10-K 1 f10k2020_tdholdingsinc.htm ANNUAL REPORT
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

Or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number: 001-36055

 

TD HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   45-4077653
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

25th Floor, Block C, Tairan Building

No. 31 Tairan 8th Road, Futian District

Shenzhen, Guangdong, PRC 518000

(Address of principal executive offices) (Zip Code)

 

+86 (0755) 88898711

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Act:

 

Title of each class registered   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   GLG   Nasdaq Capital Market

 

Securities registered under Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐   No ☒

 

As of June 30, 2020, the last business day of the registrant’s second quarter of most recently completed fiscal year, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $112.7 million based on the closing price of $1.88 for the registrant’s common stock as reported on the NASDAQ Capital Market.

 

As of June 4, 2021, there were 97,043,566 shares of the Company’s common stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 

 

 

TD Holdings, Inc.

 

Annual Report on Form 10-K

 

For the Fiscal Year Ended December 31, 2020

 

TABLE OF CONTENTS

 

Note Regarding Forward-Looking Statements   ii
         
PART I        
         
Item 1.   Description of Business   1
Item 1A.   Risk Factors   17
Item 1B.   Unresolved Staff Comments   28
Item 2.   Description of Property   28
Item 3.   Legal Proceedings   29
Item 4.   Mine Safety Disclosure   30
         
PART II        
         
Item 5.   Market for Common Equity and Related Stockholder Matters   31
Item 6.   Selected Financial Data   31
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   31
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   39
Item 8.   Financial Statements   39
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure   39
Item 9A.   Controls and Procedures   39
Item 9B.   Other Information   42
         
PART III        
         
Item 10.   Directors, Executive Officers and Corporate Governance   43
Item 11.   Executive Compensation   46
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   48
Item 13.   Certain Relationships and Related Transactions, and Director Independence   49
Item 14.   Principal Accountant Fees and Services   51
         
PART IV        
         
Item 15.   Exhibits, Financial Statement Schedules   52

 

 

All references to “we,” “us,” “our,” “GLG,” “Company,” “Registrant” or similar terms used in this report refer to TD Holdings, Inc., a Delaware corporation (“GLG”), including its consolidated subsidiaries, unless the context otherwise indicates. We conduct our business through our operating entities, Shanghai Jianchi Supply Chain Co., Ltd., Shenzhen Huamu City Trade Co. LTD., Tongdow (Hainan) Data Technology Co. LTD., and Shenzhen Qianhai Baiyu Supply Chain Co., Ltd.,Hainan Jianchi Import and Export Co., Ltd.,Hainan Baiyu Cross-border E-commerce Co., Ltd.,Yangzhou Baiyu Venture Capital Co., Ltd., and Yangzhou Baiyu Cross-border E-commerce Co., Ltd.

 

“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report, Taiwan, Hong Kong and Macau. “RMB” or “Renminbi” refers to the legal currency of China and “$,” “US$” or “U.S. Dollars” refers to the legal currency of the United States.

 

i

 

 

Note Regarding Forward-Looking Statements

 

The information contained in this Annual Report on Form 10-K includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our company and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements contained herein are based on current expectations and beliefs concerning future developments and the potential effects on us. Future developments actually affecting us may not be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Examples are statements regarding future developments with respect to the following:

 

  expand our customer base;

 

  broaden our service and product offerings;

 

  enhance our risk management capabilities;

 

  improve our operational efficiency;

 

  our ability to raise sufficient fund to expand our operations;

 

  attract, retain and motivate talented employees;

 

  a decrease in demand for automobiles renting and weakness in the automotive industry generally;
     
  the impact of COVID-19 on our business operations;
     
  a decrease in demand for commodities trading and weakness in the commodities trading industry generally;
     
  navigate an evolving regulatory environment;

 

  defend ourselves against litigation, regulatory, privacy or other claims;

 

  development of a liquid trading market for our securities; and

 

   
  our plan to maintain compliance with Nasdaq’s continued listing requirements.
     
  the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects as a result of the restatements of Quarterly Reports on form 10-Q for the periods ended March 31, 2020, June 30, 2020, and September 30, 2020 (herein referred to as “Restated Reports” or “Restatement”).

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

 

We qualify all of our forward-looking statements by these cautionary statements. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

ii

 

 

PART I

 

Item 1. Description of Business.

 

Overview and Corporate History

 

TD Holdings, Inc. (formerly known as Bat Group, Inc.) has become a business engaging in commodity trading business (the “Commodities Trading Business”) and supply chain service business (the “Supply Chain Service Business”) in China since the disposition of its direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses, farmers and individuals (the “Micro-lending Business”) in July 2018 and its used luxurious car leasing business in August 2020.  

 

The Commodities Trading Business primarily involves purchasing non-ferrous metal product from upstream metal and mineral suppliers and then selling to downstream customers. The Supply Chain Service Business primarily has served as a one-stop commodity supply chain service and digital intelligence supply chain platform integrating upstream and downstream enterprises, warehouses, logistics, information, and futures trading.

 

Our Current Business

 

Commodities Trading Business

 

The Commodity Trading Business primarily involves purchasing non-ferrous metal product, such as aluminium ingots, copper, silver, and gold, from upstream metal and mineral suppliers and then selling to downstream customers. In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help upstream metal and mineral suppliers to sell their metal products, the Company launched its Supply Chain Service Business in December 2019. The Company primarily generates revenues from bulk non-ferrous commodity products, and from providing related supply chain management services in the PRC.

 

In order to diversify the Company’s business, the Company has operated the Commodities Trading Business through Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”) since November 2019. On November 22, 2019, Hao Limo Technology (Beijing) Co., Ltd. (“Hao Limo”), our indirectly wholly owned subsidiary, entered into a series of agreements with Huamucheng and the shareholders of Huamucheng pursuant to which we obtained control of Huamucheng (the “VIE Agreement”). On June 25, 2020, Hao Limo and Huamucheng entered into certain VIE termination agreement to terminate the Huamucheng VIE Agreement. As such, Hao Limo no longer has the control rights and rights to the assets, property and revenue of Huamucheng. At the same time, Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”), our wholly-owned subsidiary incorporated in China, acquired 100% equity interest of Huamucheng from the Huamucheng shareholders for nominal consideration.

 

Through Huamucheng’s business, we source bulk commodity products from non-ferrous metal and mines or its designated distributors and then sells to manufactures who need these metals in large quantity. We also work with upstream suppliers in the sourcing of commodities.

 

For the fiscal year ended December 31, 2020, the Company generated revenue of $24.5 million from its commodities trading business and $3.9 million from its supply chain management services.

  

Supply Chain Service Business

 

The Company’s Supply Chain Service Business is conducted through Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Qianhai Baiyu”), our wholly-owned subsidiary incorporated in China. On October 26, 2020, Huamucheng entered into certain share purchase agreements to acquire 100% shares of Qianhai Baiyu. Qianhai Baiyu is engaged in the supply chain service business and covers a full range of commodities, including non-ferrous metals, ferrous metals, coal, metallurgical raw materials, soybean oils, oils, rubber, wood and various other types of commodities. It also has a supply chain infrastructure, which includes processing, logistics, warehousing and terminals. Utilizing its customer base, industry experience, and expertise in the commodity trading industry, Qianhai Baiyu serves as a one-stop commodity supply chain service and digital intelligence supply chain platform integrating upstream and downstream enterprises, warehouses, logistics, information, and futures trading.

 

1

 

 

The acquisition of Qianhai Baiyu has laid a solid foundation for the Company to further expand its operations in the commodity supply chain field. The Company plans to strengthen and upgrade its supply chain services platform by introducing a systematic quantitative risk control system, which will be based on the Qianhai Baiyu’s massive historical market data and complex data analysis models. The platform is expected to establish a quantitative risk management system utilizing ETL data integration (Extract, Transform, Load) as its core, and then optimize trading portfolios by incorporating a combination of various factors and strategies in order to effectively control risks and sustain business development. 

 

November 2019 Private Placement

 

On November 21, 2019, the Company entered into certain securities purchase agreements with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended, pursuant to which the Company agreed to sell an aggregate of 2,000,000 shares of its common stock, at a per share purchase price of $0.80, subject to various conditions to closing.

 

On February 5, 2020, the Company issued 2,000,000 shares of Common Stock to the Purchasers pursuant to the agreements dated November 21, 2019, since all the closing conditions of the SPAs have been satisfied.

 

January 2020 Private Placements

 

On January 22, 2020, the Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act pursuant to which the Company sold an aggregate of 15,000,000 shares of Common Stock, at a per share purchase price of $0.90 (“January Offering”). The January Offering closed on March 23, 2020 when all closing conditions were met and the net proceeds to the Company from the January Offering was approximately $13,500,000.

 

On January 22, 2020, the Company entered into a note securities purchase agreement with certain “non-U.S. Persons” (the “Holders”) as defined in Regulation S of the Securities Act pursuant to which the Company sold unsecured senior convertible promissory notes in the aggregate principal amount of $30,000,000 (the “Notes”) accompanied by warrants (the “Warrants”) to purchase 100% shares of Common Stock issuable upon conversion of the Notes at an exercise price of $1.80 (the “January Note Offering”). The Notes have a maturity date of 12 months with an interest rate of 7.5% per annum. Holders have the right to convert all or any part of the Notes into shares of Common Stock at a conversion price of $1.50 per share 30 days after its date of issuance. The January Note Offering closed on March 23, 2020 when all closing conditions were met and the net proceeds to the Company from the January Note Offering was approximately $30,000,000, which were received on April 3, 2020.

 

In April 2020, the Holders elected to convert the Notes at a conversion price of $1.50 per share and also exercise the Warrants at an exercise price of $1.80 per share, and paid a cash consideration of $36,000,000 for the exercise of the Warrants by April 15, 2020. As a result, an aggregate of 40,000,000 shares of the Company’s Common Stock were issued on May 18, 2020.

 

Change of the Company’s Name and Articles of Incorporation or Bylaws

 

On March 5, 2020, the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of Delaware to effect a name change (the “Charter Amendment”) to TD Holdings, Inc. The Charter Amendment became effective on March 6, 2020.

 

The Company has submitted the requisite documents and other information to the NASDAQ Listing Center to process the Charter Amendment. Effective March 11, 2020, the Company’s CUSIP number changed as a result of the Charter Amendment to 87250W103. The Company expects the marketplace effective date of the name change to TD Holdings, Inc. to be on or around March 13, 2020.

 

Previously, the Company changed its name to China Bat Group, Inc. on January 11, 2019 and further changed its name to Bat Group, Inc. on June 3, 2019.

 

2

 

 

Termination of Contractual Arrangements between Hao Limo and Huamucheng

 

On June 25, 2020, Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”), the Company’s wholly owned subsidiary incorporated in PRC, and Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”), a former VIE of the Company, entered into certain VIE Termination Agreement (the “VIE Termination Agreement”) to terminate the Huamucheng VIE Agreements. As such, Hao Limo will no longer have the control rights and rights to the assets, property and revenue of Huamucheng.

 

Previously, Hao Limo entered into a series of agreements (the “Huamucheng VIE Agreements”) with Huamucheng and the shareholders of Huamucheng on November 22, 2019. The Huamucheng VIE Agreements are designed to provide Hao Limo with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Huamucheng, including absolute control rights and the rights to the management, operations, assets, property and revenue of Huamucheng. The Agreements include the Exclusive Business Cooperation Agreement, Exclusive Option Agreement, Share Pledge Agreement, Timely Reporting Agreement and the Powers of Attorney. The Company entered into the Huamucheng VIE Agreements in order to start its commodities trading business.

 

Contractual Arrangements between HC High BVI and Huamucheng

 

HC High Summit Holding Limited (“HC High BVI”), the Company’s wholly owned subsidiary, established and owns 100% equity interest of Tongdow Block Chain Information Technology Company Limited (“Tongdow Block Chain”), a Hong Kong limited liability company, and Tongdow Block Chain owns 100% equity interest of Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”), a People’s Republic of China limited liability company.

 

On June 25, 2020, Shanghai Jianchi, Huamucheng and the shareholders of Huamucheng (the “Huamucheng Shareholders”) entered into certain Share Acquisition Agreement pursuant to which Shanghai Jianchi acquired 100% equity interest of Huamucheng from the Huamucheng Shareholders for nominal consideration.

 

As a result of the reorganization, Huamucheng transitioned from being a variable interest entity (“VIE”) controlled by Company into a wholly owned subsidiary of the Company. The Company remained in control of Huamucheng both before and after the reorganization and its operating results are consolidated into the Company’s consolidated financial statements.

 

Disposition of the Used Luxury Car Leasing Business and HC High Summit Limited

 

Historically, one of our core businesses has been the used luxury car leasing business conducted through Beijing Tianxing Kunlun Technology Co. Ltd (“Beijing Tianxing”), an entity we controlled via certain contractual arrangements. Beijing Tianxing offers our customers the opportunity to rent luxury pre-owned automobiles in Beijing, Shanghai, Zhejiang and Chengdu, China.

 

On August 28, 2020, the Company, Vision Loyal Limited (“Vision Loyal”), HC High Summit Limited (“HC High HK”) and HC High BVI entered into certain share purchase agreement. HC High BVI, our wholly-owned subsidiary, is the sole shareholder of HC High HK, a company incorporated under the laws of the Hong Kong S.A.R. of the PRC. HC High HK is the sole shareholder of Hao Limo which, via a series of contractual arrangements, controls Beijing Tianxing. Pursuant to the Disposition SPA, HC High BVI agreed to sell HC High HK in exchange for nominal consideration of $1.00, based on a valuation report rendered by an independent third party valuation firm, Beijing North Asia Asset Assessment Firm The transaction contemplated by the Disposition SPA is hereby referred as the Disposition.

