334,170 | ) | (428,773 | ) | 94,603 | -22.1 | % | |||||||||
Loss from extinguishment of debt | (784,886 | ) | - | (784,886 | ) | n/a | ||||||||||
Total other income (expense) | (1,119,056 | ) | (428,683 | ) | (690,373 | ) | 161.0 | % | ||||||||
Income before income taxes | (5,828,925 | ) | (3,495,045 | ) | (2,333,880 | ) | 66.8 | % | ||||||||
Income tax expense | 23,051 | 9,981 | 13,070 | 130.9 | ||||||||||||
Net Income (Loss) | (5,851,976 | ) | (3,505,026 | ) | (2,346,950 | ) | 67.0 | % | ||||||||
Foreign translation adjustment | 2,159 | (1,529 | ) | 3,688 | -241.2 | % | ||||||||||
Comprehensive Income (Loss) | (5,849,817 | ) | (3,506,555 | ) | (2,343,262 | ) | 66.8 | % |
Revenues
Fr8App’s revenues grew to $9,205,941 for the year ended December 31, 2020 from $4,179,845 for the year ended December 31, 2019, an increase of $5,026,096 and 120.2% on year-over-year basis. This year-over-year increase in the year ended December 31 show the impact of Fr8App’s new product offerings on its revenue growth and the effects from a more highly trained and focused salesforce in 2020 versus 2019.
Fr8App’s revenues grew to $4,179,845 for the year ended December 31, 2019 from $3,245,517 for the year ended December 31, 2018, an increase of $934,328 and 28.8% on a year-over-year basis. This year-over-year increase begins to show the impact of our new product offerings in the latter part of 2019 and the activity related to one large brokerage account serviced by Fr8App that was discontinued in early 2020.
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Costs of Revenue
In parallel with the increase in revenues, Fr8App’s cost of revenue grew to $8,411,570 for the year ended December 31, 2020 from $3,848,776 for the year ended December 31, 2019, an increase of $4,562,794 and 118.6% on a year-over-year basis. This year-over-year increase in the years ended December 31 moves in similar fashion and magnitude with our revenue, with some differences due to varying margins in the traffic from quarter-to-quarter and year-to-year.
In parallel with the increase in revenues, our cost of revenue grew to $3,848,776 for the year ended December 31, 2019 from $2,927,536 for the year ended December 31, 2018, an increase of $921,240 and 31.5% on a year-over-year basis. This year-over-year increase in the year ended moves in similar fashion and magnitude with our revenue, with some differences due to varying margins in the traffic from period to period.
Gross Profit
Fr8App’s gross profit grew to $794,371 (8.6% of revenues) for the year ended December 31, 2020 from $331,069 (7.9% of revenues) for the year ended December 31, 2019, an increase of $463,302 and 139.9% on a year-over-year basis. This year-over-year increase in absolute gross profit was due to the overall increase in revenues over the periods compared. The increase in margin as a percentage of revenue over in 2020 versus 2019 was due to the contracting of a large contract with a broker during 2019, a business we no longer actively pursue, that incurred significant accessory charges for storage that were not covered by our contract with them. This stream of business caused Fr8App to incur significant storage costs that were not offset by accessory charges and thus compressed our margins over the life of this contract. This contract ran off to conclusion during the first half of 2020. We have also increased our sales efforts towards more sustainable and repeatable revenue streams and focused on higher margin opportunities over “spot” transactions with potentially lower margins.
Fr8App’s gross profit grew to $331,069 (7.9% of revenues) for the year ended December 31, 2019 from $317,981 (9.8% of revenues) for the year ended December 31, 2018, an increase of $13,088 and 4.1% on year-over-year basis. This year-over-year increase in absolute gross profit was due to the overall increase in revenues over the periods compared. The decrease in margin as a percentage of revenue over the course of 2019 was due to the contracting of a large contract with a broker, a business we no longer actively pursue, that incurred significant accessory charges for storage that were not covered by Fr8App’s contract with them. This stream of business caused us to incur significant storage costs that were not offset by accessory charges and thus compressed our margins over the life of this contract. This contract ran off to conclusion during the first half of 2020.
Compensation and Employee Benefits
Fr8App’s compensation and employee benefits expenses were $2,212,407 for the year ended December 31, 2020 compared to $1,559,278 for the year ended December 31, 2019, which was a $653,129 or 41.9% increase on a year-over-year basis. Fr8App anticipates that its compensation and employee benefits expenses will continue to increase as we continue to invest in the expansion of our sales force and the support staff required for the company to operate as a publicly-traded company, albeit at a lesser rate than our expected increase in revenues.
Fr8App’s compensation and employee benefits expenses were $1,559,278 for the year ended December 31, 2019 compared to $1,002,902 for the year ended December 31, 2018, which was an increase of $556,376 or 55.5% on a year-over-year basis. The increase in year-over-year compensation was due to higher bonuses in 2019, higher marketing salaries and high contract expenses. Fr8App anticipates that its compensation and employee benefits expenses will continue to increase as we continue to invest in the expansion of our sales force and the support staff required for it to operate as a publicly traded company.
Sales and Marketing
Sales and marketing expenses were $23,622 for the year ended December 31, 2020 compared to $130,641 for the year ended December 31, 2019, which was a decrease of $107,019 or a 81.9% decrease. The decrease in marketing expenses in 2020 is consistent with our refocusing of sales efforts during 2020 towards more targeted efforts aimed at specific shippers and carriers fitting with the company’s target profile compared to less targeted efforts in the past.
Sales and marketing expenses were $130,641 for the year ended December 31, 2019 compared to $20,234 for the year ended December 31, 2018, which was an increase of $110,407 or 545.7% on a year-over-year basis. The increase in marketing expenses in 2019 was because of large one-time expenses incurred in for marketing and branding expenses over the course of 2019.
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General and Administrative
General and administrative expenses were $2,737,184 for the year ended December 31, 2020 compared to $1,047,551 for the year ended December 31, 2019, which was an increase of $1, 689,663 or a 161.3% increase. The increase in expenses for the year ended December 31, 2020 is due to payment of additional expenses for accounting, consulting and related professional services in preparation for Fr8App’s repositioning and in additional legal support and in anticipation of becoming a publicly traded entity.
General and administrative expenses were $1,047,551 for the year ended December 31, 2019 compared to $827,784 for the year ended December 31, 2018, which was an increase of $219,767 or a 26.5% increase on a year-over-year basis. The increase in expenses for 2019 is due to payments of additional expenses for consultants and advisors, headhunter fees and software expenses.
Depreciation and Amortization
Depreciation and amortization expense represents the amortization of previously capitalized software development costs, as appropriate, and depreciation expenses related to Fr8App’s fixed assets. This expense decreased to $531,027 for the year ended December 31, 2020, from $659,961 for the year ended December 31, 2019, a decrease of $128,934 or 19.5% on a year-over-year basis. This expense pattern is consistent with the levels of investment in Fr8App’s software and its fixed assets over time as these decreased by nearly 45.1% on a year-over-year basis.
Depreciation and amortization expense represents the amortization of previously capitalized software development costs, as appropriate, and depreciation expenses related to Fr8App’s fixed assets. This expense increased to $659,961 for the year ended December 31, 2019, from $534,543, an increase of $125,418 or 23.5% on a year-over-year basis. This expense pattern is consistent with the levels of investment in Fr8App’s software and its fixed assets over time.
Other income and expenses
Other income and expense represents the loss from extinguishment of debt recognized in the settlement of convertible notes during the three months ended June 30, 2020 in addition to the interest expenses incurred by Fr8App’s debt facilities over the course of the year, offset by a minimal amount of interest income. During the three months ended June 30, 2020, Fr8App settled its then convertible notes payable as further described in Notes 11 and 18 of our audited financial statements. The expenses incurred for doing so were $784,886 in loss from extinguishment of convertible notes during the same three months then ended. Interest expense, decreased to $334,170 for the year ended December 31, 2020, from $428,773 for the year ended December 31, 2019, a decrease in expenses of $94,603 or 22.1%. This decrease was due to settlement of convertible notes and relatively lower overall levels of debt in the year ended December 31, 2020 versus a similar prior year period.
Other income and expense represents the interest expenses incurred by Fr8App’s debt facilities offset by interest income from its cash on hand. Other expenses, primarily composed of interest expense, increased to $428,773 for the year ended December 31, 2019, from $340,481 for the year ended December 31, 2018, and increase in expenses of $88,292 or 25.9%. The increase in interest expense over the periods compared relates to a higher usage of borrowing by Fr8App in the form of convertible loans and of the company’s short-term borrowing facility over the time periods compared.
Net Income (Loss)
Fr8App’s net loss for the year ended December 31, 2020 increased to $5,851,976 from $3,505,026 for the year ended December 31, 2019 or by $2,346,950 or 67.0% on a year-over-year basis as a result of the items described above.
Fr8App’s net loss for the year ended December 31, 2019 increased to $3,505,026 from $2,407,963 for the year ended December 31, 2018 or by $1,097,063 of 45.6% on a year-over-year basis as a result of the items described above.
Cash flows
Comparison of the Years Ended December 31, 2020 and December 31, 2019
The following table summarizes our sources and uses of cash for the years ended December 31, 2020 and December 31, 2019:
Year Ended December 31, | ||||||||
2020 | 2019 | |||||||
Net cash used in operating activities | (3,413,162 | ) | (2,328,181 | ) | ||||
Net cash used in investing activities | (227,653 | ) | (414,624 | ) | ||||
Net cash provided by financing activities | 6,092,546 | 2,325,607 | ||||||
Net effect of exchange rates on cash | (876 | ) | (1,402 | ) | ||||
Net decrease in cash and cash equivalents | 2,450,855 | (418,600 |
Cash flows used in Operating Activities
For the year ended December 31, 2020, net cash used in operating activities was $3,413,162. The $3,413,162 of net cash used in operating activities consisted of a net loss of $5,851,976 adjusted for non-cash charges totaling $2,202,300, a net change in our net operating assets and liabilities of ($548,372), and a recognized loss from extinguishment of debt of $784,886. The non-cash charges primarily consisted of $1,131,311$1,431, 392 for services in exchange for warrants $445,452and common shares, $570,177 for depreciation and amortization and $156,918$200,731 of accrued interest converted to equity. The positivenegative change in our net operating assets and liabilities was primarily due to increases in accounts payable of $727,644,$959,764, increases in accrued expenses of $399,578$637,864 and an offset by an increase in unbilled receivables of $869,629, accounts receivable of $963,157.$849,094 and prepaid and other assets of $468,726. The increases in our accounts payable and accounts receivable balances are a result of the Company’s overall increase in business activities over the time periods compared.
For the nine months ended September 30, 2019, net cash used in operating activities was $1,586,231. The $1,586,231 of net cash used in operating activities consisted of a net loss of $2,528,250 adjusted for non-cash charges totaling $760,791, and a net change in our net operating assets and liabilities of $181,228. The non-cash charges primarily consisted of $534,209 for depreciation and amortization and $212,698 of accrued interest converted to equity. The positive change in our net operating assets and liabilities was primarily due to increases in accounts payable of $418,824, decreases in due from related parties of $94,500 and an offset by an increase in accounts receivable of $312,403. The increases in our accounts payable and accounts receivable balances are a result of the Company’s overall increase in business activities relative to earlier periods.
Cash flows used in Investing Activities
For the nine months ended September 30, 2020, net cash used in investing activities was $157,904. The cash flow used was driven by investment in software development and purchases of equipment.
For the nine months ended September 30, 2019, net cash used in investing activities was $317,532. The cash flow used was driven by investment in software development and purchases of equipment.
Cash flows provided by Financing Activities
For the nine months ended September 30, 2020, net cash provided by financing activities was $2,359,360. The cash flow provided was driven primarily by proceeds from notes payable of $861,112, a net draw on borrowing facilities for $944,048, proceeds from the exercise of warrants of $439,500, and proceeds from a loan issued under the Paycheck Protection Program (PPP) of $114,700.
For the nine months ended September 30, 2019, net cash provided by financing activities was $1,637,824. The cash flow provided was driven primarily by proceeds from notes payable of $1,396,578, and a net draw on borrowing facilities for $241,246.