 

Upon the closing of the Disposition on August 28, 2020, Vision Loyal became the sole shareholder of HC High HK and, as a result, assumed all assets and liabilities of all the subsidiaries and variable interest entities owned or controlled by HC High HK.

 

Acquisition of Subsidiaries

 

On September 11, 2020, the Company consolidated Zhong Hui Dao Ming Investment Management Limited (“ZHDM HK”) and its wholly owned subsidiary, Tongdow E-trading Limited (“Tongdow HK”). Both entities were holding companies incorporated in accordance with the laws and regulations of Hong Kong. The consideration was zero because both entities have not commenced any operations before the date of acquisition.

 

3

 

 

Acquisition of Supply Chain Service Business

 

On October 26, 2020, Huamucheng entered into certain share purchase agreements (the “SPA”) with Shenzhen Xinsuniao Technology Co., Ltd. (“Xinsuniao”), a limited liability company organized under the laws of the PRC, and Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Qianhai Baiyu”), a limited liability company organized under the laws of the PRC. Xinsuniao is the record holder and beneficial owner of all registered paid-up capital of the Qianhai Biayu. Pursuant to the SPA, Huamucheng acquired Qianhai Baiyu pursuant to a certain share purchase agreement, by and among Huamucheng, Qianhai Baiyu, and Shenzhen Xinsuniao for an aggregate cash consideration of RMB670 million (approximately $102.6 million). Upon closing of this acquisition, Huamucheng owned all the registered paid-up capital of Qianhai Baiyu.

 

Qianhai Baiyu was established on August 17, 2016 and is engaged in the supply chain service business, covering a full range of commodities, including non-ferrous metals, ferrous metals, coal, metallurgical raw materials, soybean oils, oils, rubber, wood and various other types of commodities. It also has a supply chain infrastructure, which includes processing, logistics, warehousing and terminals. Utilizing its customer base, industry experience, and expertise in the commodity trading industry, Qianhai Baiyu serves as an one-stop commodity supply chain service and digital intelligence supply chain platform integrating upstream and downstream enterprises, warehouses, logistics, information, and futures trading.

 

The acquisition of Qianhai Baiyu has laid a solid foundation for us to expand our operations in the commodity supply chain field. We plan to strengthen and upgrade our supply chain services platform by introducing a systematic quantitative risk control system, which will be based on the Qianhai Baiyu’s massive historical market data and complex data analysis models. The platform is expected to establish a quantitative risk management system utilizing Extract, Transform, Load (ETL) data integration as its core, and then optimize trading portfolios by incorporating a combination of various factors and strategies in order to effectively control risks and sustain business development.

 

November 2020 Registered Direct Offering

 

On November 20, 2020, The Company and certain investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such purchasers an aggregate of 8,000,000 shares of common stock in a registered direct offering, for gross proceeds of approximately $20 million (the “November 2020 RD Offering”). The purchase price for each share of common stock is $2.50. The November 2020 RD Offering closed on December 2, 2020 when all closing conditions were met.

 

Corporate Structure

 

TD Holdings, Inc. is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. HC High Summit Holding Limited (“HC High BVI”), a company incorporated under the laws of the British Virgin Islands (“BVI”) on May 22, 2018, is wholly owned by the Company. On April 2, 2020, HC High BVI established TD Internet of Things Technology Co., Ltd. (“Tongdow Block Chain”), a holding company incorporated in accordance with the laws and regulations of Hong Kong. Tongdow Block Chain is wholly owned by HC High BVI. On April 2, 2020 and July 16, 2020, Tongdow Block Chain established Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”) and Tongdow (Hainan) Data Technology Co., Ltd. (“Tondow Hainan”), respectively, as its wholly owned subsidiaries. Both Shanghai Jianchi and Tongdow Hainan are holding companies incorporated in accordance with the laws and regulations of People’s Republic of China (“PRC”).

 

On March 5, 2020, the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of Delaware to effect a name change from Bat Group, Inc. to TD Holdings, Inc. (the “March Charter Amendment”). The March Charter Amendment became effective on March 6, 2020.

 

On June 25, 2020, Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”), the Company’s wholly owned subsidiary incorporated in PRC, and Shenzhen Huamu City Trade Co., Ltd. (“Huamucheng”), a former VIE of the Company, entered into certain VIE Termination Agreement to terminate the Huamucheng VIE Agreements. On the same date, Shanghai Jianchi, Huamucheng and the shareholders of Huamucheng (the “Huamucheng Shareholders”) entered into certain Share Acquisition Agreement pursuant to which Shanghai Jianchi acquired 100% equity interest of Huamucheng. As a result, Huamucheng transitioned from being a variable interest entity controlled by Company into a wholly owned subsidiary of the Company.

 

4

 

 

On September 11, 2020, the Company acquired Zhong Hui Dao Ming Investment Management Limited (“ZHDM HK”) and its wholly owned subsidiary, Tongdow E-Trade Limited (“Tongdow HK”). Both entities were holding companies incorporated in accordance with the laws and regulations of Hong Kong.

 

On April 20, 2021, the Company effected a Certificate of Amendment of the Certificate of Incorporation (the “Amendment”) with the Secretary of State of Delaware to increase the number of authorized shares of its common stock, par value $0.001 per share, from 100,000,000 shares to 600,000,000 shares and the number of authorized shares of its preferred stock, par value $0.001 per share, from 10,000,000 shares to 50,000,000 shares. The Amendment was approved by the Company’s Board of Directors on March 9, 2021, and by shareholders holding a majority of the Company’s issued and outstanding capital stock on March 10, 2021. The Amendment does not affect the rights of the Company’s shareholders. 

 

The following diagram illustrates our corporate structure as of the date of this Annual Report:

 

 

 

 

5

 

 

Recent Developments

 

Purchase Agreement with Streeterville Capital, LLC

 

On January 6, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Streeterville Capital, LLC, a Utah limited liability company (the “Investor”), pursuant to which the Company issued the Investor an unsecured promissory note on January 6, 2021 in the original principal amount of $1,670,000, convertible into shares of common stock, $0.001 par value per share, of the Company, for $1,500,000 in gross proceeds. The transaction contemplated in the Purchase Agreement was consummated on January 7, 2021.

 

On March 4, 2021, the Company entered into another securities purchase agreement with Streeterville Capital, LLC pursuant to which the Company issued the Investor an unsecured promissory note on March 4, 2021 in the original principal amount of $3,320,000, convertible into shares of common stock, $0.001 par value per share, of the Company, for $3,000,000 in gross proceeds.

 

January 2021 Private Placement

 

On January 7, 2021, the Company entered into certain securities purchase agreement with Ms. Renmei Ouyang, the Chief Executive Officer and Chairwoman of the Company, and Mr. Shuxiang Zhang, both of whom are “non-U.S. Persons” (the “Investors”) as defined in Regulation S of the Securities Act of 1933, as amended, pursuant to which the Company agreed to sell an aggregate of 15,000,000 shares of its common stock, par value $0.001 per share, at a per share purchase price of $1.63 (the “Offering”), which is the closing price of the Common Stock on the date immediate prior to the date of the SPA. The gross proceeds from such Offering will be $24,450,000. Since Ms. Ouyang and Mr. Zhang are affiliates of the Company, the Offering was approved by the Audit Committee of the Board of Directors of the Company, which solely consistent of independent directors, as well as the Board of Directors of the Company.

 

The net proceeds of the Offering shall be used by the Company in connection with the Company’s general corporate purposes, working capital, or other related business as approved by the board of directors of the Company. On February 4, 2021, the transaction contemplated by the SPA closed.

 

Purchase Agreement with White Lion Capital, LLC

 

On January 19, 2021, the Company entered into a Common Stock Purchase Agreement with White Lion Capital, LLC, a Nevada limited liability company (the “Investor”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Investor is committed to purchase up to 15,700,000 shares of the Company common stock, par value $0.001 per share, with an aggregate of forty million dollars ($40,000,000) from time to time during a certain commitment period as defined in the Agreement, at a purchase price of 90% of the lowest daily volume-weighted average price of the Company’s Common Stock during a valuation period of three business days prior to the closing of each Purchase Notice received by the Investor.

 

Univest Securities, LLC (“Univest”) acts as placement agent for the placement of Purchase Notice Shares to be offered by the Company during the Commitment Period to the Investor under a Placement Agency Agreement (the “Placement Agency Agreement”), dated January 6, 2021. Pursuant to the terms of the Placement Agency Agreement, the placement agent agreed to use its reasonable best efforts to arrange the sale of the Company’s Purchase Notice Shares. The Company has agreed to issue 75,000 shares of Common Stock to the Investor in consideration for entering into the Purchase Agreement and 25,000 shares of Common Stock to Univest Securities, LLC as initial consideration for the placement and sale of our Common Stock.

 

Waiver and Warrant Exercise Agreements with Holders

 

On April 15, 2019, the Company issued to certain institutional investors (the “Holders”), certain warrants in a private placement, of which 100,000 warrants to purchase 100,000 shares of common stock, par value $0.0001 per share, at an exercise price of $1.32 per share, were outstanding as of March 9, 2021 (the “May Warrants”). In addition, on March 23, 2019, the Company issued to the same Holders certain warrants in another private placement, of which 1,530,000 warrants to purchase 1,530,000 shares of Common Stock at an exercise price of $2.20 per share were outstanding as of March 9, 2021 (the “April Warrants”, collectively with May Warrants, the “Original Warrants”).

 

6

 

 

On March 10, 2021, the Company entered into certain waiver and warrant exercise agreements (the “Exercise Agreement”) with each of the Holders. Pursuant to the Exercise Agreement, in order to induce the Holders to exercise all of the outstanding Original Warrants cashlessly, pursuant to the terms of and subject to beneficial ownership limitations contained in the Original Warrants, the Company agreed to waive the Holders’ obligation to pay such portion of the exercise price of each of the May Warrants in excess of $0.95 per share and each of the April Warrants in excess of $1.17 per share, immediately prior to the time of exercise of such Original Warrants. Upon the exercise of all the Original Warrants, the Company issued a total of 808,891 shares of Common Shares to the Holders.

 

Non-Reliance on Previously Issued Financial Statements and Independent Investigation

 

On March 26, 2021, the Audit Committee of the Board of Directors of the Company, after discussion with the Company’s management, concluded that the Company’s previously issued financial statements contained in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2020, June 30, 2020, and September 30, 2020, originally filed on June 26, 2020, August 14, 2020, and November 13, 2020, respectively, should no longer be relied upon. Similarly, related press releases, earnings releases, and investor communications describing the Company’s financial statements for the Non-Reliance Periods should no longer be relied upon.

 

On March 26, 2021, the Audit Committee retained an accounting consultancy firm, to conduct an independent investigation into the reasons of the non-reliance. The accounting consultancy firm delivered a final investigation report to the Audit Committee on April 16, 2021. The investigation team found that (i) it is reasonable for the Company’s commodity trading business to be operating at a gross loss of around 1% after taxes, especially considering the nature of the Chinese commodity market; (ii) the Company did not comply with the Chinese VAT during 2020, but the transactions at issue did indeed appear to flow through company bank accounts and are supported by proper corporate and bank documentation although it remains to be determined whether those revenues satisfy the requirements of ASC 660 and can be recognized; (iii) the Company is acting as a principal in its commodity trading business for the purpose of revenue recognition under ASC 606: and (iv) the Company failed to timely identify certain related party transactions.

 

As of the date of this Annual Report, the Company is in the process of conducting a comprehensive review of the issues identified by the investigation team and intends to take all remedial measures recommended by the Audit Committee within its resources to cure the material weaknesses in its internal and disclosure control procedures.

 

Matters relating to or arising from the Audit Committee investigation and the associated material weaknesses identified in our internal control over financial reporting, including adverse publicity, have caused us to incur significant legal, accounting and other professional fees and other costs, have exposed us to greater risks associated with other civil litigation, regulatory proceedings and government enforcement actions, have diverted resources and attention that would otherwise be directed toward our operations and implementation of our business strategy and may have impacted our ability to attract and retain customers, employees and vendors.

 

Our Business

 

As of December 31, 2020, the Company has one business line, the commodities trading business set forth below.

 

Commodities Trading Business

 

Industry Overview

 

Bulk commodities trading refers to the trading of materials used in industrial and agricultural production that are continuously purchased in bulk, and are unable to be purchased from the retail sector. Commodities belong at the upstream stage of production processes of various industrial chains, and the supply and demand conditions of commodities can cause price fluctuations and affect the development of these industrial chains.

 

Commodities can be divided into four categories, metals, energy, livestock and meat, and agricultural. Metal commodities include gold, silver, platinum, and copper. Energy commodities include crude oil, heating oil, natural gas, and gasoline. Livestock and meat include lean hogs, pork bellies, live cattle, and feeder cattle. Agricultural commodities include corn, soybeans, wheat rice, cocoa, coffee, cotton, and sugar.

 

In recent years, although the growth rate of China’s total commodity sales has slowed down, the aggregate sales are still impressive and exceed RMB100 billion. Prior to 2013, the growth rate of commodity trading was the highest at nearly 12% per year. From 2014 to 2016, as the national economic operations stabilized, the growth rate slowed down to approximately 8%, and slowed down further to 5.3% and 4.6% in 2017 and 2018, respectively. However at the same time, China’s commodity market turnover has increased from RMB25.89 trillion in 2009 to RMB60.28 trillion yuan in 2018. Calculating the size of China’s commodity market based on its market turnover shows that it is a multi-trillion dollar industry. 

 

Operation of Commodity Trading Business

 

The Company’s commodities trading operations via Huamucheng is focused on non-ferrous metal commodities such as aluminium, copper, silver, and gold. We strive to become an emerging platform in the non-ferrous metal e-commerce industry by offering all participants in the non-ferrous metal e-commerce industry a seamless, one-stop transaction experience.

 

In connection with the Company’s entry into the commodities trading industry, we hired Mr. Menglin Li to serve as the Client Relationship Manager in the Company’s Marketing Department. Mr. Li has more than 20 years of commodity trading industry experience and has a wide pool of customer relationship resources in the industry. He is primarily responsible for managing the Company’s interaction with current and potential customers, specifically focusing on customer retention and driving sales growth.

 

We have also hired Mr. Shican Huang to serve as the Product Manager in the Company’s Product Department. Mr. Huang has more than 10 years of industry experience and is mainly responsible for the forecasting and analysis of commodity prices, specifically focusing on making forecasts of commodity price trends.

 

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Business Model

 

We source bulk commodity from non-ferrous metal mines or its designated distributors and sell to manufactures who need these metals in large quantities. We work with many suppliers in the sourcing of commodities. Suppliers we source from include various metal and mineral suppliers such as Kunsteel Group, Baosteel Group, Aluminum Corporate of China Limited, Yunnan Benyuan, Yunnan Tin, and Shanghai Copper. Potential customers include large infrastructure companies such as China National Electricity, Datang Power, China Aluminum Foshan International Trade, Tooke Investment (China), CSSC International Trade Co., Ltd., Shenye Group, and Keliyuan.

 

The Company has entered into a Warehousing Agreement with Foshan Nanchu to designate it as the Company’s warehouse. The Company’s criteria for choosing its warehouse is based primarily on the convenience of its location for transportation, which is highly conducive to the transportation of non-ferrous metal commodities, and secondarily based on its storage price.

 

Our inventory management procedure involves (1) an Application for Storage, (2) Storage of the Commodities, (3) an Application for Shipment, and (4) Shipment of Commodities, which are further described below.

 

1) Application for Storage

 

  The upstream suppliers apply for storage with the Company’s leased warehouse center upon the sale of commodities to the Company. The application requires information including the commodities’ production company, brand, specifications, weight, quantity, and storage time.

 

  2) Storage of the Commodities

 

  Upon the arrival of the commodities at the warehouse, the warehouse checks and accepts the commodities according to the delivery instructions provided by the transportation company, ensuring that the delivery instructions, storage application, and the delivered commodities are all consistent.

 

  Upon acceptance, the warehouse scans and places the commodities into sorted storage. The warehouse then issues a certificate of inspection, which includes information such as the brand name, specifications, weight, quantity, packaging information, arrival time, storage location and other information of the received commodities. The certificate of inspection is then signed and stamped by the delivery driver, the warehouse manager, and the warehouse. Four copies of the certificate of inspection are made, two of which are provided to the transportation company and the supplier.

 

  3) Application for Shipment

 

  The downstream customers apply for shipment with the warehouse upon the purchase of Commodities from the Company. The application requires information including the production company, brand, specifications, weight, quantity, delivery time, and storage location number.

 

  The downstream customers also fill in a delivery entrustment letter, including the name of the delivery company, the name of the delivery person, his or her ID number, the delivery vehicle’s license plate number, the time, quantity, and information regarding the warehouse for delivery.

 

  4) Shipment of Commodities

 

  The warehouse prepares the commodities in advance according to the pick-up time and the Application for Shipment.

 

  Upon arrival of the pick-up driver at the warehouse, the Company reviews the identity of the pick-up driver according to the delivery entrustment letter.

 

  Upon completing the loading of the commodities for shipment, the warehouse issues a certificate of sale, which includes information such as the brand name, specifications, weight, quantity, delivery time, and storage location number. The pick-up driver, warehouse manager, and the warehouse signs and stamps the certificate of sale. Four copies of the certificate of sale are made, two of which are provided to the transportation company and the customer.

 

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We use a prepaid unified purchase and distribution model (“Prepaid Model”) in our business, which is further detailed below.

 

Under the Prepaid Model, we make advance prepayments between 1 – 3 months in advance when purchasing from the Company’s upstream suppliers. The process involves first obtaining purchase orders from one or more downstream purchasers and entering into sales agreements with such purchasers. After the Company receives the down payment from the downstream purchasers, it aggregates the total amount of commodities required to fulfill the orders and enters into purchase agreements with upstream suppliers to fulfill its purchase orders. Once the upstream suppliers have received the prepayment from the Company, they produce and deliver the commodities to the Company’s designated warehouse on the purchase agreement. Upon receipt of the commodities in the designated warehouse, the Company is notified by the warehouse and obtains the full payment from the downstream purchasers. After the Company pays its remaining balance to the upstream suppliers, it issues delivery instructions to the designated warehouse on the sales agreement and has the commodities delivered to the downstream purchasers.

 

Through the Prepaid Model, which is further illustrated below, the Company maintains a stable distribution volume and thereby generates profit margins via purchase discounts from upstream suppliers and mark-up pricing to downstream customers.

 

 

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Warehousing Arrangement

 

Huamucheng has certain warehousing agreement with Foshan Nanchu Storage Management Co., Ltd. (“Foshan Nanchu”) pursuant to which Huamucheng designated Foshan Nanchu as its warehouse for the storage of its commodities.

 

Pursuant to the Warehousing Agreement, Huamucheng and Foshan Nanchu agreed to various customary representations, warranties and covenants, including, among other things, (1) details regarding the procedures for the storage and retrieval of the commodities, (2) storage and penalty fees, and (3) negotiation and litigation in the event of any breach of contract.

 

Suppliers

 

We source the non-ferrous metal from various sources including but not limited to smelters, non-ferrous metal wholesalers and metal traders. For the year ended December 31, 2020, the Company purchased non-ferrous metal products from six third party suppliers and three related party suppliers.

 

Customers

 

We sell to various business in need of large quantity of non-ferrous metal including home appliance manufacturing enterprises, cable manufacturing enterprises and wire manufacturing enterprises. For the year ended December 31, 2020 and 2019, the Company sold non-ferrous metals to nine and one customers, respectively.

 

Supply Chain Management Services

 

Commodity Distribution Services

 

We offer a distribution service to bulk suppliers of precious metals by acting as a sales intermediary, procuring small to medium-sized buyers through our own professional sales team and channels and distributing to them the bulk precious metals of the suppliers. Upon the execution of a purchase order from our sourced buyers, we charge the suppliers with a commission fee ranging from 1% to 1.5% of the distribution order, depending on the size of the order. For the year ended December 31, 2020, the Company earned commodity distribution commission fees of $1,743,396 and $2,140,840 from facilitating such sales transactions with seven third party customers and three related party customers, respectively. For the year ended December 31, 2019, the Company earned commodity distribution commission fees of $238,963 from facilitating such sales transactions with two third party customers.

 

Loan Recommendation and Referral Services

 

We offer to our customers who require additional funding for the purchase of precious metals recommendations and referrals to third-party licensed financial institutions and small credit providers while assuming no credit risks ourselves. When our recommendation and referrals are accepted and our downstream customers proceed with the loan, we charge our downstream customers between 2% to 5% of the loan principal as our referral fee. For the year ended December 31, 2019, the Company generated revenue of $323,623 from its loan recommendation services. For the year ended December 31, 2020, the Company did not provide such services.

 

Marketing

 

Currently we market both our luxurious car leasing services and commodities trading services through our own sales personnel and online promotion. We have registered WeChat and Weibo public accounts as well as an account on Tongdao.com to promote our services. We started to introduce our services via major search engines such as Zhida and Baidu. We are actively engaged on social media platforms such as Baidu Tieba, Tik Tok, Weibo, WeChat, and Zhihu. We plan to launch wider and deeper social media marketing in the near future as well as participate in more industry-related forums to increase the market exposure of our businesses and thereby increasing our popularity and establishing brand loyalty.

 

Seasonality

 

We do not experience substantial seasonal fluctuations in our revenues and results of operations.

 

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Business Strategy

 

Commodities Trading Business

 

Our current business strategy is to expand the varieties of commodities that we trade in, including ore, crude oil and coal in addition to our current focus on non-ferrous metals. In 2021, the Company plans on further expanding the commodities trading business into Southeast Asia while continuing to maintain and grow its current domestic customers. We also plan on further expanding our trade market consultations and supply chain financing services for our bulk trading customers. 

 

Competition

 

Commodities Trading Business

 

The Company competes against other large domestic commodity trade service providers such as Xiamen International Trade and Yijian Shares. Currently, the principal competitive factors in the non-ferrous metals commodities trading business are price, product availability, quantity, service, and financing terms for purchases and sales of commodities. In addition, we also believe that that our customers will choose among service providers on the basis of industry and service leadership.

 

Competitive Strengths

 

Commodities Trading Business

 

  Our newly hired management team has accumulated substantial industry expertise through decades of experience in the commodities trading industry.

 

  Our ability to acquire customers through advertising on the promotion channels of major search engines and social media, such as Baidu, 58, Wechat, and Weibo, using search engine optimization and search engine marketing to analyze the effectiveness and efficiency of different promotion channels. We also promote our services on the Tongdao E-commerce Network, a leading e-commerce platform for non-ferrous metals bulk commodities, which provides services including non-ferrous metal price quotes, spot trading and bulk purchasing.

 

  We have strong risk control measures. Through the establishment of a series of safeguard measures, we can ensure the safety of our commodities trading, reducing risk factors such as cargo damage, customer default, logistics distribution and supply chain services in the process of commodity trading.

 

  Our customers’ privacy and security are guaranteed. This information is encrypted and can only be accessed by authorized employees for predetermined periods of time.

 

  Our commodity price system is transparent. Although commodity prices fluctuate every day, we are able to timely inform our customers of accurate prices to guide their transactions.

 

  Our customer service quality is very high and we are constantly upgrading our customer service system. We have a professional commodities consulting service, supply chain service and a comprehensive customer satisfaction evaluation mechanism.

 

Intellectual Property 

 

Our intellectual property includes domain names ir.tdglg.com and tdglg.com.

 

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.

 

In addition, although there were no litigations initiated against us in 2020 by third parties alleging infringement of their proprietary rights or declaring non-infringement of our intellectual property rights, we cannot guarantee that such litigation will not be initiated in the future. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.

 

Employees

 

As of the date of this report, we have 25 employees for our commodities trading business, all of whom are full time. We have employment contracts with all of our employees in China and in U.S. in accordance with relevant PRC laws and U.S. laws. There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

 

We have made employee benefit contributions in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing fund, work injury insurance and birth insurance. The Company recorded the contribution in the general administration expenses when incurred.

 

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Applicable Government Regulations

 

Our operations are subject to extensive and complex state, provincial and local laws, rules and regulations including but not limited to:

 

  PRC Company Law and its implementation rules;
     
  Wholly Foreign-Owned Enterprise Law and its implementation rules;
     
  Special Administrative Measures (Negative List) for the Access of Foreign Investment;

 

  Road Traffic Safety Law;

 

  Road Transportation Regulation;

 

  Notice on Promoting the Healthy Development of Car Rental Industry.

 

We are supervised by many provincial and local government authorities, including the Beijing Administration of Industry and Commerce.

 

Summaries of Certain Applicable Key PRC Laws 

 

Foreign Trade Law of the People's Republic of China

 

The "Foreign Trade Law of the People's Republic of China" was revised and adopted at the 8th meeting of the Standing Committee of the Tenth National People's Congress of the People's Republic of China on April 6, 2004. The revised "Foreign Trade Law of the People's Republic of China" became effective from July 1, 2004.

 

The term "foreign trade" in the Foreign Trade Law of the People's Republic of China refers to the import and export of goods, technology import and export, and international service trade, and the law specifies the principles of foreign trade and the reasons why the country can restrict or prohibit the import and export of related goods and technologies, intellectual property protection, service trade, monopoly in foreign business activities and other relevant provisions.

 

Summaries of Certain Key PRC Laws 

 

Regulations on registration of branch companies

 

According to the PRC Company Law amended and took effect on October 26, 2018 and the Administration Regulations of Company Registration amended and took effect on February 26, 2016, a company may establish branch companies, which are entities without the status of a legal person and conduct business outside the domicile of the company. Branch companies must be registered at the competent government agency and obtain a business license. The amended Administration Regulations of Company Registration sets forth the detailed formalities on the registration of branch companies.

 

Our PRC subsidiaries have registered one branch in Shanghai and have obtained a business licenses for it as of the date of this report.