Comparison of the period for the years ended December 31, 2019 and December 31, 2018
The following table summarizes our sources and uses of cash for the period for year ended December 31, 2019 and year ended December 31, 2018:
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net cash used in operating activities | (2,328,181 | ) | (1,496,271 | ) | ||||
Net cash used in investing activities | (414,624 | ) | (410,705 | ) | ||||
Net cash provided by financing activities | 2,325,607 | 2,477,564 | ||||||
Net effect of exchange rates on cash | (1,402 | ) | - | |||||
Net (decrease) increase in cash and cash equivalents | (418,600 | ) | 570,588 |
Cash flows used in Operating Activities
For the year ended December 31, 2019, net cash used in operating activities was $2,328,181. The $2,328,181 of net cash used in operating activities consisted of a net loss of $3,505,026 adjusted for non-cash charges totaling $717,125, share-based compensation and accrued interest converted to equity of $323,708 and net changes in our net operating assets and liabilities of $136,012. The non-cash charges primarily consisted of $717,125 for depreciation and amortization. The positive change in our net operating assets and liabilities was primarily due to increases in accounts payable of $434,418, a decrease in a related party receivable of $102,850 and an offset by an increase in accounts receivable of $414,907. The increases in our accounts payable and accounts receivable balances are a result of the Company’s overall increase in business activities over the time periods compared.
For the year ended December 31, 2018, net cash used in operating activities was $1,496,271. The $1,496,271 of net cash used in operating activities consisted of a net loss of $2,407,963 adjusted for non-cash charges totaling $633,749, accrued interest converted to equity of $164,826 and net changes in our net operating assets and liabilities amounting to $113,117. The non-cash charges primarily consisted of $633,749 for depreciation and amortization. The positive change in our net operating assets and liabilities was primarily due to increases in accounts payable of $201,187, a decrease in related receivables of $193,025 and an offset by an increase in accounts receivable of $377,833. The increases in our accounts payable and accounts receivable balances are a result of the Company’s overall increase in business activities relative to earlier periods.
Cash flows used in Investing Activities
For the year ended December 31, 2020, net cash used in investing activities was $227,653. The cash flow used was driven by investment in software development and purchases of equipment.
For the year ended December 31, 2019, net cash used in investing activities was $414,624. The cash flow used was driven by investment in software development and purchases of equipment.
For the year ended December 31, 2018, net cash used in investing activities was $410,705. The cash flow used was driven by investment in software development and purchases of equipment.
Cash flows provided by Financing Activities
For the year ended December 31, 2020, net cash provided by financing activities was $6,092,546. The cash flow provided was driven primarily by proceeds from notes payable of $4,765,562, a net draw on borrowing facilities for $772,346, proceeds from the exercise of warrants and options of $439,938, and proceeds from a loan issued under the Paycheck Protection Program (PPP) of $114,700.
For the year ended December 31, 2019, net cash provided by financing activities was $2,325,607. The cash flow provided was driven primarily by proceeds from notes payable of $2,055,024, a net draw on borrowing facilities for $269,899, and proceeds from the exercise of common stock options of $684.
For the year ended December 31, 2018, net cash provided by financing activities was $2,477,564. The cash flow provided was driven primarily by net proceeds from notes payable of $2,719,794, and a repayment on borrowing facilities for $242,230.
MANAGEMENT FOLLOWING THE MERGER
Resignation of Current Executive Officers and Directors of Hudson
Pursuant to the Merger Agreement, all of the current executive officers and directors of Hudson will resign immediately prior to the completion of the merger.
Executive Officers and Directors of the Combined Company Following the Merger
Pursuant to the Merger Agreement, prior to the Effective Time, the Hudson Board of Directors will set the size of the board of directors at fivefour and appoint Hon Man Yun, a director designated by the Purchaser, and all of the designees of Fr8Hub,Fr8App, including the current board of directors of Fr8HubFr8App and other designees, if any, of Fr8Hub.Fr8App, and Hudson has the option to designate a board observer. Collectively the reconstituted board is expected to satisfy the requisite independence requirements for the Hudson Board of Directors, as well as the sophistication and independence requirements for the required committees pursuant to NASDAQ listing requirements.
The following table lists the names and positions of the individuals currently identified to serve as executive officers and directors of the Combined Company upon the completion of the Merger.
Name | Age | Position | ||
Javier Selgas | 36 | Chief Executive Officer and Director | ||
Mike Flinker | President | |||
Luisa Irene Lopez Reyes | 49 | Chief Operating Officer | ||
Paul Freudenthaler | Chief Financial Officer and Secretary | |||
Director Nominee | ||||
45 | ||||
Director Nominee | ||||
Jerry L. Hutter | 77 | Director Nominee |
Executive Officers
Javier Selgas, Fr8Hub’sFr8App’s Chief Executive Officer and director, was Fr8Hub´sFr8App’s Chief Technology Officer from March to September 2020, and was responsible for all of Fr8Hub’sFr8App’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´sAJEgroup’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´sMaster’s Degree from Barcelona University, and a Bachelor of Science degree in Software Engineering from European University.
Mike Flinker, Fr8Hub’sFr8App’s President, is a 40 year transportation industry veteran. Mike joined Fr8HubFr8App 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.
Luisa Irene Lopez Reyes, Fr8App’s 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.
Paul Freudenthaler, Fr8Hub’sFr8App’s Chief Financial Officer and Secretary, joined Fr8HubFr8App in September 2020. Prior to joining Fr8Hub,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.
Non-Employee Directors
Hon Man Yun is currently Hudson’s Chief Financial Officer. Prior to his joining Hudson in August 2020, Mr. Yun was the Chief Financial Officer of Kiwa Bio-tech Products Group Corporate, an OTC market-listed company from April 2018. From May 2017 through August 2020, he also held various positions with Kaisun Energy Group Limited, a Hong Kong GEM company ranging from Group VP & Compliance and Internal Audit Officer to Group VP & Chief Accountant and Joint Secretary. From December 2014 through May 2017, he was an associate at China Merchants Securities (Hong Kong) Co., Limited and from March 2013 through September 2014, he was the Financial Comptroller at E Lighting Group Limited, another Hong Kong GEM company. From September 2007 through December 2014, he was a corporate consultant to Smart Pine Investment Limited. From January 2008 through April 2010, he was the Chief Operating Officer and Treasurer at China INSOnline Corp., a NASDAQ-listed company. Mr. Yun holds a Master of Business Administration (2007) from the University of Western Sydney, a Higher Diploma in Business Studies (1988 - 1991) from the City Polytechnic of Hong Kong and a Diploma in Accountancy (1986 - 1988) from Morrison Hill Technical Institute. He is currently a Fellow Member of the Chartered Accountant, The Institute of Chartered Accountants in England & Wales, a Fellow Member of The Chartered Association of Certified Accountants and a Member of The Hong Kong Institute of Certified Public Accountants.
Nicholas H. Adler, Fr8App’s 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.
Juan Manuel TrujilloWilliam Samuels, a current member of Fr8App’s Board of Directors, is a transactionalpracticing attorney with over 20 years of experience in emerging markets with a primary focus on Latin America. Juan Manuel is and has been the President and Chief Legal Officer of Sailbridge Capital LLC since July 2015 and its Chief Executive Officer since February 2018.Manhattan, New York specializing in intellectual property law. He has been serving asa 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 Chief Executive OfficerNew York State Bar Intellectual Property Section and a managing memberco-chair of SLBC Global since September 2019.that section’s Trademark Law Committee. He practiced at major international law firms advising multiple governments and private-sector clientsearned his BA in connection with pioneering and high-profile matters. Juan Manuel is admitted to practiceEnglish Literature from Georgetown University, MA in Mexico and New York. In previous years of his legal practice, he received recognition by industry peer publications such as Chambers Global and Latin America, Legal 500, and Latinvex’s 100 most influential lawyers in Latin America. Juan Manuel graduated from law school at Instituto Tecnológico y de Estudios Superiores de Monterrey and received a Master of Laws DegreeEnglish Literature from the University of Arizona.Pennsylvania and J.D. from Emory University.
Jerry L. Hutter, a current member of Fr8App’s Board of Directors, retired in 2009 as the Chief Executive Officer of CFO Strategies, Inc., a consulting company which he co-founded in 2005. Mr. Hutter served as a director of DJSP Enterprises, Inc. (DJSP) beginning in 2010 where he also served as Audit Committee Chairman and is designated as an Audit Committee Financial Expert for SEC purposes. DJSP was traded on NASDAQ under the symbol of “DJSP.” Recently, DJSP completed the process of liquidating and distributing assets to shareholders, under the guidance of Mr. Hutter and three other remaining directors. From 2001 to 2005 he was employed by CBIZ MHM, LLC as a Senior Manager. Mr. Hutter has over forty years of experience as an auditor, controller, chief financial officer, and management consultant for firms ranging from Fortune 500 companies to smaller private sector corporations and not-for-profit organizations. Mr. Hutter has experience in all phases of the mortgage division of Home Savings of America before their acquisition by Washington Mutual and also was their Corporate Financial Controller, having participated in the initial public offering of H. F. Ahmanson Company. Mr. Hutter has also held positions on the corporate staff at KB Homes, tasked with SEC filings. He is a former certified public accountant with Price Waterhouse Coopers, where he was certified with both the American Institute of Certified Public Accountants (AICPA) and the California Society of Certified Public Accountants. He holds a Bachelor of Science degree in Accounting from California State University at Long Beach, with special studies at the University of California at Los Angeles and San Diego State University.
Family Relationships
There are no family relationships among any of Combined Company’s directors or executive officers.
The Board of Directors and Its Committees
Board of Directors
The Combined Company will not have a formal policy requiring members of the board to attend annual meetings of the stockholders.
Board Committees
The board of directors has the authority to appoint committees to perform certain management and administration functions. The board of directors will establish an audit committee and a compensation committee. The board of directors may establish other committees to facilitate the management of the Combined Company’s business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by the board of directors.
All of the committees will comply with all applicable requirements of the Sarbanes-Oxley Act, NASDAQ and SEC rules and regulations as further described below. Following the closing of the Merger, the charters for each of these committees will be available on the Combined Company’s website at https://www.fr8hub.com/www.Fr8App.com/. Information contained on or accessible through Fr8Hub’sFr8App’s or Hudson’s website is not a part of this proxy statement/prospectus and the inclusion of such website addresses in this proxy statement/prospectus are inactive textual references only.
Audit Committee
Upon the closing of the Merger, the Combined Company will have an Audit Committee.Committee, comprised of Nicholas H. Adler, Jerry L. Hutter and William Samuels. The primary responsibility of the Audit Committee is to oversee the Combined Company’s financial reporting process on behalf of the board and report the result of its activities to the board. Such responsibilities include, but are not limited to, the selection and, if necessary, the replacement of independent auditors and review and discussion with such independent auditors of (i) the overall scope and plans for the audit, (ii) the adequacy and effectiveness of the accounting and financial controls, including a system to monitor and manage business risks, and legal and ethical programs, and (iii) the results of the annual audit, including the financial statements to be included in the Combined Company’s Annual Report on Form 10-K.
Each member of the Audit Committee will be “independent” as that term is defined under the applicable rules of the Securities and Exchange Commission (the “SEC”) and the applicable rules of The NASDAQ Stock Market. Each Audit Committee member will have sufficient knowledge in financial and auditing matters to serve on the Committee. At least one member of the Audit Committee will be an “audit committee financial expert,” as defined under the applicable rules of the SEC and the applicable rules of The NASDAQ Stock Market. Purchaser currently expects Jerry L. Hutter will be the audit committee financial expert.
Compensation Committee
Upon the closing of the Merger, the Combined Company will have a Compensation Committee.Committee, comprised of Nicholas H. Adler and Jerry L. Hutter. The responsibilities of the Compensation Committee include, among other things, overseeing the evaluation of executive officers (including the Chief Executive Officer) of the Combined Company, determining the compensation of executive officers of the Combined Company, and overseeing the management of risks associated therewith. The Compensation Committee will determine and approve the Chief Executive Officer’s compensation. The Compensation Committee will also administer the Combined Company’s equity-based plans and make recommendations to the board with respect to actions that are subject to approval of the board regarding such plans. The Compensation Committee will also review and make recommendations to the board with respect to the compensation of directors. The Compensation Committee monitors the risks associated with the Combined Company’s compensation policies and practices as contemplated by Item 402(s) of Regulation S-K.
Each member of the Compensation Committee will be “independent” as that term is defined under the applicable rules of the SEC and the applicable rules of The NASDAQ Stock Market.