 

Regulations on employment contracts

 

The Labor Contract Law of the PRC was promulgated on June 29, 2007, as amended on December 28, 2012 and effective on July 1, 2013. On September 18, 2008, the PRC State Council issued the PRC Labor Contract Law Implementing Rules, which became effective as of the date of issuance. The Labor Contract Law and its Implementing Rules govern the establishment of employment relationships between employers and employees, and the conclusion, performance, termination of, and the amendment to employment contracts. To establish an employment relationship, a written employment contract must be signed. In the event that no written employment contract was signed at the time of establishment of an employment relationship, a written employment contract must be signed within one month after the date on which the employer starts to use the employee’s services. An employer may terminate the labor agreement of an employee under certain specified circumstances and in some cases, such termination can only be done after fulfillment of certain procedural requirements, such as 30 days’ prior notice or upon payment of one month’s salary in lieu of such notice. In certain cases, the terminated employee is entitled to receive a severance payment equal to the average monthly salary during the 12-month period immediately preceding to the termination (inclusive of all monetary income such as base salary, bonus, allowances, etc.), for each year of service up to the date of termination. If an employer terminate an labor contract in any circumstance other than those specified under the Labor Contract Law and its implementing rules, including termination without cause, the employer must either reinstate and continue to perform the employee’s employment contract or pay the employee damages calculated at twice the rate for calculating the severance payment, subject to the employee’s own request. In the case that the employee requests for damages, the employer is not required to pay other severance or the remainder of the amount owed under the employment contract unless the employment contract has otherwise provided for.

 

In addition, according to the Labor Contract Law and its implementing rules, in order to enforce the non-compete provision with the employees after the termination or ending of employment relationship, the employer shall compensate the employees on a monthly basis during the non-competition period after such termination or ending of employment.

 

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On January 24, 2014 the Ministry of Human Resources and Social Security promulgated Interim Provisions on Labor Dispatching, or Circular 22, effective from March 1, 2014, which provides that an employer shall strictly control the number of employees under labor dispatching arrangements and dispatched employees can only be used in temporary, ancillary and replaceable positions. The number of dispatched workers used by an employer shall be reduced to no more than 10% of the total number of its employees within two years after March 1, 2014. If the employer fails to reduce the number of dispatched employees as required by Circular 22 and could not correct its practice after receiving warnings from government authority, the employer may be subject to a fine ranging from RMB1,000 to RMB5,000 per dispatched employee.

 

Regulation on PRC business tax and VAT

 

Prior to January 1, 2012, pursuant to the Provisional Regulation of China on Business Tax and its Implementing Rules, an entity or individual rendering services in China was generally subject to a business tax at the rate of 5% on revenues generated from the provision of such services. Since January 1, 2012, the MOF and the SAT have started to implement the VAT Pilot Program, which imposes VAT in lieu of business tax for certain industries in Shanghai. Since August 1, 2012, the VAT Pilot Program has been expanded to and implemented in other regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong. On May 24, 2013, the MOF and the SAT jointly issued Notice 37, which expanded the VAT Pilot Program nationwide starting on August 1, 2013. On December 12, 2013, the MOF and the SAT jointly issued Notice 106, effective on January 1, 2014, which replaced Notice 37 and improved some tax policies in the VAT Pilot Program. From May 1, 2016, the VAT were expanded to all business tax taxpayers and until November 19, 2017, the State Council promulgated Decision of the State Council on Abolishing the Provisional Regulations on Business Tax of the People’s Republic of China and Amending the Provisional Regulations on Value-Added Tax of the People’s Republic of China. As a result of the VAT, an entity or individual rendering services in China is subject to VAT at the rate of 17%, 11% or 6%, as applicable. We are small-scale taxpayer and shall apply to a VAT rate of 3% unless otherwise specified by the State Council.

 

Regulations on PRC Enterprise Income Tax

 

The PRC enterprise income tax is calculated based on the taxable income determined under the PRC laws and accounting standards. On March 16, 2007, the National People’s Congress of China enacted a new PRC Enterprise Income Tax Law, which became effective on January 1, 2008 and amended the PRC Enterprise Income Tax Law on February 24, 2017. On December 6, 2007, the State Council promulgated the Implementation Rules to the PRC Enterprise Income Tax Law, or the Implementation Rules, which also became effective on January 1, 2008. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the PRC Enterprise Income Tax Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the PRC Enterprise Income Tax Law. On October 17, 2017, the State Administration of Taxation promulgated the Announcement of the State Administration of Taxation on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, which became effective on December 1, 2017. The PRC Enterprise Income Tax Law imposes a uniform enterprise income tax rate of 25% on all domestic enterprises, including foreign-invested enterprises unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential treatments available under previous tax laws and regulations.

 

Moreover, under the PRC Enterprise Income Tax Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementation Rules define the term “de facto management body” as the management body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In addition, the Circular Related to Relevant Issues on the Identification of a Chinese holding Company Incorporated Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies Recognizing issued by the State Administration of Taxation on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function mainly in China; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies in China; (iii) its major assets, accounting books, company seals and minutes and files of its board and shareholders’ meetings are located or kept in China; and (iv) more than half of the enterprise’s directors or senior management with voting rights reside in China. Although the circular only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, the determining criteria set forth in the circular 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, individuals or foreigners.

 

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Torts law

 

The PRC Torts Law was promulgated by the NPC Standing Committee on December 26, 2009 and became effective on July 1, 2010. According to the Torts Law, in the case of car rental, where the driver is different from the owner of the vehicle, if the driver is held liable for a traffic accident, such liability will first be covered by the insurance company within the coverage of the compulsory traffic accident insurance of the vehicle. If the insurance coverage is not sufficient, the driver shall be responsible for the remaining compensation, and the vehicle owner shall not be liable for compensation unless the owner has fault in such accident.

 

Regulations on foreign currency exchange and dividend distribution

 

Foreign currency exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which was most recently amended in August 2008. Under the PRC Foreign Exchange Administration Regulations, Renminbi is freely convertible for payments of current account items, such as distribution of dividends, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE. On the contrast, approval from or registration with appropriate government authorities is required where Renminbi is to convert into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.

 

In November 2012, SAFE promulgated the Circular on Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, or Circular on Improving and Adjusting Foreign Exchange Policies, which substantially amends and simplifies the foreign exchange procedure. Pursuant to Circular on Improving and Adjusting Foreign Exchange Policies, the opening of various foreign exchange accounts for designated purposes, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of Renminbi proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by foreign-invested enterprises to their foreign shareholders, no longer require approval or verification from SAFE, and the same entity may open multiple capital accounts in different provinces.

 

On May 10, 2013, 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, which specifies that the administration by SAFE or its local branches over foreign direct investment in the PRC shall be conducted by way of registration. Institutions and individuals shall register with SAFE and/or its branches for their direct investment in China. Banks shall process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches.

 

In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or Circular 13, which became effective on June 1, 2015. Upon the implementation of Circular 13, the current foreign exchange procedures will be further simplified, foreign exchange registrations of direct investment will be handled by designated foreign exchange settlement banks instead of SAFE and its branches.

 

On March 30, 2015, SAFE issued the Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises (“SAFE Circular 19”), which became effective on June 1, 2015. Pursuant to SAFE Circular 19, foreign-invested enterprises may either continue to follow the current payment-based foreign currency settlement system or elect to follow the “conversion-at-will” regime of foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will regime of foreign currency settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time. The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by a foreign-invested enterprise of its RMB registered capital converted from foreign currencies. According to SAFE Circular 19, such Renminbi capital may be used at the discretion of the foreign-invested enterprise and SAFE will eliminate the prior approval requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises are still not allowed to extend intercompany loans to PRC consolidated entities. In addition, as Circular 19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this circular by relevant authorities.

 

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On June 9, 2016, SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”), which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities.

 

On January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance to further Promote Foreign Exchange Control, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks must check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities must hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

 

Regulations on dividend distribution

 

The principal regulations governing dividend distributions of wholly foreign-owned companies include:

 

  Wholly Foreign-Owned Enterprise Law, as amended on September 3, 2016;
     
  Wholly Foreign-Owned Enterprise Law Implementing Rules, as amended on February 19, 2014; and
     
  Company Law of China, as amended on December 28, 2013.

 

Under these laws and regulations, wholly foreign-owned companies in China may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, these wholly foreign-owned companies are required to set aside no less than 10% of the after-tax profits, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. At the discretion of these wholly foreign-owned companies, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

Regulations on Employee Share Incentive Plans of Overseas Publicly-Listed Company

 

In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participation in Share Incentive Plan of Companies Listed Overseas, or the 2012 SAFE Notice. Under such notice and other relevant rules and regulations, PRC residents, including PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year, that participate in any share incentive plan of any overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a share incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly 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 plan on behalf of the participants. We and our executive officers and other employees who are PRC residents that have been granted share incentive awards will be subject to these regulations upon the completion of this offering. Failure by these individuals to complete their SAFE registrations may subject such individuals and us to fines and other legal sanctions.

 

The SAT has issued certain circulars concerning employee share incentive awards. Under these circulars, our employees working in China who exercise share incentive awards will be subject to PRC individual income tax. Our PRC subsidiary has the obligation to make filings related to employee share incentive awards with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share incentive awards. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.

 

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Regulations on Offshore Investment by PRC Residents

 

Pursuant to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Round Trip Investment via Overseas Special Purpose Companies and its subsequent amendments, supplements or implementation rules, or SAFE Circular 75, issued on October 21, 2005, a PRC resident (whether a natural person or legal persons) shall register with the local branch of the SAFE before it establishes or controls an overseas SPV, with assets or equity interests in a PRC company, for the purpose of overseas equity financing. On July 4, 2014, SAFE issued the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Outbound Investment and Financing and Inbound Investment via Special Purpose Vehicles (“SPV”), or SAFE Circular 37, which has superseded SAFE Circular 75. According to SAFE Circular 37, the PRC domestic resident shall apply for SAFE registration for overseas investment before paying capital to SPV by using his, her or its legal assets whether overseas or domestic. The SPV is defined as “offshore enterprise directly established or indirectly controlled by the domestic residents (including domestic institutions and individuals) with their legally owned assets and equity of the domestic enterprise, or legally owned offshore assets or equity, for the purpose of off shore investment and financing”. In addition, in the event that the SPV undergoes changes of its basic information such as the individual shareholder, name, operation term, etc., or material events including increase or decrease by domestic individual shareholder in investment amount, equity transfer or swap, merge, spinoff, etc., the domestic resident shall timely complete the change of foreign exchange registration formality for offshore investment.

 

According to SAFE Circular 37, failure to make such registration or truthfully disclose actual controllers of the round-trip enterprises may subject PRC residents to fines up to RMB300,000 in case of domestic institutions or RMB50,000 in case of domestic individuals. If the registered or beneficial shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiary. Moreover, failure to comply with SAFE registration and amendment requirements described above could result in liability under PRC law for violating applicable foreign exchange restrictions.

 

Regulations on cross-border direct investment in Renminbi

 

On October 12, 2011, MOFCOM issued the Notice of the Ministry of Commerce on Issues concerning Cross border Direct Investment in Renminbi which was abolished in 2013 and on December 3, 2013 the MOFCOM promulgated the Announcement on Issues relating to Cross-border Direct Investment in RMB, effective from January 1, 2014. Under this announcement, the “cross- border direct investment in RMB “shall refer to the direct investment activities conducted by foreign investors (including the investors from Hong Kong, Macau and Taiwan) in China with offshore RMB funds obtained legally, including, among other things, the establishment of new enterprises, increase of capital, shareholding or merger and acquisition of domestic enterprises. The cross-border direct investment in RMB by a foreign investor or reinvestment by its foreign-invested enterprise shall conform to the requirements of laws, regulations and relevant provisions on foreign investment and comply with the foreign investment industry policies of China and the provisions on security review of foreign investment mergers and acquisitions and anti-monopoly review. No foreign-invested enterprise is allowed to use the funds of cross-border direct investment in RMB for investment, directly or indirectly, in negotiable securities and financial derivatives in China (except for strategic investment in listed companies) or for entrusted loans. On October 13, 2011, the PBOC issued the Management Rules on the Settlement of Foreign Direct Invested Renminbi, which provide that foreign invested enterprises with RMB-dominated foreign direct investment must register with the PBOC or its local branch after obtaining the permit from MOFCOM and the business license.

 

Regulations on intellectual property rights

 

China has adopted comprehensive legislation governing intellectual property rights, including copyright, trademark, patents and domain names.

 

The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.

 

Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law, which become effective in 2010, and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.

 

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Patent. The Patent Law, which became effective in 2009, provides for patentable inventions, utility models and designs. An invention or utility model for which patents may be granted must have novelty, creativity and practical applicability. The State Intellectual Property Office under the State Council is responsible for examining and approving patent applications.

 

Trademark. The Trademark Law, which became effective in 2014, and its implementation rules protect registered trademarks. The Trademark Office of the State Administration for Industry & Commerce is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration.

 

Domain Name. The MIIT is the major regulatory body responsible for the administration of the PRC internet domain names. Domain names are protected under the Administrative Measures on the Internet Domain Names, promulgated by the MIIT on August 16, 2017 and took effect on November 1, 2017. The measure has adopted a “first-to-file” principle with respect to the registration of domain names.

 

Item 1A. RISK FACTORS

 

You should carefully consider the following material risk factors and other information in this report. If any of the following risks actually occur, our business, financial condition, results of operations and prospects for growth could be seriously impacted. As a result, the trading price, if any, of our Common Stock could decline and you could lose part or all of your investment.

 

Risk Factors Related to the Commodities Trading Business

 

There is no assurance that we will be able to manage the commodities trading business effectively.

 

Operating the commodities trading business is a significant challenge and there is no assurance that we will be able to manage the integration successfully. If we are unable to efficiently integrate these businesses, the attention of our management could be diverted from our existing operations and the ability of the management teams at these business units to meet operational and financial expectations could be adversely impacted, which could impair our ability to execute our business plans. Failure to successfully integrate the new commodities trading business or to realize the expected benefits of entry into the business may have an adverse impact on our results of operations and financial condition.

 

Investment in our new line of business could disrupt the Company’s ongoing business and present risks not originally contemplated.

 

We have deployed a significant amount of proceeds from our financings in our new commodities business line, Huamucheng. New ventures are inherently risky and may not be successful. In evaluating such endeavors, we are required to make difficult judgments regarding the value of business strategies, opportunities, technologies and other assets, and the risks and cost of potential liabilities. Furthermore, these investments involve certain other risks and uncertainties, including the risks involved with entering new competitive categories or regions, the difficulty in integrating the new business, the challenges in achieving strategic objectives and other benefits expected from our investment, the diversion of our attention and resources from our operations and other initiatives, the potential impairment of acquired assets and liabilities and the performance of underlying products, capabilities or technologies.

 

We may not be able to ensure the successful implementation of our strategy to diversify our businesses.

 

We have entered into the commodities trading business. Such initiatives involve various risks including but not limited to the investment costs in establishing a distribution network within the PRC, leasing warehouses, offices and other working capital requirements. There is no assurance that such future plans can be successfully implemented as the successful execution of such future plans will depend on several factors, some of which are not within our control, such as retaining and recruiting qualified and skilled staff, and the continued demand for our products by our customers. Failure to implement any part of our future plans or executing such plan costs effectively, may lead to a material adverse change in our operating environment or affect our ability to respond to market or industry changes, which may, in turn, adversely affect our business and financial results.

 

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We expect that we will require additional debt and equity capital to pursue our business objectives and respond to business opportunities, challenges and/or unforeseen circumstances. If such capital is not available to us, or is not available on favorable terms, our business, operating results and financial condition may be harmed.

 

We expect that we will require additional capital to pursue our business objectives and respond to business opportunities, challenges and/or unforeseen circumstances, including to increase our marketing expenditures in order to improve our brand awareness, build our non-ferrous metal inventory, develop new customers, enhance our operating infrastructure and acquire complementary technologies. Accordingly, we may need to engage in equity, debt or other types of financings to secure additional funds. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. In addition, any debt financing that we secure in the future could involve restrictive covenants which may make it more difficult for us to obtain additional capital and to pursue business opportunities.

 

Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our Common Stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

 

Our success depends substantially upon the continued retention of our senior management.

 

Our future success is substantially dependent on the continued service of certain members of our senior management, including Ms. Renmei Ouyang, our Chairwoman and Chief Executive Officer, Ms. Wei Sun, our Chief Financial Officer and Qun Xie, our Chief Strategy Officer. These officers play an integral role in determining our strategic direction and for executing our growth strategy and are important to our brand and culture. The loss of the services of any of these executives without qualified replacement could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed negatively by investors and analysts, which could cause the price of our ordinary shares to decline.

 

Our business depends on adequate supply and availability of nonferrous metal commodities.

 

Our planned business requires nonferrous metal commodities that are sourced from third-party suppliers. We are affected by industry supply conditions, which generally involve risks beyond our control, including costs of these materials, transportation costs and market demand. As a result, we may not be able to obtain an adequate supply of quality nonferrous metal commodities in a timely or cost-effective manner, which would have a material adverse effect on our business, financial condition and results of operations.

 

We derive a substantial portion of our revenue and profits from our supply chain management services from a small number of clients, and adverse industry trends or the loss of one or more of any of those clients could significantly damage our business.

 

We derive a substantial portion of our revenue from our supply chain management services to a small number of clients. Our business and future growth will continue to depend in large part on the industry trend towards outsourcing supply chain management and other business processes. If these trends do not continue or decline, demand for our supply chain management services will decline, and our financial results could suffer.

 

In addition, the loss of a significant amount of business or program with any key client could cause our revenue and or profits to decline and our financial results could suffer.

 

The supply chain management services segment of our business is expected to continue to derive the vast majority of its net revenue and or profits from sales to a small number of key clients. In general, we do not have any agreements which obligate any client to buy a minimum amount of services from us, or to designate us as its sole supplier of any particular services. If any of our key clients fail to respond successfully to market shifts, we would be adversely affected. There can be no assurance that our revenue and or profits from key clients will not decline in future periods.

 

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A decline in our key business sectors or a reduction in consumer demand generally could have a material adverse effect on our business.

 

A large portion of our supply chain management services revenue comes from clients in the energy, material and industrial sectors, which is intensely competitive, very volatile, and subject to rapid changes and fluctuations in the overall economic conditions. Declines in the overall performance of the energy, material and industrial sectors have in the past and could in the future, adversely affect the demand for our supply chain management services and reduce our revenue and profitability from these clients. In addition, industry changes, such as the transition of more collateral materials from physical form to digital form and changes in marketing channels, could lessen the demand for certain of our services we currently handle. To the extent recent uncertainty in the economy or other factors result in decreased demand for our clients’ products, we may experience a reduction in volumes of client products that we handle which could have a material adverse effect on our supply chain management services business, financial position and operating results.

 

We operate in a business that is cyclical and where demand can be volatile, which could have a material adverse effect on our business, financial condition or results of operations.

 

We operate in a business that is cyclical and where demand can be volatile, which could have a material adverse effect on our results of operations and financial condition. The timing and magnitude of the cycles in the business in which we operate are difficult to predict. Purchase prices for the raw materials we purchase, and selling prices for our products are volatile and beyond our control. While we attempt to respond to changing raw material costs through adjustments to the sales price of our products, our ability to do so is limited by competitive and other market factors. A significant reduction in selling prices for our products may have a material adverse effect on our business, financial condition and results of operations, and adversely impact our ability to recover purchase costs from end customers. A decline in market prices for our products between the date of the sales order and shipment of the product may impact the customer’s ability to obtain letters of credit to cover the full sales amount. A decline in selling prices for our products coupled with customers failing to meet their contractual obligations may also result in a net realizable value adjustment to the average cost of inventory to reflect the lower of cost or fair market value. Additionally, changing prices could potentially impact the volume of raw materials available to us, the volume of ore and processed metal sold by us and inventory levels. The cyclical nature of our businesses tends to reflect and be amplified by changes in general economic conditions, both domestically and internationally.

 

We expect that we will require additional debt and equity capital to pursue our business objectives and respond to business opportunities, challenges and/or unforeseen circumstances. If such capital is not available to us, or is not available on favorable terms, our business, operating results and financial condition may be harmed.

 

We expect that we will require additional capital to pursue our business objectives and respond to business opportunities, challenges and/or unforeseen circumstances, including to increase our marketing expenditures in order to improve our brand awareness, develop new products or services or further improve existing services, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity, debt or other types of financings to secure additional funds. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. In addition, any debt financing that we secure in the future could involve restrictive covenants which may make it more difficult for us to obtain additional capital and to pursue business opportunities.

 

Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our Common Stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

 

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Risk Factors Related to Our General Operations

 

The current geographic concentration where we provide services creates an exposure to local economies, regional downturns or severe weather or catastrophic occurrences that may materially adversely affect our financial condition and results of operations.

 

We currently conduct our commodities trading business in Shenzhen. We currently hold all our commodities inventory at our warehouse in Foshan. While we have insurance to cover certain losses on those commodities, events such as theft, fire, flood, or hail could adversely impact our business.

 

In addition, our business is currently more susceptible to regional conditions than the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect our revenues and profitability. These factors include, among other things, changes in demographics and population. In addition, severe weather conditions, acts of God and other catastrophic occurrences in the area in which we operate or from which we obtain inventory may materially adversely affect our financial condition and results of operations. Such conditions may result in physical damage to our properties and loss of inventory. Any of these factors may disrupt our business and materially adversely affect our financial condition and result of operations. Furthermore, there can be no assurance that we will be able to successfully replicate our business model and achieve levels of success as we enter new geographic markets.

 

Our failure to maintain a reputation of integrity and to otherwise maintain and enhance our brand could adversely affect our business and results of operations.

 

Our business model is based on our ability to provide customers with commodities trading that we believe will save them time and money. If we fail to build and maintain a positive reputation, or if an event occurs that damages this reputation, it could adversely affect consumer demand and have a material adverse effect on our business and results of operations. Even the perception of a decrease in the quality of our brand could negatively impact results.

 

Complaints or negative publicity about our business practices, marketing and advertising campaigns, compliance with applicable laws and regulations, the integrity of the data that we provide to users, and other aspects of our business, especially on industry-specific blogs and social media websites, and irrespective of their validity, could diminish consumer confidence in our services and adversely affect our brand. The growing use of social media increases the speed with which information and opinions can be shared and, thus, the speed with which reputation can be affected. If we fail to correct or mitigate misinformation or negative information, including information spread through social media or traditional media channels, about us, the vehicles we offer, our customer experience, or any aspect of our brand, it could have a material adverse effect on our business and results of operations.

 

Failure to adequately protect our intellectual property, technology and confidential information could harm our business and operating results.

 

Our business depends on our intellectual property, technology and confidential information, the protection of which is crucial to the success of our business. We attempt to protect our intellectual property, technology and confidential information by requiring certain of our employees and consultants to enter into confidentiality agreements and certain third parties to enter into nondisclosure agreements. In addition, these agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property, or technology. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our website features, software and functionality or obtain and use information that we consider proprietary. Changes in the law or adverse court rulings may also negatively affect our ability to prevent others from using our technology.

 

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We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employees or claims asserting ownership of what we regard as our own intellectual property.

 

Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

In addition, while we intend to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property may not be self-executing or the assignment agreement may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property.

 

We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results.

 

We may, from time to time, face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Patent and other intellectual property litigation may be protracted and expensive, the results are difficult to predict and may require us to stop offering some features, purchase licenses or modify our products and features while we develop non-infringing substitutes or may result in significant settlement costs.

 

Even if these matters do not result in litigation, are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, our operating results and our reputation.

 

We may be subject to legal proceedings in the ordinary course of our business. If the outcomes of these proceedings are adverse to us, they could have a material adverse effect on our business, results of operations and financial condition.

 

We may be subject to various litigation matters from time to time, which could have a material adverse effect on our business, results of operations and financial condition. Claims arising out of actual or alleged violations of law could be asserted against us by individuals, either individually or through class actions, by governmental entities in civil or criminal investigations, and proceedings or by other entities. These claims could be asserted under a variety of laws, including but not limited to consumer finance laws, consumer protection laws, intellectual property laws, privacy laws, labor and employment laws, securities laws and employee benefit laws. These actions could expose us to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business.

 

In the event we are not able to get refund from Harrison Fund, we will suffer significant losses.

 

In May 2019, the Company invested an aggregate of $1,000,000 to purchase financial products from Harrison Fund, LLC (“Harrison Fund”), a private equity fund, for investment return. On April 6, 2020, we filed a law suit against Harrison Fund in California seeking the full refund of the $1,000,000 investment because we identified problematic information in Harrison Fund’s brochure. Based on the current stage of the proceedings in this case, the outcome of this legal proceeding, including the anticipated legal costs, remains uncertain. Therefore we recorded a full investment impairment loss of $1,000,000, which was reflected in the consolidated statements of operation and comprehensive income (loss). We may incur significant legal fees, settlements or damages awards resulting from this or other civil litigation. If this matter is not resolved in our favor, it could have a material adverse effect on our results of operations and cash flows.

 

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

 

We are subject to the United States Foreign Corrupt Practices Act, or FCPA, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. We have implemented these policies through our Code of Conduct. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in China. While we make every effort to comply with FCPA and our company Code of Conduct, we can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that will likely have a material adverse effect on our business, financial condition and results of operations.

 

We have identified material weaknesses in our internal control over financial reporting, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and which may lead to a decline in our stock price.

 

On March 26, 2021, the Audit Committee of the Board of Directors of the Company, after discussion with the Company’s management, concluded that the Company’s previously issued financial statements contained in the Company’s Quarterly Reports (“2020 Quarterly Reports”) on Form 10-Q for the periods ended March 31, 2020, June 30, 2020, and September 30, 2020 (collectively “Non-Reliance Periods”), originally filed on June 26, 2020, August 14, 2020, and November 13, 2020, respectively, should no longer be relied upon. Similarly, related press releases, earnings releases, and investor communications describing the Company’s financial statements for the Non-Reliance Periods should no longer be relied upon.

 

The Company’s review of the above mentioned filings revealed that (1) in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers, service revenues previously recognized for supply chain management services have been determined to not meet the definition of US GAAP; (2) sales revenues from commodity trading business may need to be amended since certain transactions shall be further evaluated whether the Company is a principal or an agent; and (3) in accordance with FASB ASC Topic 850, Related Party Disclosures, transactions with certain related parties shall be properly identified or disclosed. This does not affect the Company’s cash position, cash flow or liquidity, but the potential reversal of recognition of supply chain management services may materially decrease the Company’s revenue and net income, and the potential net presentation of sales from commodity trading business may materially decrease the Company’s revenue. As a result of the foregoing, management has concluded that the Company’s internal control over financial reporting and its disclosure controls and procedures were not effective as of the ends of each of the applicable restatement periods.