Nominating Committee
Upon the Closingclosing of the Merger, the Combined Company will not initially have a standing nominating committee.Compensation Committee, comprised of Nicholas H. Adler and William Samuels. The responsibilities of the Nominating Committee include, among other things, evaluating the current composition, organization and governance of the Board nominees are selected or recommendedand its committees; reviewing periodically the policy and procedures for considering stockholder nominee for election to the Board; searching for, identifying, evaluating and recommending for the board’s selection by independent directors constituting a majoritythe Board, candidates to fill new positions or vacancies on the Board; evaluating the performance of individual members of the board’s independentBoard eligible for re-election; and evaluating the independence of directors inand director nominees against the independence requirements of the SEC rules and other applicable requirements; reviewing periodically the composition of each Board committee; developing and recommending to the Board a vote in which onlyset of corporate governance principles and practices; and reviewing and monitoring the independent directors participate.Combined Company’s Code of Ethics.
Each member of the Compensation Committee will be “independent” as that term is defined under the applicable rules of the SEC and the applicable rules of The NASDAQ Stock Market.
Code of Business Conduct and Ethics
Upon the closing of the Merger, the Combined Company will have a Code of Business Conduct and Ethics that applies to its directors, officers and employees. The purpose of the Code of Business Conduct and Ethics is to deter wrongdoing and to provide guidance to the combined company’s directors, officers and employees to help them recognize and deal with ethical issues, to provide mechanisms to report unethical or illegal conduct and to contribute positively to the combined company’s culture of honesty and accountability. The Code of Business Conduct and Ethics will be publicly available on the combined company’s website at https://www.fr8hub.com/www.Fr8App.com/. If the Combined Company makes any substantive amendments to the Code of Business Conduct and Ethics or grants any waiver, including any implicit waiver from a provision of the Code of Business Conduct and Ethics to its directors or executive officers, it will disclose the nature of such amendments or waiver on its website or in a current report on Form 8-K.
Compensation Committee Interlocks and Insider Participation
Upon the closing of the Merger, the Combined Company will have a compensation committee that will be selected from among the directors who are independent under applicable NASDAQ listing standards. None of the members of Combined Company’s compensation committee will have ever been an officer or employee of either company. None of the Combined Company’s executive officers will serve, or will have served during the last fiscal year, as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of the Combined Company’s directors or on the compensation committee.
Combined Company Non-Employee Director Compensation Policy
The Combined Company expects to adopt a non-employee director compensation policy, pursuant to which non-employee directors will be eligible to receive compensation for service on the Combined Company’s board of directors and committees of the board of directors.
Fr8HubFr8App Executive Compensation
Summary Compensation Table
The following table sets forth the total compensation paid in 2020 and during the last two fiscal years ended December 31, 2019 and 2018 to Fr8Hub’sFr8App’s only executive officer at the time, its then Chief Executive Officer, Ohad Axelrod. Mr. Axelrod served as Fr8Hub’sFr8App’s Chief Executive Officer between June 2017 and March 2020 and his responsibility included oversight and management of Fr8Hub’sFr8App’s overall budget.
Name and Principal Position | Year | Salary ($) | Bonus ($)(1) | Stock Award | Option Award | All Other Compensation ($)(4) | Total ($) | Year | Salary ($) | Bonus ($) | Stock Award | Option Award ($) | All Other Compensation ($)(8) | Total ($) | ||||||||||||||||||||||||||||||||||||||||||
Javier Selgas Chief Executive Officer(1) | 2020 | 83,334 | - | - | 29,164 | (4) | - | 112,498 | ||||||||||||||||||||||||||||||||||||||||||||||||
Mike Flinker(2) President | 2020 | 60,238 | - | - | - | - | 60,238 | |||||||||||||||||||||||||||||||||||||||||||||||||
Paul Freudenthaler(2) Chief Financial Officer and Secretary | 2020 | 62,500 | - | - | 14,582 | (5) | 1,189 | 78,271 | ||||||||||||||||||||||||||||||||||||||||||||||||
Ohad Axelrod | 2020 | 75,961 | 30,000 | - | 669,364 | (2) | 124,093 | 230,054 | 2020 | 75,961 | 30,000 | (3) | - | 90,311 | (6) | 124,093 | 320,365 | |||||||||||||||||||||||||||||||||||||||
Former Chief Executive Officer | 2019 | 250,000 | 70,000 | (3) | - | - | (7) | 6,024 | 326,024 | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 250,000 | 70,000 | - | - | (3) | 6,024 | 326,024 | 2018 | 208,769 | 50,000 | (3) | - | - | 5,178 | 263,947 | |||||||||||||||||||||||||||||||||||||||||
2018 | 208,769 | 50,000 | - | - | 5,178 | 263,947 |
(1) Mr. Selgas joined Fr8App initially as its Chief Technology Officer in March 2020.
(2) Messrs. Flinker and Freudenthaler joined Fr8App in September 2020.
(3) Bonus amount represents a discretionary bonus determined by Fr8Hub’sFr8App’s then board of directors pursuant to Mr. Axelrod’s then employment agreement with Fr8Hub.Fr8App.
(2)(4) Under his employment agreement, Mr. Selgas was given an option grant for 154,066 shares of Fr8App Common Stock at $0.25 per share, fully vested upon grant on October 7, 2020.
(5) Under his employment agreement, Mr. Freudenthaler was given an option grant for 77,033 shares of Fr8App Common Stock at $0.25 per share, fully vested upon grant on October 7, 2020.
(6) In July 2020, 679,678 options were granted to Mr. Axelrod pursuant to the terms of his separation agreement with Fr8Hub.Fr8App. However, these options together with the 80,000 options granted in 2018 (see footnote 3 below) were forfeited and cancelled in their entirety and replaced by the 669,364 options granted to Mr. Axelrod in September 2020, as a replacement of all his previous option grants under the 2018 Plan. The 669,364 options are fully vested, exercisable at $0.25 per share and will expire on March 25, 2022.
(3)(7) In 2019, Mr. Axelrod was granted 80,000 options which were forfeited and cancelled in their entirety and replaced by the 669,364 replacement options granted in September 2020. (see footnote 26 above)
(4)(8) All other compensation consists of primarily health benefits and life insurance premiums paid by Fr8HubFr8App for the benefit of Mr. Axelrod; except that in 2020, Mr. Axelrod also received severance payment of $107,307, and accrued paid vacation, 401(k) and other benefits through July 30, 2020.
Between March and September 2020, personnel of an affiliate of ATW provided professional services to Fr8HubFr8App pursuant to an Advisory and Consulting Services Agreement. These professional services included among other things, holding key operational and management positions at Fr8Hub,Fr8App, enacting cost cutting measures to improve operational efficiencies, identifying a public company for a reverse stock merger, hiring the investment bank, legal counsel and auditors to prepare for a public listing, hiring of Fr8Hub’sFr8App’s current executive officers, and identifying candidates for Fr8Hub’sFr8App’s current board of directors. In return for these professional services, the affiliate of ATW received a warrant to purchase up to 765,862 shares of Fr8Hub’sFr8App’s Series A2 Preferred Stock. See the section titled, “Certain Relationships and Related-Party Transactions.”
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Agreements with Fr8App’s Current Executive Officers
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.
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 initial exercise price of $0.25 per share, which will automatically increase 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.
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 $0.25 per share, which will automatically increase to 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 an initial exercise price of $0.25 per share, which will automatically increase to 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.
Under her Employment Agreement with Fr8App, Luisa Irene Lopez Reyes serves as Fr8App’s and FreightHub 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 $0.80 per share, fully vested upon grant, and (ii) an option grant for 163,818 shares of Fr8App Common Stock at a price which is the Applicable Per Share Merger Consideration, vesting over four years starting on the one year anniversary date of the Effective Date of the Merger. In the event that Ms. Reyes is terminated without cause or for good reason, she will be entitled to receive continued payment of her base salary for three months immediately following the termination date.
Director Compensation Table
DuringFor the last fiscal year ended December 31, 2019, Fr8Hub’sfirst nine months of 2020, Fr8App’s only director was Edmundo Gonzalez. On October 1, 2020, Messrs. Javier Selgas (Fr8App’s current Chief Executive Officer), Nicholas H. Adler, and Jerry L. Hutter were elected to the board and Mr. Edmundo Gonzalez was removed from the board. In February 2021, William Samuels was elected to the board. The following table reflects compensation earned for services performed in 20192010 by Mr. Gonzalez as the sole director. Fr8Hubvarious board members. Fr8App also reimbursed himits directors for expenses incurred in his their capacity as a director.directors.
Name | Director Fees Earned or Paid in Cash ($) | Stock Awards | Option Awards | Total ($) | ||||||||||||
Edmundo Gonzalez | 96,000 | __ | __ | 96,000 |
Agreements with Fr8Hub’s Current Executive Officers
Fr8Hub’s current Chief Executive Officer joined Fr8Hub in March 2020 as its Chief Technology Officer, and became the Chief Executive Officer in September 2020. Both President and Chief Financial Officer of Fr8Hub joined Fr8Hub in September 2020. Set forth below are compensation arrangements based on their current employment agreements with Fr8Hub.
Under his Employment Agreement with Fr8Hub, Javier Selgas serves as Fr8Hub’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 Fr8Hub Common Stock at $0.25 per share, fully vested upon grant, and (ii) an option grant for 308,131 shares of Fr8Hub Common Stock at an initial exercise price of $0.25 per share, which will automatically increase 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.
Under his Executive Services Agreement with Fr8Hub, 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 Fr8Hub Common Stock at $0.25 per share, which will automatically increase to 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 Fr8Hub, Paul Freudenthaler serves as Fr8Hub’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 Fr8Hub Common Stock at $0.25 per share, fully vested upon grant, and (ii) an option grant for 385,164 shares of Fr8Hub Common Stock at an initial exercise price of $0.25 per share, which will automatically increase to the Applicable Per Share Merger Consideration upon the Closing of the Merger, vesting over four years starting in September 2020. In the event Paul Freudenthaler is terminated without cause or for good reason, he will be entitled to receive continued payment of his base salary for six months immediately following the termination date.
Name | Director Fees Earned or Paid in Cash ($) | Stock Awards | Option Awards | Total ($) | ||||||||||||
Edmundo Gonzalez | 16,000 | _ | - | 16,000 | ||||||||||||
Nicholas H. Adler | 5,000 | _ | _ | 5,000 | ||||||||||||
Jerry L. Hutter | 5,000 | _ | _ | 5,000 |
Pension Benefits
None of Fr8Hub’sFr8App’s current executive officers is covered by a pension plan or other similar benefit plan that provides for payments by Fr8HubFr8App or other benefits from Fr8HubFr8App at, following, or in connection with retirement.
Nonqualified Deferred Compensation
None of Fr8Hub’sFr8App’s current executive officers is covered by a nonqualified defined contribution or other nonqualified deferred compensation plan.
Director Compensation
Fr8HubFr8App currently pays $20,000 in annual cash compensation to its non-employee directors for their service on the board. All of Fr8Hub’sFr8App’s directors are entitled to reimbursement of reasonable expenses incurred in connection with attending board and committee meetings. Fr8HubFr8App also compensates its non-employee directors with an annual restricted stock grant of such number of shares of common stock that equals $20,000 on the respective grant date.
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
On August 26, 2020, Fr8HubFr8App issued a warrant to ATW Partners to purchase up to 765,862 shares of Series A2 Preferred Stock at an exercise price of $0.25 in exchange for professional services, including among other things, holding key operational and management positions at Fr8HubFr8App between March and September 2020, enacting cost cutting measures to improve operational efficiencies, identifying a public company for a reverse stock merger, hiring of Fr8Hub’sFr8App’s current executive officers, and identifying candidates for Fr8Hub’sFr8App’s current board of directors. Effective September 30, 2020, this warrant was cancelled and a replacement warrant to purchase up to 765,862 shares of Series A2 Preferred Stock at an exercise price of $0.25 was issued to ATW Opportunities Manager. Both ATW Partners and ATW Opportunities Manager are affiliates of ATW.
On September 16, 2020, Fr8HubFr8App issued a promissory note to ATW in the principal amount of $300,000 with a 90-day term (“90-Day Note”). The 90-Day Note accrued interest at an annual rate of 5% over the 90-day term and was payable by Fr8HubFr8App at maturity, upon acceleration of the indebtedness in the case of an event of default or in connection with any prepayment of the 90-Day Note by Fr8Hub.Fr8App. The 90-Day Note was converted into a 2020 Bridge Note (as defined herein) in connection with ATW’s participation in the 2020 Bridge Financing described below.
On October 7, 2020, Fr8HubFr8App entered into athe Note Purchase Agreement with certain existing shareholders and investors pursuant to which Fr8HubFr8App issued 2020 Bridge Notes in the aggregate principal amount of $4,004,421 in a 2020 Bridge Financing. All 2020 Bridge Notes will mature on the date that is two years from the closing date of the 2020 Bridge Financing. Interest on the 2020 Bridge Notes will accrue at an annual rate of 5% over the two-year term of the 2020 Bridge Notes and is payable by Fr8HubFr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the 2020 Bridge Notes by Fr8HubFr8App or, (iv) in connection with any conversion of the 2020 Bridge Notes through the issuance of shares of the capital stock of Fr8HubFr8App in exchange for accrued and unpaid interest owing at the time of conversion. Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the 2020 Bridge Notes will automatically convert into Series A3 Preferred Stock and Series A3 Warrants issued in the Pre-Merger Financing, but at a conversion price equivalent to approximately 50% of the corresponding purchase price in the Pre-Merger Financing. As the lead investor in the 2020 Bridge Financing, ATW’s affiliate, ATW Opportunities was granted the right of first refusal to participate in up to 50% of the aggregate principal amount to be raised by Fr8HubFr8App in any equity or equity-linked financing (except for the Pre-Merger Financing) occurring in the five years following the initial closing of the 2020 Bridge Financing pursuant to the Note Purchase Agreement.
On January 29, 2021, Fr8App entered into the January Bridge Note Purchase Agreement with ATW Opportunities pursuant to which Fr8App issued the January Bridge Note. The January Bridge Note matures on October 7, 2022. Interest on the January Bridge Note accrues at an annual rate of 5% over the term and is payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment of the January Bridge Note by Fr8App, or (iv) in connection with any conversion of the January Bridge Note through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The January Bridge Note is convertible into Conversion Shares, at the option of ATW Opportunities, pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the January Bridge Note will automatically convert into Series A3 Preferred Stock and Series A3-2 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 20% discount to the corresponding purchase price in the Pre-Merger Financing.
On May 24, 2021, Fr8App entered into the May Bridge Note Purchase Agreement with ATW and ATW Opportunities pursuant to which Fr8App issued the May Bridge Notes. On July 30, Fr8App issued the July Bridge Note. The May Bridge Notes and the July Bridge Note will mature on October 7, 2022. Interest on the May Bridge Notes and the July Bridge Note will accrue at an annual rate of 5% over the maturity period and will be payable by Fr8App (i) at maturity, (ii) upon acceleration of the indebtedness in the case of an event of default, (iii) in connection with any prepayment by Fr8App or, (iv) in connection with any conversion through the issuance of shares of the capital stock of Fr8App in exchange for accrued and unpaid interest owing at the time of conversion. The May Bridge Notes and the July Bridge Note will be convertible into Conversion Shares at the option of the holders pursuant to one of the following: (i) next equity financing conversion; (ii) corporate transaction conversion; and (iii) at maturity.
Upon closing of the Pre-Merger Financing, the principal balance and unpaid accrued interest on the May Bridge Notes and the July Bridge Note will automatically convert into the Series A3 Preferred Stock and Series A3-3 Warrants to be issued in the Pre-Merger Financing, at a conversion price equivalent to approximately 25% discount to the corresponding purchase price in the Pre-Merger Financing.
ATW and its affiliates, together with Chardan are deemed affiliates of Fr8Hub,Fr8App, by virtue of Mr. Kerry Propper’s relationship to each of Fr8Hub,Fr8App, ATW and its affiliates, and Chardan.
Mr. Propper’s various relationships with ATW and its affiliates are as follows: (i) he is a Managing Member of ATW Partners, LLC, which is the investment manager of ATW Fund I, L.P. (“ATW I”) and ATW, both of which currently own shares of preferred stock of Fr8Hub,Fr8App, (ii) he is a Managing Member of ATW Partners GP, LLC, which is the general partner of ATW I, (iii) he is a Member of ATW Opportunities Manager, which (A) is the investment manager of ATW Opportunities, which participated in the 2020 Bridge Financing, the January Bridge Financing, and the May Bridge Financing, (B) holds Fr8Huba Fr8App warrant, exercisable for the purchase of shares of Series A2 Preferred Stock of Fr8Hub,Fr8App, issued in consideration of certain consulting services rendered and to be rendered by ATW Partners to Fr8Hub);Fr8App; and (iv) he is a Member of ATW Partners Opportunities Fund GP, LLC, which is the general partner of ATW Opportunities, which participated in the 2020 Bridge Financing, the January Bridge Financing and the May Bridge Financing.
Mr. Propper, in his individual capacity, isat the consummation of the Merger will be the beneficial holder of _______shares678,687 shares of the preferred stockSeries A3 Preferred Stock, 23,306 shares of Fr8HubSeries A4 Preferred Stock and 193,986 Series A3 Warrants of Fr8App. Mr. Propper served as one of the ATW director designees on the Fr8HubFr8App board of directors between May and September 2020.
Mr. Propper is the Chairman of Chardan, which was engaged to serve as a financial advisor to Fr8HubFr8App in connection with the transactions contemplated by the Merger.
Chardan, at the consummation of the Merger, is entitled to receive its finder’s fee in the form of 6,766,667 shares of Series A3 Preferred Stock and Series A3 Warrants to purchase 1,933,333 shares of Combined Company Common Stock. The 6,766,667 shares of Fr8App’s Series A3 Preferred Stock shall, in connection with the closing of the Merger, be exchanged for 1,933,333 shares of Series A3 Preferred Stock of the Combined Company, which may be converted into a maximum of 6,766,667 shares of Combined Company common stock. However, only 1,933,333 shares of Series A3 Preferred Stock of the Combined Company will be initially convertible into common stock of the Combined Company on a 1:1 basis immediately following the closing of the Merger. The remaining 4,833,334 shares of Series A3 Preferred Stock of the Combined Company will only be convertible into Combined Company common stock in the event certain price-protection adjustments are made based upon the VWAP of the Combined Company’s common stock during specified periods following the closing of the Merger.
Based on Fr8Hub’s FourthThe Combined Company’s Amended and Restated Certificate of Incorporation (“Fourth Charter”), Fr8Hubwill provide that Fr8App is authorized to issue up to 400,150,000 shares, comprising (i) 26,519,692300,000,000 shares of Common Stock, $0.00001$0.0001 par value per share, (ii) 80,000150,000 shares of Non-Voting Common Stock, $0.00001$0.0001 par value per share, and (iii) 22,350,498100,000,000 shares of Preferred Stock, $0.00001$0.0001 par value per share.
Common Stock
General
The voting, dividend and liquidation rights of the holders of Fr8App’s Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock.
Voting
The holders of the Common Stock are entitled to one vote for each share (“Preferred Stock”)of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings).
Dividends.
Subject to the rights of the holders of Preferred Stock, holders of shares of Common Stock shall be entitled to receive such dividends and distributions and other distributions in cash, stock or property of the Combined Company when, as and if declared thereon by the Combined Company Board from time to time out of assets or funds of the Combined Company legally available therefor
Non-Voting Common Stock
The dividend and liquidation rights of the holders of the Non-Voting Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock. Holders of Non-Voting Common Stock have no voting rights.
Preferred Stock
Under the Fourth Charter,Amended and Restated Certificate of Incorporation, together with the Certificate of Designation of the 22,350,498 shares of Fr8Hub’sSeries A3 Preferred Stock, (i) 19,958the following series of Preferred Stock have been designated, 25,271 shares areshall be designated as Series Seed Preferred Stock $0.00001 par value per share, (ii) 7,864,698(the “Series Seed Preferred Stock”), 10,118,434 shares shall be designated as Series A1-A shares of Preferred Stock (iii) 3,167,474(the “Series A1-A Preferred Stock”), 4,010,707 shares shall be designated as Series A1-B Preferred Stock, (iv) 2,280,000(the “Series A1-B Preferred Stock” and together with the Series A1-A Preferred Stock, the “Series A1 Preferred Stock”), 2,859,776 shares shall be designated as Series A2 Preferred Stock (v) 8,393,527 shares(the “Series A2 Preferred Stock”), 55,914,267 shall be designated as Series A3 Preferred Stock (the “Series A3 Preferred Stock”), and (vi) 624,841814,919 shares shall be designated as Series A4 Preferred Stock. TheStock (the “Series A4 Preferred Stock”, and together with the Series A1-AA1 Preferred Stock, Series A1-B Preferred Stock andthe Series A2 Preferred Stock, are referred to collectively asand the Series A3 Preferred Stock, the “Series A Preferred Stock.”Stock”).
Blank Check Preferred
Shares of Preferred Stock may be issued from time to time in one or more series. The Board is authorized to provide by resolution or resolutions from time to time for the issuance, out of the unissued shares of Preferred Stock, of one or more series of Preferred Stock, without stockholder approval, by filing a certificate pursuant to the applicable law of the State of Delaware, setting forth such resolution and, with respect to each such series, establishing the number of shares to be included in such series, and fixing the voting powers, full or limited, or no voting power of the shares of such series, and the designation, preferences and relative, participating, optional or other special rights, if any, of the shares of each such series and any qualifications, limitations or restrictions thereof. The powers, designation, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations and restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
Conversion Rights
Each share of the Series A Preferred Stock isshall be convertible, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the applicable original issue price by the applicable conversion price in effect at the time of conversion – initially at the time of issuance, each share of Series A Preferred Stock was convertible into shares of Common Stock at a 1:1 ratio. The shares of Series A Preferred Stock are convertible into Common Stock, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder.holder thereof, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the applicable Reference Price (as defined below) by the applicable Conversion Price (as defined below) in effect at the time of conversion. The initial Conversion Price (as applicable), and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment.
● | The Series Seed Reference Price and Conversion Price shall be equal to $16.2689. | |
● | The Series A1-A Reference Price and Conversion Price shall be equal to $0.95. | |
● | The Series A1-B Reference Price and Conversion Price shall be equal to $1.18. | |
● | The Series A2 Reference Price and Conversion Price shall be equal to $1.42. | |
● | The Series A3 Reference Price and Conversion Price shall be equal to $3.00. | |
● | The Series A4 Reference Price and Conversion Price shall be equal to $1.78. |
In the event of a liquidation, dissolution or winding up of the Combined Company or a Deemed Liquidation Event (as described below), the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Preferred Stock
Voting RightsRights; Election of Directors
On any matter presented to the Fr8Hub stockholders, each holder of outstanding shares of Fr8Hub Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the sharesHolders of Preferred Stock held by such holder are convertible and holders of Preferred Stock generally vote together with the holders of Common Stock as a single class and on an as-converted to Common Stock basis.have no voting rights.
Protective Provisions
Section 3.3 of the Fourth Charter requiresAmended and Restated Certificate of Incorporation will require that at any time when shares of Series AA3 Preferred Stock, Series A2 Preferred Stock, Series A1-A Preferred Stock or Series A1-B Preferred Stock are outstanding Fr8Hubare outstanding, the Combined Company shall not, amendeither directly or indirectly, do any of the Fourth Charterfollowing without (in addition to any other vote required by law or its bylaws in any manner that is adverse to or negatively affectsthis Amended and Restated Certificate of Incorporation) the rights of any class of Series A Preferred Stock without written consent or an affirmative vote of the holders of at least a majority of the then outstanding shares of Series A2 Preferred Stock voting together as a single class, which must include ATW.ATW Master Fund II, L.P. given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect:
Dividends
Fr8HubThe Combined Company shall not declare, pay or set aside any dividends on shares of any other class or series of its capital stock (other than dividends on shares of Common Stock payable in shares of Common Stock) unless the holders of the Series A Preferred Stock then outstanding shall simultaneously receive with the holders of Common Stock and Fr8Hub’sthe Combined Company s Series Seed Preferred Stock like dividends on an as-converted-to-Common Stock basis.