 

Furthermore, as discussed in “Part II, Item 9A. Controls and Procedures,” our management has identified material weaknesses in our internal control over financial reporting, which were not remediated as of December 31, 2020. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

As of the date of this Annual Report, we are re-assessing the design of our controls and modifying processes. However, there can be no assurance that we will be able to fully remediate our existing material weaknesses or that our internal control over financial reporting will not suffer in the future from other material weaknesses, thus making us unable to prevent or detect on a timely basis material misstatements in our periodic reports with the SEC. If we fail to remediate these material weaknesses or otherwise maintain effective internal control over financial reporting in the future, the existence of one or more internal control deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify internal control deficiencies. If we cannot produce reliable financial reports, we may have difficulty in filing timely periodic reports with the SEC, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be materially harmed. In addition, any failure to remediate the existing material weaknesses or a failure to maintain effective internal control over financial reporting could negatively impact our results of operations, cash flows and financial condition, subject us to potential litigation and regulatory inquiry and cause us to incur additional costs in future periods relating to the implementation of remedial measures.

 

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Matters relating to or arising from the restatements, Audit Committee investigation and the associated material weaknesses identified in our internal control over financial reporting, including adverse publicity, have caused us to incur significant legal, accounting and other professional fees and other costs, have exposed us to greater risks associated with other civil litigation, regulatory proceedings and government enforcement actions, have diverted resources and attention that would otherwise be directed toward our operations and implementation of our business strategy and may impact our ability to attract and retain customers, employees and vendors, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Risks Relating to Our Corporate Structure

 

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

 

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

 

The application of the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under the M&A Rules were not required in the context of our share exchange transaction because at such time the share exchange was a foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC will not deem that the transactions effected by the share exchange circumvented the M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for overseas financing. Further, we cannot rule out the possibility that the relevant PRC government agencies, including MOFCOM, would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies in connection with Hao Limo’s control of Beijing Tianxing through contractual arrangements.

 

If the CSRC, MOFCOM, or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the share exchange transaction and/or the VIE arrangements between Hao Limo and Beijing Tianxing, or if prior CSRC approval for overseas financings is required and not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Common Stock. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas financings, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.

 

The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example, Beijing Tianxing’s ability to remit its profits to us, or to engage in foreign-currency-denominated borrowings, may be conditioned upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control.

 

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Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.

 

In July 2014, SAFE promulgated the Circular on Issues Concerning Foreign Exchange Administration over the Overseas Investment and Financing and Roundtrip Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75. 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, referred to in Circular 37 as a “special purpose vehicle” for the purpose of holding domestic or offshore assets or interests. Circular 37 further requires amendment to a PRC resident’s registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease in the capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under these regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital inflows from the offshore entity to the PRC entity, including restrictions on its ability to contribute additional capital to its PRC subsidiaries. Further, failure to comply with the SAFE registration requirements could result in penalties under PRC law for evasion of foreign exchange regulations.

 

As Circular 37 is newly-issued, it is unclear how these regulations will be interpreted and implemented. In addition, different local SAFE branches may have different views and procedures as to the interpretation and implementation of the SAFE regulations, and it may be difficult for our ultimate shareholders or beneficial owners who are PRC residents to provide sufficient supporting documents required by the SAFE or to complete the required registration with the SAFE in a timely manner, or at all. Any failure by any of our shareholders who is a PRC resident, or is controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us to fines or sanctions imposed by the PRC government.

 

Risks Related to Ownership of our Common Stock

 

We have not been in compliance with Nasdaq’s requirements for continued listing and as a result our common stock may be delisted from trading on Nasdaq, which would have a material effect on us and our stockholders.

 

We were delinquent in the filing of our periodic reports with the SEC as a result of which we are not in compliance with listing requirements of The Nasdaq Stock Market LLC (“Nasdaq”) Listing Rule 5250(c)(1), which requires timely filing of periodic financial reports with the SEC. Under Nasdaq’s listing rules, we were permitted to submit to Nasdaq a plan to regain compliance with the Nasdaq listing rules. We plan to submit such a plan to the Nasdaq Staff on or prior to the deadline of June 4, 2021. We expect to file the delinquent report for the period ended March 31, 2021 as promptly as practicable following the filing of this annual report, however there can be no guarantee that Nasdaq will accept our compliance plan, grant us the extension or that we will be able to file by the extended compliance period, in which case our common stock may be subject to delisting by Nasdaq. If our common stock is delisted, there can no assurance whether or when it would be listed for trading on Nasdaq or any other exchange. If our common stock is delisted, the market price of our shares will likely decline and become more volatile, and our stockholders may find that their ability to trade in our stock will be adversely affected. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our stock.

 

The delayed filing of some of our periodic reports has made us currently ineligible to use a registration statement on Form S-3 to register the offer and sale of securities, which could adversely affect our ability to raise future capital or complete acquisitions.

 

As a result of the delayed filing of some of our periodic reports with the SEC, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until 12 months after the delinquent filings have been made. Should we wish to register the offer and sale of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.

 

As a result of the delayed filings, we are also in breach of the common stock purchase agreement with White Lion Capital, LLC as the prospectus supplement dated January 19, 2021 registering up to 15,800,000 shares of our common stock is no longer eligible for use. Pursuant to the terms of the common stock purchase agreement, White Lion Capital, LLC will be entitled to injunctive relief as well as specific performance due to our breach of the agreement. Claim from White Lion may result in legal expenses, diversion of management attention, as well as possible damages which may negatively affect our financial condition.

 

 

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We do not expect to declare or pay dividends in the foreseeable future.

 

We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business. Therefore, holders of our Common Stock will not receive any return on their investment unless they sell their securities, and holders may be unable to sell their securities on favorable terms or at all.

 

Future issuances of our Common Stock or securities convertible into, or exercisable or exchangeable for, our Common Stock (“Securities”), or the expiration of lock-up agreements that restrict the issuance of new Common Stock or the trading of outstanding Common Stock, could cause the market price of our Common Stock to decline and would result in the dilution of your holdings.

 

Future issuances of our Securities, or the expiration of lock-up agreements that restrict the issuance of new Common Stock or the trading of outstanding Common Stock, could cause the market price of our Common Stock to decline. We cannot predict the effect, if any, of future issuances of our Securities, or the future expirations of lock-up agreements, on the price of our Common Stock. In all events, future issuances of our Common Stock would result in the dilution of your holdings. In addition, the perception that new issuances of our Securities could occur, or the perception that locked-up parties will sell their securities when the lock-ups expire, could adversely affect the market price of our Common Stock. In addition to any adverse effects that may arise upon the expiration of these lock-up agreements, the lock-up provisions in these agreements may be waived, at any time and without notice. If the restrictions under the lock-up agreements are waived, our Common Stock may become available for resale, subject to applicable law, including without notice, which could reduce the market price for our Common Stock.

 

The Company has outstanding warrants having a “cashless exercise” feature and may cause dilution to existing stockholders.

 

As part of its Registered Direct Offerings in 2019, the Company issued warrants to purchase an aggregate of 2,760,000 shares of common stock. The warrants have a cashless exercise feature giving the holders the option of exercising the warrants on a cashless basis if there is no effective registration statement covering the common stock issuable upon exercise of these warrants. If the warrant shares are issued in such a cashless exercise, the warrant shares will take on the characteristics of the warrants being exercised, and the holding period of the warrant shares being issued may be tacked on to the holding period of the warrants in accordance with Section 3(a)(9).

 

The Company would not receive any proceeds from the exercise of warrants issued to the holder in such a cashless exercise, causing dilution to existing stockholders with no corresponding influx of capital. This may affect our ability to raise additional equity capital.

 

Our Common Stock may be thinly traded and our stockholders may be unable to sell at or near ask prices or at all if they need to sell their shares to raise money or otherwise desire to liquidate their shares.

 

Our Common Stock may be “thinly-traded”, meaning that the number of persons interested in purchasing our Common Stock at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our Common Stock may not develop or be sustained.

 

The market price for our Common Stock may be volatile and subject to wide fluctuations due to factors such as:

 

  the perception of U.S. investors and regulators of U.S. listed Chinese companies;

 

  actual or anticipated fluctuations in our quarterly operating results;

 

  changes in financial estimates by securities research analysts;

 

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  negative publicity, studies or reports;

 

  changes in the economic performance or market valuations of other microcredit companies;

 

  announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;

 

  addition or departure of key personnel;

 

  fluctuations of exchange rates between RMB and the U.S. dollar; and

 

  general economic or political conditions in China.

 

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our Common Stock.

 

Volatility in our Common Stock price may subject us to securities litigation.

 

The market for our Common Stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

Provisions in our By-laws and Delaware laws might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our Common Stock.

 

Provisions of our by-laws and Delaware laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our Common Stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

 

  the inability of stockholders to act by written consent or to call special meetings;
     
  the ability of our board of directors to make, alter or repeal our by-laws; and
     
  the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

 

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your Common Stock in an acquisition.

 

The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification of our directors, officers and employees under Delaware law may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.

 

Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to us and our stockholders to the maximum extent permitted under the corporate laws of Delaware. We may also provide contractual indemnification obligations under agreements with our directors, officers and employees. These indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors, officers and employees for breach of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and our shareholders.

 

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If we fail to meet the requirements for continued listing on the Nasdaq Capital Market, our common stock could be delisted from trading, which would decrease the liquidity of our common stock and our ability to raise additional capital.

 

Our common stock is currently listed for quotation on the Nasdaq Capital Market. We are required to meet specified financial requirements in order to maintain our listing on the Nasdaq Capital Market.

 

Although we have cured the bid price deficiency, there can be no assurance that the Company will be able to continue to meet the applicable Nasdaq listing requirements. Any potential delisting of our common stock from the Nasdaq Capital Market would make it more difficult for our stockholders to sell our stock in the public market and would likely result in decreased liquidity and increased volatility for our common stock.

 

We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our Common Stock.

 

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for fiscal 2014, the first fiscal year beginning after our initial public offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting and, after we cease to be an “emerging growth company,” a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

 

If we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Common Stock to decline, and we may be subject to investigation or sanctions by the SEC.

 

We will be required to disclose changes made in our internal controls and procedures on a quarterly basis.

 

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Our business, results of operations and financial condition may be adversely affected by global public health epidemics, including the strain of coronavirus known as COVID-19.

 

In light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus (COVID-19), we have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, our customers, and the communities in which we participate, which could negatively impact our business. To this end, we are evaluating alternative working arrangements, including requiring all employees to work remotely, and we have suspended all non-essential travel for our employees and limiting in-person work-related meetings.

 

In addition, with the extended Chinese business shutdowns that resulted from the outbreak of COVID-19, we may experience delays or the inability to service our customers on a timely basis in both our luxurious car leasing business and our commodities trading business. The disruptions to our supply chain and business operations, or to our suppliers’ or customers’ supply chains and business operations, could include disruptions from the closure of our luxury car rental facilities, interruptions in the supply of commodities, personnel absences, and restrictions on the luxury car rental services or delivery and storage of commodities, any of which could have adverse ripple effects on our luxurious car leasing business and our commodities trading business. If we need to close any of our facilities or a critical number of our employees become too ill to work, our ability to provide our products and services to our customers could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse business consequences due to COVID-19, or any other pandemic, demand for our products and services could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the localities in which we or our suppliers and customers operate within China.

 

While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. While it is too early to tell whether COVID-19 will have a material effect on our business over time, we continue to monitor the situation as it unfolds. The extent to which COVID-19 affects our results will depend on many factors and future developments, including new information about COVID-19 and any new government regulations which may emerge to contain the virus, among others.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Description of Property.

 

Our principal executive offices are located at 25th Floor, Block C, Tairan Building, No. 31 Tairan 8th Road, Futian District, Shenzhen, Guangdong, PRC 518000, where we leased approximately 9,000 square feet of office space pursuant to a lease agreement, which lasts from September 1, 2020 to August 31, 2021 with an annual rent in the amount of RMB 600,000 (approximately US$86,400).

 

In addition, we also leased an office at 3302, Zhongzhou Building, Jintian Road, Futian District, Shenzhen, China, where we leased approximately 6,352.5 square feet of office space pursuant to a lease agreement, which lasts from January 1, 2020 to June 30, 2021 with a total rent in the amount of RMB2,995,680 (approximately US$429,920) for the year of 2020 and 2021. The lease was terminated in June 2020.

 

We do not own any real property or have any land use rights.

 

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Item 3. Legal Proceedings.

 

The Company is involved in various legal actions arising in the ordinary course of its business.

 

a) 2015 Derivative Action

 

On February 3, 2015, a purported shareholder Kiran Kodali filed a putative shareholder derivative complaint against the Company, alleging that the Company and its former officers and directors violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints.

 

On July 16, 2019, the Company received a copy of the final order and judgment that the Court entered on July 11, 2019, approving the settlement set forth in the Stipulation. The Stipulation provides for dismissal of the Derivative Action as to the Company and the Individual Defendants, and the Company agrees to adopt or maintain certain corporate governance reforms for at least three years. The Stipulation also provides for attorneys’ fees and expenses to be paid by the Individual Defendants’ insurance carriers to plaintiffs’ counsel.

 

b) 2017 Arbitration with Sorghum

 

On December 21, 2017, the Company delivered notice (“Notice”) to Sorghum notifying Sorghum that certain recent actions of Sorghum constituted breaches of Sorghum’s covenants under the Exchange Agreement. Specifically, we believe that Sorghum is in breach of Section 6.9 (a and Section 6.11 (b of the Exchange Agreement which required Sorghum to use commercially reasonable efforts and to cooperate fully with the other parties to consummate the transactions contemplated by the Exchange Agreement and to make its directors, officers and employees available in connection with responding in a timely manner to SEC comments. According to the terms of the Exchange Agreement, the Company is entitled to terminate the Exchange Agreement if the breach is not cured within twenty (20 days after the Notice is provided to Sorghum.