Limitation on Beneficial Ownership
To the extent that the conversion of any Preferred Stock by a stockholder will result in such stockholder, together with its affiliate(s), beneficially owning in excess of 4.99% (or upon the election by such stockholder prior to the issuance of any Preferred Stock, 9.99%) (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such conversion, the number of shares in excess of the Maximum Percentage (the “Excess Shares”) shall be deemed null and void and shall be cancelled, and such holder of Preferred Stock shall not have the power to vote or transfer the Excess Shares.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or winding up of Fr8Hubthe Combined Company or any Deemed Liquidation Event (as defined below), all distributions or proceeds available for Fr8Hubthe Combined Company stockholders will be distributed to all stockholders pari passu and pro rata based on the number of shares held by each stockholder (on an as-converted to Common Stock basis). Certain mergers, consolidations, and asset sales and similar business combination transactions constituting a change of control of Fr8Hubthe Combined Company and/or sale of Fr8Hubthe Combined Company or substantially all of its assets shall be considered a “Deemed Liquidation Event.”
Common StockExclusive Forum
The Proposed Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (a) any derivative action or proceeding brought on behalf of the Combined Company, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Combined Company to the Combined Company or the Combined Company’s stockholders, (iii) any action asserting a claim against the Combined Company, its directors, officers or employees arising pursuant to any provision of the DGCL or the Combined Company’s certificate of incorporation or bylaws or (iv) any action asserting a claim against the Combined Company, its directors, officers or employees governed by the internal affairs doctrine, except in each case for certain limited exceptions as set forth in the Proposed Charter. The federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint, claim or proceeding asserting a cause of action arising under the Exchange Act and the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in the Proposed Charter.
The voting, dividendchoice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Purchaser or its directors, officers or other employees, and liquidation rightsmay result in increased costs to a stockholder who has to bring a claim in a forum that is not convenient to the stockholder, which may discourage such lawsuits. Although under Section 115 of the holdersDGCL, exclusive forum provisions may be included in a company’s certificate of Fr8Hub’s Common Stock are subjectincorporation, the enforceability of similar forum provisions in other companies’ certificates or incorporation or bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to and qualified bybe inapplicable or unenforceable. If a court were to find the rights, powers and preferencesexclusive forum provision of our Proposed Charter inapplicable or unenforceable with respect to one or more of the holdersspecified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the Preferred Stock; except that holderstime and resources of Non-Voting Common Stock have no voting rights.our management and board of directors.
PRINCIPAL STOCKHOLDERSSECURITY OWNERSHIP OF FR8HUBCERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To Fr8Hub’s knowledge, theThe following table sets forth information with respect toregarding the beneficial ownership of outstanding common stockshares of our Common Stock after the Redomestication as of December __, 2020[●], 2021, the Record Date Pre-Merger, and immediately after the consummation of the Merger by:
● each person or “group” (as such term is used in Section 13(d)(3) of the Exchange Act) known by Hudson to be the beneficial owner of more than 5% of shares of our Common Stock as of [●], 2021, the Record Date (pre-Merger) or of shares of our Common Stock upon the closing of the Merger;
● each of Hudson’s executive officers and directors;
● each person who will become an executive officer or director of the Combined Company upon the closing of the Merger;
● all of our current executive officers and directors as a group; and
● all executive officers and directors of the Combined Company as a group upon the closing of the Merger.
As of the Record Date, Hudson had 6,406,146 ordinary shares issued and outstanding. The percentage of shares beneficially owned after the Redomestication as of the Record Date is calculated based on the 6,406,146 shares of Common Stock to be issued and outstanding.
Beneficial ownership is determined in accordance with theSEC rules of the SEC and includes voting or investment power with respect to the securities as well as securities which the individual or group has the right to acquire within 60 days of the determination date. Unless otherwise indicated, the address for those listed below is c/o FreightHub, Inc., at 2001 Timberloch Place, Suite 500, The Woodlands, Texas 77380. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
The number of shares of the common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying warrants, options or other convertible securities held by such persons that are exercisable within 60 days of December __, 2020 but excludes shares of common stock underlying warrants, options or other convertible securities held by any other person. The number of shares of common stock issued and outstanding as of December __, 2020 was _________. Except as noted otherwise, the amounts reflected below are based upon information provided to Fr8Hub.
PRINCIPAL STOCKHOLDERS OF HUDSON
The following table sets forth information with respect to the beneficial ownership of ordinary shares of Hudson as of December __, 2020 by:
The percentage of shares beneficially owned is based on 6,406,146 ordinary shares outstanding as of December __, 2020.
Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including securities that are exercisable or convertible, as the case may be, within 60 days of November 10, 2020. Ordinary shares issuable pursuant to such securities are deemed outstanding for computing the percentage of the person holding such securities and the percentage of any group of which the person is a member but are not deemed outstanding for computing the percentage of any other person.securities. Except as indicated by the footnotes below, Hudson believes, based on the information furnished to it, that the persons and entities named in the table below have, or will have immediately after the consummation of the Merger, sole voting and investment power with respect to all shares of common stock shownour Common Stock that they beneficially own, subject to applicable community property laws where applicable. The information doeslaws. Any shares of our Common Stock subject to options or warrants exercisable within 60 days of the consummation of the Merger are deemed to be outstanding and beneficially owned by the persons holding those options or warrants for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person. They are not, necessarily indicate beneficialhowever, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership forof any other purpose, including for purposes of Section 13(d) and 13(g) of the Securities Act. Hudson does not know of any arrangements, including any pledge by any person of securities of Hudson.person.
Under our Amended and Restated Certificate of Incorporation, to the extent that the conversion of any Purchaser Preferred Stock by a stockholder will result in such stockholder, together with its affiliate(s), beneficially owning in excess of 4.99% (or upon the election by such stockholder prior to the issuance of any Purchaser Preferred Stock, 9.99%) (the “Maximum Percentage”) of the shares of Purchaser Common Stock outstanding immediately after giving effect to such conversion, the number of shares in excess of the Maximum Percentage (the “Excess Shares”) shall be deemed null and void and shall be cancelled, and such holder of Purchaser Preferred stock shall not have the power to transfer the Excess Shares.
Subject to the foregoing, percentage ownership of outstanding shares is based on 38,811,130 shares of our Common Stock to be outstanding immediately upon consummation of the Merger assuming conversion of all outstanding shares of Purchaser Preferred Stock.
Pre-Merger, Post-Redomestication | Post-Merger, Post-Redomestication | |||||||||||||||
Number of Shares | Number of Shares | |||||||||||||||
Name and Address of Beneficial Owner(1) | Beneficially Owned | % of Class | Number of Shares | % of Class | ||||||||||||
Five Percent Holders of Hudson and the Combined Company | ||||||||||||||||
PX Global Advisors LLC(1) | 2,508,000 | 39.15 | % | 2,508,000 | 6.46 | % | ||||||||||
Directors and Named Executive Officers of Hudson | ||||||||||||||||
Warren Wang | — | — | — | — | ||||||||||||
Hon Man Yun | — | — | — | — | ||||||||||||
Ming Yi | — | — | — | — | ||||||||||||
Hong Chen | — | — | �� | — | ||||||||||||
Xiaoyue Zhang | — | — | — | — | ||||||||||||
All Directors and Executive Officers of Hudson as a Group (5 individuals) | — | — | — | — | ||||||||||||
Directors and Named Executive Officers Post-Business Combination(2): | ||||||||||||||||
Javier Selgas | — | — | 195,081 | (3) | * | |||||||||||
Mike Flinker | — | — | — | — | ||||||||||||
Luisa Irene Lopez Reyes | — | — | 41,486 | (4) | * | |||||||||||
Paul Freudenthaler | — | — | 97,541 | (5) | * | |||||||||||
Nicholas H. Adler | — | — | 13,333 | (6) | * | |||||||||||
William Samuels | — | — | 13,333 | (7) | * | |||||||||||
Jerry L. Hutter | — | — | 13,333 | (8) | * | |||||||||||
All directors and executive officers post-Business Combination as a group (6 individuals) | — | — | 374,107 | * |
* | Less than 1%. |
(1) PX Global Advisors LLC, a Delaware limited liability corporation, holds 2,508,000 ordinary shares of Hudson, and therefore 2,508,000 shares of our Common Stock post-Redomestication, constituting 39.15% of the total issued and outstanding shares pre-Merger. 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.
(2) Unless otherwise indicated, the address of each beneficial ownerfor those listed in the table below is c/o Hudson CapitalFreight App, Inc., 19 W. 44th Street, Suite 1001, New York, NY 10036.
Name and Address | Title of Class | Number of Shares Beneficially Owned | Percentage Ownership of Ordinary Shares | |||||||
Owner of more than 5% of Class | ||||||||||
PX Global Advisors LLC(1) | Ordinary Shares | 2,508,000 | 39.16 | % | ||||||
Directors and Officers | ||||||||||
Warren Wang | Ordinary Shares | - | - | |||||||
Hon Man Yun | Ordinary Shares | - | - | |||||||
Ming (Martin) Yi | Ordinary Shares | - | - | |||||||
Hong Chen | Ordinary Shares | - | - | |||||||
Xiaoyue Zhang | Ordinary Shares | - | - | |||||||
All Officers and Directors (Five Persons) | Ordinary Shares | - | - |
PRINCIPAL STOCKHOLDERS OF THE COMBINED COMPANY
The following table sets forth information with respect to the beneficial ownership of the Combined Company’s common stock immediately after the closing of the Merger, assuming the closing of the Merger and the Pre-Merger Financing occurred on ___________ 2020 by:
Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including securities that are exercisable or convertible, as the case may be, within 60 days of ________, 2020. Shares of common stock issuable pursuant to such securities are deemed outstanding for computing the percentage of the person holding such securities and the percentage of any group of which the person is a member but are not deemed outstanding for computing the percentage of any other person. Except as indicated by the footnotes below, the Combined Company believes, based on the information furnished to it, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate beneficial ownership for any other purpose, including for purposes of Section 13(d) and 13(g) of the Securities Act.
The percentage of shares beneficially owned is based on ______ shares of _____ Combined Company Common Stock expected to be outstanding upon the closing of the Merger, taking into account the Bridge Financing and the Pre-Merger Financing. Immediately following the Merger, the former Fr8Hub stockholders will hold approximately 85.7% of the outstanding shares of Combined Company Common Stock, the former shareholders of Hudson will retain ownership of approximately 14.3% of the outstanding shares of Combined Company Common Stock.
Except as indicated in footnotes to this table, Purchaser and Fr8Hub believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock of the Combined Company shown as beneficially owned by them, based on information provided to Purchaser and Fr8Hub by such stockholders and subject to community property laws where applicable.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/oat 2001 Timberloch Place, Suite 500, The Woodlands, Texas 77380.
(3) Represents the product of (i) 154,066 shares of Fr8App Common Stock underlying an option, and (ii) the Exchange Ratio.
(4) Represents the product of (i) 32,764 shares of Fr8App Common Stock underlying an option, and (ii) the Exchange Ratio.
(5) Represents the product of (i) 77,033 shares of Fr8App Common Stock underlying an option, and (ii) the Exchange Ratio.
(6) Represents the product of (i) a restricted share grant of 10,530 shares of Fr8App Common Stock, and (ii) the Exchange Ratio.
(7) Represents the product of (i) a restricted share grant of 10,530 shares of Fr8App Common Stock, and (ii) the Exchange Ratio.
(8) Represents the product of (i) a restricted share grant of 10,530 shares of Fr8App Common Stock, and (ii) the Exchange Ratio.
Sichenzia Ross Ference LLP will pass upon the validity of the Purchaser Common Stock offered by this proxy statement/prospectus.
The consolidated financial statements of Hudson Capital, Inc. and Subsidiaries as of and for the years ended December 31, 20192020 and 20182019 included in this proxy statement/prospectus have been audited by Centurion ZD CPA & Co. and Wei, Wei & Co., LLP, respectively;; given on the authority of said firmsfirm as an independent registered public accounting firm, as separately stated in its report appearing elsewhere herein, and have been so included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
The consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for year ended December 31, 2017 of Hudson Capital Inc. and Subsidiaries included in this proxy statement/prospectus have been audited by Marcum Bernstein & Pinchuk LLP; given on the authority of such firm as an independent registered public accounting firm, as separately stated in its report appearing elsewhere herein, and have been so included in reliance upon such report and upon the authority of such firm as expert in accounting and auditing.
The financial statements of Freight App, Inc. (formerly known as FreightHub, Inc.) as of and for the years ended December 31, 2020, 2019 and 2018 included in this proxy statement/prospectus in reliance upon the report of UHY LLP, independent registered public accounting firm, as stated in its report appearing elsewhere herein, and have been so included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act, and, in accordance with the Exchange Act, we also must file reports with, and furnish other information to, the SEC. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our 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 addition, we are not required to publish financial statements as promptly as U.S. companies. However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and we submit to the SEC, on Form 6-K, unaudited interim financial information. The SEC also maintains an internet site (www.sec.gov) that makes available reports and other information that we file or furnish electronically with it.
Purchaser has filed a registration statement under the Securities Act with the SEC with respect to the securities of Purchaser to be issued pursuant to the Merger Agreement. This proxy statement/prospectus constitutes the prospectus of Purchaser filed as part of the registration statement. This proxy statement/prospectus does not contain all of the information set forth in the registration statement because certain parts of the registration statement are omitted as provided by the rules and regulations of the SEC. You may inspect and copy the registration statement at any of the addresses listed above.
Fr8HubFr8App does not have a class of equity securities registered under the Securities Exchange Act of 1934 and does not file reports or other information with the SEC.
Householding of Proxy statement/prospectus
The SEC has adopted rules that permit companies and intermediaries (such as banks and brokers) to satisfy the delivery requirements for proxy materials with respect to two or more stockholders sharing the same address by delivering a single copy of the proxy statement or annual report, as applicable, addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies. As permitted by the Exchange Act, only one copy of this proxy statement/prospectus will be delivered to multiple Hudson shareholders sharing an address unless contrary instructions have been received by from the impacted stockholders. Once you have received notice from Hudson (if you are a Hudson shareholder of record) or from your broker (if you are a beneficial owner of ordinary shares of) that Hudson or they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive separate copies of Hudson’s annual disclosure documents and this proxy statement/prospectus or if you currently receive multiple copies and would like to request “householding” of these communications, please notify your broker or Hudson. Direct your written request to Hudson to Warren Wang. In the event a shareholder that received multiple copies would like to receive only one copy for such shareholder’s household, such shareholder should contact their bank, broker, or other nominee record holder, or contact Hudson at the above address or phone number.
As of the date of this proxy statement/prospectus, the Hudson board does not intend to present at the Meeting any matters other than those described herein and does not presently know of any matters that will be presented by other parties. If any other matter requiring a vote of the stockholders should come before the meeting, it is the intention of the persons named in the proxy to vote with respect to any such matter in accordance with the recommendation of the Hudson board or, in the absence of such a recommendation, in accordance with the best judgment of the proxy holder.
(formerly known as CHINA INTERNET NATIONWIDE FINANCIAL SERVICES INC.)
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HUDSON CAPITAL INC.
(formerly known as CHINA INTERNET NATIONWIDE FINANCIAL SERVICES INC.)
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In US$)
As of June 30, | As of December 31, | |||||||
2021 | 2020 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 699,000 | $ | 3,274,287 | ||||
Accounts receivable (including $0 and $0 of receivable from related parties as of June 30, 2021 and December 31, 2020, respectively) | - | - | ||||||
Other receivables | 140,935 | 105,149 | ||||||
Loan to third parties | - | - | ||||||
Prepayments and advance to suppliers | 9,565 | 9,470 | ||||||
Due from related parties | 82,576 | 81,756 | ||||||
Total Current Assets | 932,076 | 3,470,662 | ||||||
Non-current assets | ||||||||
Property and Equipment, net | 11,290 | 108,467 | ||||||
Intangible assets, net | 814 | 806 | ||||||
Long-term prepayment | 3,061 | 3,031 | ||||||
Deferred Tax Assets | - | - | ||||||
Total Assets | $ | 947,241 | $ | 3,582,966 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accrued payroll | $ | 212,975 | $ | 168,016 | ||||
Other payables and accruals | 39,318 | 244,370 | ||||||
Due to related party | 361,339 | 358,241 | ||||||
Taxes payable | 143,306 | 1,053,249 | ||||||
Total Current Liabilities | 756,938 | 1,823,876 | ||||||
Provision of other Liabilities | - | 1,127,945 | ||||||
Total Liabilities | 756,938 | 2,951,821 | ||||||
Shareholders’ equity | ||||||||
Common Stock ($0.005 par value, unlimited shares authorized, 6,406,146 and 6,406,146 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively) | 32,031 | 32,031 | ||||||
Additional paid in capital | 32,931,128 | 32,931,128 | ||||||
Statutory reserve | 3,032,854 | 3,032,854 | ||||||
Retained earnings | (34,930,006 | ) | (34,537,976 | ) | ||||
Accumulated other comprehensive loss | (875,704 | ) | (826,892 | ) | ||||
Total Shareholders’ Equity | 190,303 | 631,145 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 947,241 | $ | 3,582,966 |
F-1 |
HUDSON CAPITAL INC.
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT
(In US$)
Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||
Revenue | ||||||||
International corporate financing advisory | $ | - | $ | - | ||||
Factoring service | - | 605 | ||||||
Total revenue | - | 605 | ||||||
Cost of revenues | - | - | ||||||
Gross profit | - | 605 | ||||||
Operating expenses | ||||||||
Selling and marketing expenses | - | 10,534 | ||||||
General and administrative expenses | 395,665 | 862,015 | ||||||
Total Operating expenses | 395,665 | 872,549 | ||||||
(Loss) Income from operations | (395,665 | ) | (871,944 | ) | ||||
Other income (expenses) | ||||||||
Interest income on bank deposit | 4 | 14 | ||||||
Other income (expenses), net | 3,631 | 50,000 | ||||||
Interest income from loans to third parties | - | 181,000 | ||||||
Reversal of impairment (Impairment loss) on loans to third parties | - | 687 | ||||||
Total other income (expenses), net | 3,635 | 231,701 | ||||||
Loss before income tax expenses | (392,030 | ) | (640,243 | ) | ||||
Income tax expenses | - | - | ||||||
Net Loss | $ | (392,030 | ) | $ | (640,243 | ) | ||
Other comprehensive loss | ||||||||
Foreign currency translation gain(loss) | (48,812 | ) | 25,125 | |||||
Comprehensive Loss | $ | (440,842 | ) | $ | (615,118 | ) | ||
Weighted average number of shares | ||||||||
Basic | 6,406,146 | 4,662,657 | * | |||||
Diluted | 6,406,146 | 4,662,657 | * | |||||
Earnings per share | ||||||||
Basic | $ | (0.061 | ) | $ | (0.137 | ) | ||
Diluted | $ | (0.061 | ) | $ | (0.137 | ) |
* - 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.
F-2 |
HUDSON CAPITAL INC. (formerly known as CHINA INTERNET NATIONWIDE FINANCIAL SERVICES INC.) AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: | The Board of Directors and Shareholders of Hudson Capital Inc. (Formerly known as China Internet Nationwide Financial Services Inc.) |
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hudson Capital Inc. (Formerly known as China Internet Nationwide Financial Services Inc.) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for each of the yeartwo years in the period ended December 31, 2019,2020, 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, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the yeartwo years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
As part of our audit of the 2019 financial statements, we also audited the adjustments to the 2017 financial statements to retroactively apply the effects of the reverse stock split that occurred subsequent to the year ended December 31, 2019 as described in Note 12 and Note 18. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to Hudson Capital Inc. (Formerly known as China Internet Nationwide Financial Services Inc.)’s 2017 financial statements other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2017 financial statements as whole.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2v to the consolidated financial statements, the Company has suffered from losses from operation and significant accumulated deficits. The Company comes to have insufficient cash flows generated from operations and provided for development. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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.
We have served as the Company’s auditor since 2019.
Hong Kong, China
June 15, 2020, except for Note 12 and Note 18 which the date is November 12, 2020
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
We conducted our
Our
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.
We have served as the Company’s auditor Hong Kong, China May 5, 2021
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Hudson Capital Inc.
Opinion on the Financial Statements
We have audited the consolidated statements of income
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Hudson Capital Inc. (formerly known as China Internet Nationwide Financial Services Inc.) Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of China Internet Nationwide Financial Services Inc. and Subsidiaries (the “Company”) as of December 31, 2018, the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of operations and cash flows for the year then ended
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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 audit, 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 audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Wei, Wei & Co., LLP We have served as the Company’s auditor for 2019 Flushing, New York May 10, 2019 |
F-5 |
/s/ Marcum BernsteinHUDSON CAPITAL INC. (formerly known as CHINA INTERNET NATIONWIDE FINANCIAL
SERVICES INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, | ||||||||
2020 | 2019 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 3,274,287 | $ | 13,567 | ||||
Accounts receivable, net | - | 7,264 | ||||||
Other receivables | 105,149 | 646,690 | ||||||
Loans to third parties, net | - | 4,800,000 | ||||||
Prepayments | 9,470 | 17,047 | ||||||
Due from related parties | 81,756 | 76,466 | ||||||
Total Current Assets | 3,470,662 | 5,561,034 | ||||||
Non-current assets | ||||||||
Property and Equipment, net | 108,467 | 1,503 | ||||||
Intangible assets, net | 806 | 1,940 | ||||||
Long-term prepayment | 3,031 | 4,580 | ||||||
Goodwill | - | - | ||||||
Deferred Tax Assets | - | - | ||||||
Total Assets | $ | 3,582,966 | $ | 5,569,057 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accrued payroll | $ | 168,016 | $ | 621,483 | ||||
Accounts payable | ||||||||
Advance from customers | - | - | ||||||
Other payables and accruals | 244,370 | 201,469 | ||||||
Due to related party | 358,241 | 279,925 | ||||||
Taxes payable | 1,053,249 | 986,195 | ||||||
Total Current Liabilities | 1,823,876 | 2,089,072 | ||||||
Provision of other liabilities | 1,127,945 | 959,881 | ||||||
Deferred tax liabilities | - | - | ||||||
Total Liabilities | 2,951,821 | 3,048,953 | ||||||
Shareholders’ equity | ||||||||
Common Stock ($0.005* par value, unlimited shares authorized, 6,406,146 and 4,422,837* shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively) | 32,031 | 22,114 | ||||||
Additional paid in capital | 32,931,128 | 28,441,045 | ||||||
Statutory reserve | 3,032,854 | 2,949,930 | ||||||
Retained earnings | (34,537,976 | ) | (25,379,699 | ) | ||||
Accumulated other comprehensive loss | (826,892 | ) | (3,513,286 | ) | ||||
Total Shareholders’ Equity | 631,145 | 2,520,104 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 3,582,966 | $ | 5,569,057 |
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.
* - 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.
See notes to the consolidated financial statements
F-6 |
HUDSON CAPITAL INC. (formerly known as CHINA INTERNET NATIONWIDE FINANCIAL
SERVICES INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||||||
Revenue | ||||||||||||
- Third parties | $ | 618 | $ | 1,366,417 | $ | 14,402,329 | ||||||
- Related parties | ||||||||||||
Total revenue | 618 | 1,366,417 | 14,402,329 | |||||||||
Cost of revenues | - | 123 | 654,979 | |||||||||
Gross profit | 618 | 1,366,294 | 13,747,350 | |||||||||
Operating expenses | ||||||||||||
Selling and marketing expenses | 10,748 | 100,460 | 576,526 | |||||||||
General and administrative expenses | 4,123,108 | 1,893,499 | 11,664,394 | |||||||||
Research & Development Expense | - | - | 3,512,512 | |||||||||
Donation expenses | - | - | - | |||||||||
Total Operating expenses | 4,133,856 | 1,993,959 | 15,753,432 | |||||||||
(Loss) income from operations | (4,133,238 | ) | (627,665 | ) | (2,006,082 | ) | ||||||
Other income (expenses) | ||||||||||||
Interest income on bank deposit | 14 | 666 | 16,182 | |||||||||
Loss on disposal of a subsidiary | (2,062,155 | ) | ||||||||||
Other income (expenses) | 38,870 | (5,611,484 | ) | (510,200 | ) | |||||||
Interest income from loans to third parties | 365,000 | 2,191,631 | 6,465,042 | |||||||||
Impairment loss on loans to third parties and property and equipment | (5,345,999 | ) | (57,941,663 | ) | (7,423,651 | ) | ||||||
Total other (expenses) income, net | (4,942,115 | ) | (61,360,850 | ) | (3,514,782 | ) | ||||||
(Loss) Income before income tax expenses | (9,075,353 | ) | (61,988,515 | ) | (5,520,864 | ) | ||||||
Income tax (benefit) expenses | - | 7,243 | (1,702,127 | ) | ||||||||
Net (loss) income | $ | (9,075,353 | ) | $ | (61,995,758 | ) | $ | (3,818,737 | ) | |||
Other comprehensive (loss) income | ||||||||||||
Foreign currency translation (loss) gain | 2,686,394 | (365,258 | ) | (2,415,919 | ) | |||||||
Comprehensive (loss) Income | $ | (6,388,959 | ) | $ | (62,361,016 | ) | $ | (6,234,656 | ) | |||
Weighted average number of shares, basic and diluted | 6,406,146 | 4,422,837 | * | 4,422,837 | * | |||||||
Basic and diluted (loss) earnings per share | $ | (1.42 | ) | $ | (14.02 | )* | $ | (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.