 

On January 25, 2018, the Company filed an arbitration demand (“Arbitration Demand” with the American Arbitration Association (“AAA” against Sorghum in connection with Sorghum’s breach of the Exchange Agreement.

 

On July 30, 2018, Arbitrator entered a reasoned award, accepting the Company’s proposal for resolution, awarding the Company damages of $1,436,522 against Sorghum and denying Sorghum’s Counterclaim against the Company in its entirety with prejudice. Sorghum has sought to vacate the arbitration award by filing a petition to vacate the arbitration award in the Supreme Court for the State of New York, New York County. The Court heard the Company and Sorghum’s arguments on May 1, 2019, and entered an order vacating the arbitration award. The Company vigorously opposed and moved to confirm the arbitration award on May 6, 2019. On June 5, 2019, the Company filed a notice of appeal with the New York Supreme Court Appellate Division First Department. The appeal was scheduled to be mediated on November 20, 2019. On November 15, 2019, the Company withdrew its appeal filed June 5, 2019, upon the stipulation of the parties and accordingly, the arbitration award is deemed to be vacated.

 

c) 2018 Court Matter with Shanghai Nonobank Financial Information Service Co. Ltd.

 

On August 2, 2018, the Company became party to an action filed by Shanghai Nonobank Financial Information Service Co. Ltd. (“Plaintiff”) in the Supreme Court for the State of New York, New York County (“NY Supreme Court” (Index No. 653834/2018 (the “Action”). Plaintiff’s complaint seeks to recover approximately $3.5 million of Plaintiff’s funds that were allegedly required to be held in escrow in New York pursuant to an agreement by and between Plaintiff, Yang Jie and Yi Lin (the “Complaint”). Plaintiff has alleged that the funds were required to be held in escrow in a New York attorney trust account pending the alleged consummation of a merger between Plaintiff’s parent company and the Company. Plaintiff alleged two causes of action against the Company for fraud/fraudulent inducement and conversion. On August 30, 2018, the Company filed a motion to dismiss Plaintiff’s causes of action against the Company. The Court has scheduled oral arguments on the Company’s motion to dismiss for May 1, 2019.

 

On July 15, 2019, the Company received a copy of the decision and order the Court entered on July 12, 2019, granting the Company’s motion to dismiss the Complaint in its entirety as against the Company without prejudice, with costs and disbursements to the Company as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of the Company.

 

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d) 2020 Court Matter with Harrison Fund

 

On April 6, 2020, the Company filed a law suit against Harrison Fund, LLC (“Harrison Fund”) in the United States District Court for the Northern District of California (the “District Court”) (Case No. 3:20-cv-2307). The Company had invested $1,000,000 in Harrison Fund around May 2019. However, Harrison Fund had been reluctant to disclose related investment information to the Company and it was discovered that certain information presented on Harrison Fund’s brochure appeared to be problematic. The Company demanded a return of its investment from Harrison Fund. When the Company failed to obtain a response from Harrison Fund, it filed the complaint against Harrison Fund seeking to recover the $1,000,000 investment.

 

Due to the uncertainty arising from this pending legal proceeding, a full impairment has been applied against the Company’s investment in financial products.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock is currently listed on the NASDAQ Capital Market under the symbol “GLG.”

 

Recent Sales of Unregistered Securities

 

During the period covered by this annual report, there were no sales by us of unregistered securities that were not previously reported by us in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.

 

Holders

 

We had 269 holders of record of our common stock as of the date of this Annual Report.

 

Dividends

 

We did not declare or pay any dividend in 2020 and do not plan to do so in the foreseeable future. Although we intend to retain our earnings, if any, to finance the growth of our business, our board of directors will have the discretion to declare and pay dividends in the future, subject to applicable PRC regulations and restrictions as described below. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our board of directors may deem relevant.

 

In addition, due to various restrictions under PRC laws on the distribution of dividends by WFOE, we may not be able to pay dividends to our stockholders. The Wholly-Foreign Owned Enterprise Law (1986), as amended, and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006), contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds until such time as the accumulated reserve funds reach and remain above 50% of the registered capital amount. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.

 

Item 6. Selected Financial Data.

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

During the year ended December 31, 2020, the Company discontinued its used luxury car leasing business. As of December 31, 2020, the Company had one business line, which is the commodities trading business. 

 

Commodities Trading Business

 

The commodity trading business primarily involves purchasing non-ferrous metal product, such as aluminium ingots, copper, silver, and gold, from metal and mineral suppliers and then selling to customers. In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help metal and mineral suppliers to sell their metal products, the Company launched its supply chain management service in December 2019. The Company primarily generates revenues from bulk non-ferrous commodity products, and from providing related supply chain management services in the PRC.

 

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The Company sources bulk commodity products from non-ferrous metal and mines or its designated distributors and then sells to manufacturers who need these metals in large quantities. The Company works with suppliers in the sourcing of commodities. Major suppliers include various metal and mineral suppliers such as Kunsteel Group, Baosteel Group, Aluminum Corporate of China Limited, Yunnan Benyuan, Yunnan Tin, and Shanghai Copper. The Company’s target customers include large infrastructure companies such as China National Electricity, Datang Power, China Aluminum Foshan International Trade, Tooke Investment (China), CSSC International Trade Co., Ltd., Shenye Group, and Keliyuan.

 

In addition, the Company commenced supply chain financing services in April 2020. For the year ended December 31, 2020, the Company provided such services to one customer. On March 25, 2020, the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao. The Company selected Shenzhen Xinsuniao as its customer because Shenzhen Xinsuniao was reputable for their extensive experience in supply chain services for commodities trading.

 

Competition

 

The Company mainly competes against other large domestic commodity metal product trading service providers such as Xiamen International Trade and Yijian Shares. Currently, the principal competitive factors in the non-ferrous metals commodities trading business are price, product availability, quantity, service, and financing terms for purchases and sales of commodities.

 

Applicable Government Regulations

 

Huamucheng has obtained all material approvals, permits, licenses and certificates required for our metal product trading operations, including registrations from the local business and administrative department authorizing the purchase of raw materials.

 

Recent developments

 

Acquisition of supply chain service business

 

On October 26, 2020, Huamucheng closed acquisition of Qianhai Baiyu pursuant to certain share purchase agreements, by and among Huamucheng, Qianhai Baiyu, and Shenzhen Xinsuniao for an aggregate cash consideration of RMB670 million (approximately $102.6 million). Upon closing of this acquisition, Huamucheng owns all the registered paid-up capital of Qianhai Baiyu.

 

Disposition of used luxurious car leasing business

 

Historically, one of the Company’s core business has been the used luxurious car leasing business conducted through Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”), an entity that the Company controlled via certain contractual arrangements.

 

On August 28, 2020, the Company entered into the Disposition SPA with Vision Loyal, HC High HK and HC High BVI. Pursuant to the Disposition SPA, Vision Loyal agreed to purchase HC High HK in exchange for nominal consideration of $1.00 based on a valuation report presented by an independent third party valuation firm, Beijing North Asia Asset Assessment Firm. The Board approved the Disposition and the Disposition closed on August 28, 2020.

 

Revolving Credit Facility

 

On March 25, 2020, the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao, to which the Company also provided loan recommendations services during the year ended December 31, 2020.

 

The revolving credit facility lasted for a period of two years. Shenzhen Xinsuniao pledged 100% of its equity interest in Qianhai Baiyu, which enterprise value was estimated at approximately $106 million. Upon the Company’s acquisition of Qianhai Baiyu on October 26, 2020, the Company terminated the revolving credit facility agreement with Shenzhen Xinsuniao. For the year ended December 31, 2020, the Company provided revolving loans aggregating approximately $158.0 million and fully collected outstanding balance as of December 31, 2020. As of December 31, 2020, the Company had no loan receivable due from Shenzhen Xinsuniao.

 

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Termination of VIE Agreement

 

On April 2, 2020, HC High Summit Holding Limited (“HC High BVI”), the Company’s wholly owned subsidiary, established Tongdow Block Chain Information Technology Company Limited (“Tongdow Block Chain”), a holding company incorporated in accordance with the laws and regulations of Hong Kong. Tongdow Block Chain is wholly owned by HC High BVI. On April 2, 2020, Tongdow Block Chain established Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”) as its wholly owned subsidiary. Shanghai Jianchi is a holding company incorporated in accordance with the laws and regulations of People’s Republic of China (“PRC”).

 

On June 25, 2020, Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”), the Company’s wholly owned subsidiary incorporated in PRC, and Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”), a former VIE of the Company, entered into certain VIE Termination Agreement (the “VIE Termination Agreement”) to terminate the Huamucheng VIE Agreements. As such, Hao Limo will no longer have the control rights and rights to the assets, property and revenue of Huamucheng. On the same date, Shanghai Jianchi, Huamucheng and the shareholders of Huamucheng (the “Huamucheng Shareholders”) entered into certain Share Acquisition Agreement (the “Acquisition Agreement”) pursuant to which Shanghai Jianchi acquired 100% equity interest of Huamucheng from the Huamucheng Shareholders for nominal consideration.

 

As a result of the above reorganization, Huamucheng transitioned from being a variable interest entity (“VIE”) controlled by Company into a wholly owned subsidiary of the Company. The Company remained in control of Huamucheng both before and after the reorganization and its operating results are consolidated into the Company’s consolidated financial statements.

 

The Company has commenced its supply chain financing services and the Company provided such services to one customer for the year ended December 31, 2020.

 

Key Factors Affecting Our Results of Operation

 

The commodities trading industry is also experiencing decreasing demand as a result of China’s overall economic slowdown. We expect competition in commodities trading business to persist and intensify.

 

We have a limited operating history having just started our commodities trading business in late November 2019. We believe our future success depends on our ability to significantly increase sales as well as maintain profitability from our operations. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving industry. These risks and challenges include, among other things,

 

  our ability to continue our growth as well as maintain profitability;

 

  preservation of our competitive position in commodities trading industry in China;

 

  our ability to implement our strategies and make timely and effective responses to competition and changes in customer preferences; and

 

  recruitment, training and retaining of qualified managerial and other personnel.

 

Our business requires a significant amount of capital in large part due to needing to purchase bulk volume of commodities, and expand our business in existing markets and to additional markets where we currently do not have operations.

 

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Results of Operations

 

Years Ended December 31, 2020 as Compared to Years Ended December 31, 2019

 

    For the Years Ended
December 31,
    Change  
    2020     2019     Amount     %  
Revenues                        
Sales of commodity products   $ 8,252,866     $ 100,427     $ 8,152,439       8,118 %
Sales of commodity products – related parties     16,243,777       -       16,243,777       100 %
Supply chain management services     1,631,318       562,586       1,068,732       190 %
Supply chain management services – related parties     2,140,840       -       2,140,840       100 %
Total revenue     28,268,801       663,013       27,605,788       4,164 %
                                 
Cost of revenue                                
Commodity product sales     (7,853,215 )     -       (7,853,215 )     100 %
Commodity product sales – related parties     (16,744,094 )     (100,180 )     (16,643,914 )     16,614 %
Supply chain management services     (43,162 )     -       (43,162 )     100 %
Supply chain management services – related parties     -       (489,231 )     489,231       (100 )%
Total cost of revenue     (24,640,471 )     (589,411 )     (24,051,060 )     4,081 %
                                 
Gross profit     3,628,330       73,602       3,554,728       4,830 %
                                 
Operating expenses                                
Selling, general, and administrative expenses     (3,035,598 )     (2,334,315 )     (701,283 )     30 %
Total operating cost and expenses     (3,035,598 )     (2,334,315 )     (701,283 )     30 %
                                 
Other income (expenses), net                                
Interest income     6,239,943       64,461       6,175,482       9,580 %
Interest expenses     (185,106 )     -       (185,106 )     100 %
Amortization of beneficial conversion feature relating to issuance of convertible notes     (3,400,000 )     -       (3,400,000 )     100 %
Amortization of relative fair value of warrants relating to issuance of convertible notes     (3,060,000 )     -       (3,060,000 )     100 %
Impairment of investment securities     -       (200,000 )     (200,000 )     100 %
Impairment of investment in an equity investee     (410,000 )     (1,809,251 )     1,399,251       (77 )%
Impairment of investment in financial products     -       (1,000,000 )     1,000,000       (100 )%
Total other income, net     (815,163 )     (2,944,790 )     2,129,627       (72 )%
                                 
Loss from continuing operations before income taxes     (222,431 )     (5,205,503 )     4,983,072       (96 )%
                                 
Income tax expenses     (2,177,924 )     (14,861 )     (2,163,063 )     14,555 %
                                 
Net loss from continuing operations     (2,400,355 )     (5,220,364 )     2,820,009       (54 )%
                                 
Net loss from discontinued operations     (3,551,258 )     (1,722,158 )     (1,829,100 )     106 %
                                 
Net loss   $ (5,951,613 )   $ (6,942,522 )   $ 990,909       (14 )%

 

34

 

 

Revenue

 

For the years ended December 31, 2020 and 2019, we generate revenue from the following two sources, including (1) revenue from sales of commodity products, and (2) revenue from supply chain management services. Total revenue increased by $27,605,788 from $663,013 for the year ended December 31, 2019 to $28,268,801 for the year ended December 31, 2020. The increase was mainly due to an increase of $24,396,216 in sales of commodity products and an increase of $3,209,572 in provision of supply chain management services.