See notes to consolidated financial statements
F-7 |
HUDSON CAPITAL INC. (formerly known as CHINA INTERNET NATIONWIDE FINANCIAL SERVICES INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | (9,075,353 | ) | $ | (61,995,758 | ) | $ | (3,818,737 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 1,179 | 62,358 | 59,907 | |||||||||
Deferred taxes | - | 1,790,260 | (1,733,152 | ) | ||||||||
Loss on disposal of a subsidiary | - | - | 2,062,155 | |||||||||
Impairment loss on loans to third parties | 4,800,000 | 56,242,596 | 7,346,903 | |||||||||
Impairment loss on fixed assets | - | - | 76,748 | |||||||||
Changes in operating assets and liabilities: | - | - | - | |||||||||
Accounts receivable | 7,264 | (1,450,857 | ) | (13,327,901 | ) | |||||||
Other receivables | 541,541 | 2,782,583 | (3,055,473 | ) | ||||||||
Prepayments | 7,577 | 23,842 | 254,879 | |||||||||
Due from related parties | 73,026 | 389,337 | (191,832 | ) | ||||||||
Long-term office rental deposit | - | - | 669,888 | |||||||||
Accrued payroll | (453,467 | ) | 80,431 | (454,552 | ) | |||||||
Other payables and accruals | 42,901 | (78,971 | ) | (381,174 | ) | |||||||
Tax payable | 67,054 | 202,515 | (4,780,002 | ) | ||||||||
Accounts Payable | - | - | (70,242 | ) | ||||||||
Other Assets | - | - | - | |||||||||
Long-term prepayment | 1,549 | 3,705 | - | |||||||||
Estimated Liabilities | 168,064 | 971,268 | - | |||||||||
Advance from customers | - | (94,688 | ) | 76,203 | ||||||||
Net cash (used in)/provided by operating activities | (3,818,665 | ) | (1,071,379 | ) | (17,266,382 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (108,095 | ) | - | (175,972 | ) | |||||||
Loans to third parties | - | (200,000 | ) | (39,417,810 | ) | |||||||
Collection of loans to third parties | - | - | 31,870,523 | |||||||||
Net cash (used in)/provided by investing activities | (108,095 | ) | (200,000 | ) | (7,723,259 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from related party | - | (31,201 | ) | - | ||||||||
Repayment to a related party | - | - | (128,407 | ) | ||||||||
Proceeds from shares placement (net of offering cost of $222,000) | 4,278,000 | - | - | |||||||||
Net cash provided by/ (used in) financing activities | 4,278,000 | (31,201 | ) | (128,407 | ) | |||||||
Effect of exchange rate changes on cash | 2,909,480 | (262,681 | ) | (468,386 | ) | |||||||
Net increase (decrease) in cash | 3,260,720 | (1,565,261 | ) | (25,586,434 | ) | |||||||
Cash at beginning of year | 13,567 | 1,578,828 | 27,165,262 | |||||||||
Cash at end of year | 3,274,287 | 13,567 | $ | 1,578,828 | ||||||||
Supplemental disclosure of cash flow information | - | |||||||||||
Interest paid | $ | - | - | $ | - | |||||||
Income taxes paid | $ | - | - | $ | 2,503,688 | |||||||
Non- cash investing activities | ||||||||||||
Net assets from acquisition of Anytrust | $ | - | - | $ | - | |||||||
Deferred offering costs | $ | - | - | $ | - |
See notes to the consolidated financial statements
F-8 |
HUDSON CAPITAL INC. (formerly known as CHINA INTERNET NATIONWIDE FINANCIAL SERVICES INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Statutory | Retained | Comprehensive | Shareholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Reserve | Earnings | Loss | Equity | ||||||||||||||||||||||
Balance at January 1, 2018 | 4,422,837 | * | $ | 22,114 | $ | 28,441,045 | $ | 1,828,601 | $ | 41,556,125 | $ | (732,109 | ) | $ | 71,115,776 | |||||||||||||
Net (loss) | - | - | - | - | (3,818,737 | ) | - | (3,818,737 | ) | |||||||||||||||||||
Appropriations of statutory reserves | - | - | - | 1,083,928 | (1,083,928 | ) | - | - | ||||||||||||||||||||
Foreign currency translation loss | - | - | - | - | - | (2,415,919 | ) | (2,415,919 | ) | |||||||||||||||||||
Balance as of December 31, 2018 | 4,422,837 | * | $ | 22,114 | $ | 28,441,045 | $ | 2,912,529 | $ | 36,653,460 | $ | (3,148,028 | ) | $ | 64,881,120 | |||||||||||||
Net (loss) | (61,995,758 | ) | (61,995,758 | ) | ||||||||||||||||||||||||
Appropriations of statutory reserves | 37,401 | (37,401 | ) | |||||||||||||||||||||||||
Foreign currency translation loss | (365,258 | ) | (365,258 | ) | ||||||||||||||||||||||||
Balance as of December 31, 2019 | 4,422,837 | * | $ | 22,114 | $ | 28,441,045 | $ | 2,949,930 | $ | (25,379,699 | ) | $ | (3,513,286 | ) | $ | 2,520,104 | ||||||||||||
Net (loss) | (9,075,353 | ) | (9,075,353 | ) | ||||||||||||||||||||||||
Appropriations of statutory reserves | 82,924 | (82,924 | ) | - | ||||||||||||||||||||||||
Proceeds from issuance of common stock | 1,983,309 | * | 6,353 | 4,493,647 | 4,500,000 | |||||||||||||||||||||||
Reverse split adjustments | - | 3,564 | (3,564 | ) | - | |||||||||||||||||||||||
Foreign currency translation loss | 2,686,394 | 2,686,394 | ||||||||||||||||||||||||||
Balance as of December 31, 2020 | 6,406,146 | $ | 32,031 | $ | 32,931,128 | $ | 3,032,854 | $ | (32,537,976 | ) | $ | (826,892 | ) | $ | 631,145 |
* - 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.
See notes to the consolidated financial statements
F-9 |
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 RMB5,000,000 (approximately $726,600), which capital has to be contributed in full by December 31, 2026. The legal representative of Kashgar SYX is Mr. Shaoyong Huang, who is also a 1% equity shareholder of Sheng Ying Xin.
HUSN is 60.22% owned by Mr. Jianxin Lin, who also owned 99% of Sheng Ying Xin directly and 1% of Sheng Ying Xin indirectly since its inception, September 16, 2014; Mr. Jianxin Lin is the former chief executive officer of both HUSN and Sheng Ying Xin. So HUSN and Sheng Ying Xin were considered to be under common control since September 28, 2015.
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-10 |
On July 28, 2017, HUSN completed its initial public offering (“IPO”) and issued 2,023,146 shares of common stock to investors at a price of $10.00 per share for a total of $20,231,460 before underwriting discounts and commissions and offering expenses of $1,262,562 and deferred issuing cost of $763,365. According to the underwriting agreement signed on May 9,2017, the Company issued warrants to the underwriter to purchase 91,042 ordinary shares upon the successful completion of the IPO at an exercise price of 120% of the IPO price, namely $12 dollars per share, and exercisable for two years. On November 21, 2017 the underwriter exercised all the warrants in connection with the IPO to purchase 91,042 shares. As of December 31, 2017 the number of shares issued and outstanding is 22,114,188.
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 100% equity interest in Beijing Anytrust Information Technology Co., Ltd (“Anytrust”) which mainly provides enterprise financial data services, including system management, application development, business intelligence and maintenance services. On September 25, 2019, Yin Da Xin Cheng carried out industrial and commercial deregistration.
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 & Pinchuk llp
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-11 |
As of December 31, 2020, 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 100% of the net profit of Sheng Ying Xin. Any payment from Sheng Ying Xin to Yingxin Yijia must comply with applicable Chinese laws. Yingxin Yijia is also obligated to bears all losses of Sheng Ying Xin. Further, the parties agreed that Yingxin Yijia shall retain sole ownership of all intellectual property developed in connection with providing technology services to Sheng Ying Xin. The Exclusive Business Cooperation Agreement has a ten-year term. The term of these agreements may be extended if confirmed in writing by Yingxin Yijia, prior to the expiration of the term. The extended term shall be determined by Yingxin Yijia, and Sheng Ying Xin shall accept such extended term unconditionally.
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 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.
F-12 |
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 1 in total. To the extent Sheng Ying Xin shareholders receive any of such consideration, the Option requires Sheng Ying Xin shareholders to transfer (and not retain) the same to Sheng Ying Xin or Yingxin Yijia. The Exclusive Option Agreement has a ten-year term. The term of these agreements may be extended if confirmed in writing by Yingxin Yijia, and if no written confirmation was obtained from Yingxin Yijia, the Exclusive Option Agreement will be automatically renewed, the term of the renewed agreement will be determined till Yingxin Yijia’s written confirmation.
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.
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-13 |
Summarized below is the information related to the combined VIEs’ assets and liabilities as of December 31, 2020 and 2019, respectively:
As of December 31, 2020 | As of December 31, 2019 | |||||||
Current assets | $ | 48,287,298 | $ | 45,180,787 | ||||
Plant and equipment, net | 373 | 1,503 | ||||||
Other noncurrent assets | 3,836 | 6,520 | ||||||
Total assets | 48,291,507 | 45,188,810 | ||||||
Total liabilities | (48,851,480 | ) | (45,964,142 | ) | ||||
Net assets (liabilities) | $ | (559,973 | ) | $ | (775,332 | ) |
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, 2020, 2019 and 2018, respectively:
Year ended December 31, 2020 | Year ended 2019 | Year ended 2018 | ||||||||||
Revenues | $ | 618 | $ | 1,366,417 | $ | 14,402,329 | ||||||
Cost of revenues | $ | - | $ | 123 | $ | 654,979 | ||||||
Total operating expenses | $ | 102,135 | $ | 784,840 | $ | 12,329,417 | ||||||
Net loss | $ | 248,314 | $ | 53,859,306 | $ | 1,530,958 |
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-14 |
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:
December 31, 2020 | December 31, 2019 | |||||||
RMB exchange rate at balance sheets dates, | 6.5249 | 6.9762 |
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Average exchange rate for each year | 6.9010 | 6.8944 | 6.6174 |
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-15 |
(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 PRC. As of December 31, 2020 and 2019, the Company had no cash equivalents.
(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 $41,782,173 as of December 31, 2020, allowance for loans to third party was $39,402,683 as of December 31, 2019, and, allowance for loans to third party was $7,119,594 as of December 31, 2018. The value-added tax receivable from customers included in the accounts receivable in the balance sheet were $0, and $97,287 as of December 31, 2020 and 2019, respectively. The accounts receivable, except for the principal of factoring as of December 31, 2019 were 0.07% collected as of March 31, 2020.
(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 5% residual value for electronic equipment, and a 5% residual value for furniture and a 0% residual value for leasehold improvement.
Estimated useful lives of property and equipment:
Useful Life | ||
Furniture | 10 years | |
Electronic equipment | 3 years | |
Motor vehicle | 5 years | |
Leasehold improvements | Shorter of life of asset or lease |
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.
We have served as the Company’s auditor from 2016 to 2018(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-16 |
(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, 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. For the year ended December 31, 2018, the Company recognized $73,999 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 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of Board of Directors.
(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-17 |
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-18 |
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 RMB100,000. In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The Company did not have any material interest or penalties associated with tax positions for the years ended December 31, 2020, 2019, and 2018 and did not have any significant unrecognized uncertain tax positions as of December 31, 2020, 2019, and 2018. The Company does not expect that the position of unrecognized tax benefits will significantly increase or decrease within 12 months of December 31, 2020.
(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. Expenses for research and development for the years ended December 31, 2020, 2019 and 2018 were approximately nil and nil and US$3,512,512, respectively.
(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-19 |
(p) Earnings (loss) per Share
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 no dilutive effect for the years ended December 31, 2020, 2019 and 2018.
(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.
F-20 |
(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-21 |
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.
F-22 |
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-23 |
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, 2020 and 2019 were $9,075,353 and $61,995,758, respectively, and turned the retained earnings as of December 31, 2018 to 2019 from $36,653,460 to (25,379,698). As of December 31, 2020 and 2019, the Company has cash and cash equivalents of $3,274,287 and $13,567, respectively and net cash used in operating activities during the year ended December 31, 2020 and 2019 were $3,818,665 and $1,071,378, respectively. The Company comes to have insufficient cash flows generated from operations and provided for development. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The management determines that additional effort will be required to improve the operation so that the Company may generate more profits to sustain its continuous. The Company may explore the channels to raise additional capital or any opportunities to improve the cash flow in the years to come. The Company had raised $4.278,000 from share placement to improve the financial position and cash flow as of December 31, 2020.
F-24 |
NOTE 3. CASH
Cash consisted of the following:
As of December 31, 2020 | As of December 31, 2019 | |||||||
Cash on hand | $ | - | $ | - | ||||
Cash in banks | 3,247,287 | 13,567 | ||||||
Total cash | $ | 3,247,287 | $ | 13,567 |
NOTE 4. OTHER RECEIVABLES
Other receivables consisted of the following:
As of December 31, 2020 | As of December 31, 2019 | |||||||
Interest receivable | $ | - | $ | 570,862 | ||||
Others | 105,149 | 75,828 | ||||||
Total | $ | 105,149 | $ | 646,690 |
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:
As of December 31, | As of December 31, | |||||||
Direct loans to third parties | $ | 12,200,000 | $ | 12,200,000 | ||||
Entrusted loans to third parties | 36,782,173 | 34,402,684 | ||||||
Impairment on uncollectable loans | (48,982,173 | ) | (41,802,684 | ) | ||||
Total loans to third parties | $ | - | $ | 4,800,000 |
Direct loans
The Company lends their own funds directly to third parties. Due to the COVID-19 pandemic, the Company has agreed to extend the due dates of the loans and the detailed direct loan information as of December 31, 2020 is as follows:
Borrower | Amount | Annual Interest rate | Due dates (after extension) | |||||||
A | $ | 4,000,000 | 5 | % | Feb 7, 2021 | |||||
B | 5,000,000 | 15 | % | Jan 28, 2019 | ||||||
C | 3,000,000 | 5 | % | Jan 6, 2021 | ||||||
C | 200,000 | 5 | % | Jun 26, 2021 | ||||||
Total | $ | 12,200,000 |
All the above loans were fully impaired as at December 31, 2020 and no extension agreements were executed for them and are overdue.
The Company lends their own funds directly to third parties. The detailed direct loan information as of December 31, 2019 is as follows:
Borrower | Amount | Annual Interest rate | Due dates | |||||||
A | $ | 4,000,000 | 5 | % | Aug 7, 2020 | |||||
B | 5,000,000 | 15 | % | Jan 28, 2019 | ||||||
C | 3,000,000 | 5 | % | Jul 6, 2020 | ||||||
C | 200,000 | 5 | % | Dec 26, 2020 | ||||||
Total | $ | 12,200,000 |
F-25 |
The detailed direct loan information as of December 31, 2018 is as follows:
Borrower | Amount | Annual Interest rate | Due dates | |||||||
A | $ | 4,000,000 | 5 | % | August 6, 2019 | |||||
B | 5,000,000 | 15 | % | January 28, 2019 | ||||||
C | 3,000,000 | 5 | % | July 6, 2019 | ||||||
Total | $ | 12,000,000 |
Management assessed the collectability of loans to third parties and determined that an impairment of $12,200,000 was required as of December 31, 2020. The interest income from such direct loans was $365,000, $422,284 and $1,133,407 for the years ended December 31, 2020, 2019 and 2018, respectively.
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, 2020 was $36,782,173 to four borrowers. The detailed entrusted loan information as of December 31, 2020 is as follows:
Borrower | Amount | Annual Interest rate | Due dates | |||||||
A | $ | 3,065,181 | 16 | % | October 23, 2018 | |||||
A | 6,130,362 | 16 | % | December 26, 2018 | ||||||
B | 4,597,772 | 16 | % | May 30, 2019 | ||||||
B | 5,364,067 | 16 | % | July 27, 2019 | ||||||
C | 7,662,953 | 16 | % | June 9, 2019 | ||||||
C | 6,130,362 | 16 | % | July 9, 2019 | ||||||
D | 3,831,476 | 16 | % | September 7, 2019 | ||||||
Total | $ | 36,782,173 |
The balance of entrusted loans as of December 31, 2019 was $34,402,684 to four borrowers. The detailed entrusted loan information as of December 31, 2019 is as follows:
Borrower | Amount | Annual Interest rate | Due dates | |||||||
A | $ | 2,866,890 | 16 | % | October 23, 2018 | |||||
A | 5,733,781 | 16 | % | December 26, 2018 | ||||||
B | 4,300,335 | 16 | % | May 30, 2019 | ||||||
B | 5,017,058 | 16 | % | July 27, 2019 | ||||||
C | 7,167,225 | 16 | % | June 9, 2019 | ||||||
C | 5,733,781 | 16 | % | July 9, 2019 | ||||||
D | 3,583,614 | 16 | % | September 7, 2019 | ||||||
Total | $ | 34,402,684 |
The balance of entrusted loans as of December 31, 2018 was $34,969,111 to four borrowers. The detailed entrusted loan information as of December 31, 2018 is as follows:
Borrower | Amount | Annual Interest rate | Due dates | |||||||
A | $ | 2,914,093 | 16 | % | October 23, 2018 | |||||
A | 5,828,185 | 16 | % | December 26, 2018 | ||||||
B | 4,371,139 | 16 | % | May 30, 2019 | ||||||
B | 5,099,662 | 16 | % | July 27, 2019 | ||||||
C | 7,285,231 | 16 | % | June 5, 2019 | ||||||
C | 5,828,185 | 16 | % | July 9, 2019 | ||||||
D | 3,642,616 | 16 | % | September 7, 2019 | ||||||
Total | $ | 34,969,111 |
$34,402,684 of the entrusted loan balance as of December 31, 2019 due from all borrower was not collected subsequently. Management assessed the collectability of these entrusted loans and determined that an impairment of $34,402,684 was required as of December 31, 2019.
The interest income from such entrusted loans was $0, $2,043,124 and $5,109,237 for the years ended December 31, 2020, 2019 and 2018.
NOTE 6. DUE FROM RELATED PARTIES
Due from related party consists of the following:
As of December 31, | As of December 31, | |||||||
Sheng Ying Xin (Beijing) Film Industry Co., Ltd. | $ | 46,416 | $ | 43,412 | ||||
Beijing ZhipingScience and Technology Development Co., Ltd. | 30,214 | 28,259 | ||||||
Anytrust Information Technology Co., Ltd | 5,126 | 4,795 | ||||||
Total due from related party | $ | 81,756 | $ | 76,466 |
As of December 31, 2020, the Company has related party receivable of $81,756, due to advances made on behalf of these related parties.
NOTE 7. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
As of December 31, | As of December 31, | |||||||
Furniture | $ | 460 | $ | 430 | ||||
Electronic equipment | 15,931 | 7,329 | ||||||
Motor vehicle | 100,000 | 7,329 | ||||||
Leasehold improvement | - | - | ||||||
Total property and equipment | 116,391 | 7,759 | ||||||
Less: accumulated depreciation | (7,924 | ) | (6,256 | ) | ||||
Less: impairment | - | - | ||||||
Property and equipment, net | $ | 108,467 | $ | 1,503 |
F-26 |
Depreciation expense was $703, $60,910 and $58,369, respectively for the years ended December 31, 2020, 2019, and 2018.
NOTE 8. INTANGIBLE ASSETS, NET
The intangible assets consisted of the following:
As of December 31, | As of December 31, | |||||||
Accounting software | $ | 7,650 | $ | 7,155 | ||||
Less: accumulated amortization | (6,844 | ) | (5,215 | ) | ||||
Intangible assets, net | $ | 806 | $ | 1,940 |
Amortization expense was $476, $1,448 and $1,538, respectively, for the years ended December 31, 2020, 2019, 2018.
NOTE 9. RELATED PARTY TRANSACTIONS
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 $68,000 for the period from April 1, 2020 to December 31, 2020. The Company has also entered into consultant agreement with PX Capital for the 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 have common chief executive officer, Mr. Warren Wang.
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., $28,259 from Beijing Zhiping Science.
Due to related party:
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 the Company’s founder, former chairman of the board of directors and former chief executive officer and Mr Jinchi Xu the Company’s former director and chief financial officer, who lend funds for the Company’s operations. The payables are unsecured, non-interest bearing and due on demand.
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 $0, $140,149 and $1,317,484 for the years ended December 31, 2020, 2019 and 2018, respectively.
F-27 |
NOTE 11. Taxation
New York, New York
May 15, 2018
HUDSON CAPITAL INC. (formerly known as CHINA INTERNET NATIONWIDE FINANCIAL
SERVICES INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, | ||||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 13,567 | $ | 1,578,828 | ||||
Accounts receivable, net | 7,264 | 18,839,050 | ||||||
Other receivables | 646,690 | 3,452,568 | ||||||
Loans to third parties, net | 4,800,000 | 39,849,517 | ||||||
Prepayments | 17,047 | 41,279 | ||||||
Advance for investment | - | 837,802 | ||||||
Due from related parties | 76,466 | 184,961 | ||||||
Total Current Assets | 5,561,034 | 64,784,005 | ||||||
Non-current assets | ||||||||
Property and Equipment, net | 1,503 | 250,886 | ||||||
Intangible assets, net | 1,940 | 3,426 | ||||||
Long-term office rental deposit | - | |||||||
Long-term prepayment | 4,580 | 8,377 | ||||||
Goodwill | - | - | ||||||
Deferred Tax Assets | - | 1,798,398 | ||||||
Total Assets | $ | 5,569,057 | $ | 66,845,092 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accrued payroll | $ | 621,483 | $ | 766,383 | ||||
Accounts payable | - | |||||||
Advance from customers | - | 95,118 | ||||||
Other payables and accruals | 201,469 | 271,467 | ||||||
Due to related party | 279,925 | 32,005 | ||||||
Taxes payable | 986,195 | 798,999 | ||||||
Total Current Liabilities | 2,089,072 | 1,963,972 | ||||||
Provision of other liabilities | 959,881 | - | ||||||
Deferred tax liabilities | - | |||||||
Total Liabilities | 3,048,953 | 1,963,972 | ||||||
Shareholders’ equity | ||||||||
Common Stock ($0.005* par value, unlimited shares authorized, 4,422,837* shares issued and outstanding at December 31, 2019 and December 31, 2018) | 22,114 | 22,114 | ||||||
Additional paid in capital | 28,441,045 | 28,441,045 | ||||||
Statutory reserve | 2,949,930 | 2,912,529 | ||||||
Retained earnings | (25,379,699 | ) | 36,653,460 | |||||
Accumulated other comprehensive loss | (3,513,286 | ) | (3,148,028 | ) | ||||
Total Shareholders’ Equity | 2,520,104 | 64,881,120 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 5,569,057 | $ | 66,845,092 |
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.
* - 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.
See notes to the consolidated financial statements
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, 2020, 2019 and 2018. 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 25%, and applies to both domestic and foreign invested enterprises. Kashgar Sheng Ying Xin, which was incorporated in Kashgar City, Xinjiang Autonomous Region in People’s Republic of China, is exempted from income tax from its inception to December 31, 2020 and is subject to a tax rate of 25% after December 31, 2020. The components of the income tax expense are as follows:
Reconciliation of the income tax expenses at the PRC statutory EIT rate of 25% for the years ended December 31, 2020, 2019 and 2018 and the Company’s effective income tax expenses is as follows:
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:
The Company’s NOL was mainly from the Company’s VIE and subsidiaries’ cumulative net operating losses (“NOL”) of approximately $252,483 as of December 31, 2020. Management considers projected future losses outweighs other factors and made a full allowance of related deferred tax assets.”
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