 

The Company just commenced its commodity trading business in December 2019 and generated minimal revenues from sales of commodity products to one third party customer. For the year ended December 31, 2020, the Company expanded its customers to five third party customers and four related party customers, due to the high volume of commodity metal products ordered by customers, the Company generated $24,496,643 from the sales.

 

In the meantime, the Company’s expansion of customers in commodity trading business also brought an increase in commodity distribution services in the year ended December 31, 2020, which led to an increase of $3,209,572 in provision of supply chain management services.

 

For the year ended December 31, 2020, revenue from commodity trading and supply chain management accounted for 86.7% and 13.3%, respectively. For the year ended December 31, 2019, revenue from commodity trading and supply chain management accounted for 15.1% and 84.9%, respectively.

 

(1) Revenue from sales of commodity products

 

For the year ended December 31, 2020, the Company sold non-ferrous metals to five third party customers and four related party customer at fixed prices, and earned revenues when the product ownership was transferred to its customers. The Company earned revenues of $8,252,866 and $16,243,777, respectively, from sales of commodity products to five third party customers and four related party customers.

 

For the year ended December 31, 2019, the Company sold non-ferrous metals to one third party customer at fixed prices, and earned revenues when the product ownership was transferred to its customers. The Company earned revenues of $100,427 the third party customer.

 

(2) Revenue from supply chain management services

 

In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help metal and mineral suppliers sell their metal products, the Company launched its supply chain management service business in December 2019, which primarily consisted of commodity distribution services.

 

Commodity distribution service fees

 

The Company utilizes its strong sales, marketing expertise and customer network to introduce customers to large metal and mineral suppliers, and facilitate the metal product sales between the suppliers and the customers. The Company merely acts as an agent in this type of transaction and earns a commission fee based on the percentage of volume of metal products that customers purchase. Commodity distribution service fees are recognized as revenue when the Company successfully facilitates the sales transactions between the suppliers and the customers.

 

For the year ended December 31, 2020, the Company earned commodity distribution commission fees of $1,631,318 and $2,140,840 from facilitating such sales transactions with seven third party customers and three related party customers, respectively. For the year ended December 31, 2019, the Company earned commodity distribution commission fees of $238,963 from facilitating such sales transactions with two third party customers.

 

Loan recommendation service fees

 

For the year ended December 31, 2019, the Company recommends customers who have financing need for metal product trading to various financial institutions and assist these customers to obtain loans from the financial institutions. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by customer. The referral service fee is set at 2.5% of the amount of loans obtained by the customers from the financial institutions. The Company earned $323,623 from loan recommendation services from facilitation of loan volume of approximately $13.72 million (RMB 94.8 million) with two customers. For the year ended December 31, 2020, the Company did not provide such services.

 

35

 

 

Cost of revenue

 

Our cost of revenue primarily includes cost of commodity products and taxes and surcharges associated with sales of commodity products and management services of supply chain. Total cost of revenue increased by $24,051,060 from $589,411 for the year ended December 31, 2019 to $24,640,471 for the year ended December 31, 2020, primarily because we just launched commodity product trading business in December 2019.

 

Cost of revenue associated with commodity trading

 

Cost of revenue primarily consists of purchase costs of non-ferrous metal products and business taxes and surcharges. For the year ended December 31, 2020, the Company purchased non-ferrous metal products of $7,661,629 and $16,672,323, respectively, from six third party suppliers and three related party suppliers. The Company sold all metal products to customers and recorded cost of products aggregating $24,333,952.

 

For the year ended December 31, 2019, the Company purchased aluminum ingots of $100,180 from Qianhai Baiyu, a related party before March 31, 2020 under control of the legal representative of Huamucheng. The Company sold all alumimum ingots to customers and recorded cost of revenues of $100,180.

 

Selling, general, and administrative expenses

 

Selling, general and administrative expenses increased from $2,334,315 for the year ended December 31, 2019 to $3,035,598 for the year ended December 31, 2020, representing an increase of $701,283, or 30%. Selling, general and administrative expenses primarily consisted of salary and employee benefits, office rental expense, business tax and surcharge, professional service fees, office supplies. The increase was mainly attributable to an increase of $891,758 in salary and employee benefits because the Company appointed three new senior management in the year ended December 31, 2020 with an aggregation of compensation of $950,000, an increase of $514,618 in amortization of intangible assets acquired in business combination in October 2020, against a decrease of $937,581 in professional consulting services fees. The decrease in professional consulting services was mainly attributable to a decrease of stock-based compensation expenses of $884,208, because we issued 502,391 restricted shares as compensation expenses to certain service providers for the year ended December 31, 2019, while no such issuance for the year ended December 31, 2020.  

 

Interest income

 

The Company accrues interest income on its loans receivable based on the contractual terms of the respective loans. For the year ended December 31, 2020, interest income was primarily generated from loans made to Shenzhen Xinsuniao and certain customers of the Company. Among the interest income of $6,239,943 for the year ended December 31, 2020, $4,691,905 were collected from Shenzhen Xinsunniao. For the year ended December 31, 2020, the Company provided revolving loans aggregating $157,965,155 to Shenzhen Xinsuniao and fully collected principal and interest as of December 31, 2020.

 

For the year ended December 31, 2019, the interest income was primarily comprised of interest income of $25,537 from loan to a related party and $37,112 from loans to third parties.

 

Amortization of beneficial conversion feature and relative fair value of warrants relating to issuance of convertible notes

 

For the year ended December 31, 2020, the item represented the full amortization of beneficial conversion feature of $3.4 million and amortization of relative fair value of warrants of $3.06 million relating to the convertible notes which was exercised in May 2020.

 

For the year ended December 31, 2019, no such expenses incurred.

 

Net loss from discontinued operations

 

During the year ended December 31, 2020, the net loss from discontinued operations was comprised of a net loss of $545,620 from discontinued operations of used luxurious car leasing business and a loss of $3,005,638 from disposal of the discontinued operations of used luxurious car leasing business.

 

During the year ended December 31, 2019, the net loss from discontinued operations was comprised of a net loss of $1,722,158 from discontinued operations of used luxurious car leasing business.

 

For details of discontinued operations, please refer to Note 3 to consolidated financial statements.

 

36

 

 

Net loss

 

As a result of the foregoing, net loss for the year ended December 31, 2020 was $5,951,613, representing a decrease of $990,909 from net loss of $6,942,522 for the year ended December 31, 2019.

 

Cash Flows and Capital Resources

 

We have financed our operations primarily through shareholder contributions, cash flow from operations, borrowings from third parties and related parties, and equity financing through public offerings of our securities.

 

For the year ended December 31, 2020, the Company raised from equity financing transactions as follows:

 

In March 2020, the Company issued an aggregate of 15,000,000 shares of its common stock, and unsecured senior convertible promissory notes (“Notes”) in the aggregate principal amount of $30,000,000 accompanied by warrants to purchase 20,000,000 shares of Common Stock issuable upon conversion of the Notes at an exercise price of $1.80. In April 2020, the Holders elected to convert the Notes at a conversion price of $1.50 per share and also exercise the Warrants at an exercise price of $1.80 per share. The Company raised an aggregation of $79.5 million from the equity financing transactions.

 

On September 1, 2020, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell an aggregate of 2,000,000 shares of its common stock, at a per share purchase price of $2.50. The Company received proceeds of $5,000,000 in November 2020.

 

On November 20, 2020, the Company and certain investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors an aggregate of 8,000,000 shares of common stock in a registered direct offering, for gross proceeds of approximately $20 million. The purchase price for each share of Common Stock is $2.50. The Company received proceeds of $20,000,000 in November 2020.

 

During July 2020 through August 2020, the holders of warrants issued in direct offerings closed on April 11, 2019 (“April Offer”) and May 20, 2019 (“May Offer”) elected to exercise 150,000 shares and 17,978 shares of warrants at an exercise price of $2.2 and $1.32, respectively. The Company received proceeds of $353,731 through escrow account.

 

The Company expects to use the proceeds from this equity financing as working capital to expand its commodity trading business.

 

37

 

 

Statement of Cash Flows

 

The following table sets forth a summary of our cash flows. For the years ended December 31, 2020 and 2019, respectively:

 

   For the Years Ended
December 31,
 
   2020   2019 
Net Cash Provided by (Used in) Operating Activities  $29,856,033   $(2,165,632)
Net Cash Used in Investing Activities   (132,582,547)   (8,873,916)
Net Cash Provided by Financing Activities   106,148,679    11,829,704 
Effect of exchange rate changes on cash and cash equivalents   (2,499,428)   172,411 
Net increase (decrease) in cash and cash equivalents   922,737    962,567 
Cash at beginning of period   1,777,276    1,484,116 
Cash at end of period  $2,700,013   $2,446,683 
Less: cash from discontinued operations   -      (669,407)
 Cash from continuing operations  $2,700,013   $1,777,276 

 

Operating Activities

 

During the year ended December 31, 2020, we had a cash inflow from operating activities of $29,856,033, a change of $32,021,665 from a cash outflow of $2,165,632 for the same period ended December 31, 2019. We incurred a net loss for the year ended December 31, 2020 of $5,951,613, a decrease of $990,909 from the year ended December 31, 2019, during which we recorded a net loss of $6,942,522. For the years ended December 31, 2020 and 2019, we had a cash outflow of $125,133 and a cash inflow of $638,249 from operating activities from discontinued operations, and we incurred net loss of $3,551,258 and $1,722,158 from discontinued operations, respectively.

 

In addition to the change in profitability, the change in net cash provided by/(used in) operating activities from continuing operations was the result of several factors, including:

 

  Adjustments of $3,400,000 in amortization of beneficial conversion feature relating to issuance of convertible notes and $3,060,000 in amortization of relative fair value of warrants relating to issuance of convertible notes;

 

  An increase of $13,317,930 in changes of prepayments for the year ended December 31, 2020 because we received commodity products from suppliers and we had no prepayments as of December 31, 2020;
     
  An increase of $6,692,708 and $5,321,874 in changes of advance from customers and due to related parties for the year ended December 31, 2020 because we collected service fees from customers before we completed loan recommendation services.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the year ended December 31, 2020 was $132,582,547, which was primarily attributable to cash payment of $82,227,328 in exchange for 100% equity interest in Qianhai Biayu, loans of $47,114,208 and $173,673,614 made to related parties and third parties, against collections of loans of $170,432,603 from third parties.

 

Net cash used in investing activities for the year ended December 31, 2019 was $8,873,916, which was primarily attributable to investments in financial products of $1,000,000, loans made to related parties and third parties of $2,865,070 and $576,647, respectively, and cash of $4,432,199 used in investing activities from discontinued operations.  

 

Net Cash Provided by Financing Activities

 

During the year ended December 31, 2020, the cash provided by financing activities was mainly attributable to borrowings from related parties of $1,613,696, cash raised of $18,500,000 from certain private placements by issuance of 19,000,000 shares of common stocks, cash raised of $20,000,000 from a registered direct offering by issuance of 8,000,000 shares of common stocks, cash raised of $66,000,000 from issuance of unsecured senior convertible promissory notes in the aggregate principal amount of $30,000,000 and exercise of accompanied warrants to purchase 20,000,000 shares of common stock at an exercise price of $1.80.

 

During the year ended December 31, 2019, the cash provided by financing activities was mainly attributable cash raised in registered direct offerings of $4,653,440, cash raised in private placement of $589,750 and stock subscription advance of $1,600,000 received from shareholders, capital injection of $1,417,736 from shareholders, and cash of $3,038,151 provided by financing activities from discontinued operations.  

 

38

 

 

Off-balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of December 31, 2020.

 

Contractual Obligations

 

As of December 31, 2020, the Company had one lease arrangement with an unrelated third party with a monthly rental fee of approximately $7,200. The lease term was within 12 months, which will be due in August 2021. As of the date of this report, the Company cannot reasonably assess whether it will renew the lease term. The lease commitment was as following table:

 

   Total   Less than
1 year
   1-2 years   Thereafter 
Contractual obligations:                    
Operating lease (1)  $57,954   $57,954   $-   $- 
Total  $57,954   $57,954   $-   $- 

 

Critical Accounting Policies

 

Please refer to Note 2 of the Consolidated Financial Statements included in this Form 10-K for details of our critical accounting policies.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

Our Consolidated Financial Statements and Notes thereto and the report of BF Borgers CPA PC and Friedman LLP, our independent registered public accounting firms for the fiscal years ended December 31, 2020 and 2019, respectively, are set forth on pages F-1 through F-36 of this Report.

 

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2020 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Specifically, on March 26, 2021, the Audit Committee (the “Audit Committee”) of the Board of Directors of TD Holdings, Inc. (the “Company”), after discussion with the Company’s management, concluded that the Company’s previously issued financial statements contained in the Company’s Quarterly Reports (“2020 Quarterly Reports”) on Form 10-Q for the periods ended March 31, 2020, June 30, 2020, and September 30, 2020 (collectively “Non-Reliance Periods”), originally filed on June 26, 2020, August 14, 2020, and November 13, 2020, respectively, should no longer be relied upon.

 

The Company intends to file restatements of its financial statements for the Non-Reliance Periods to amend and restate financial statements and other financial information by June 4, 2021 or as soon as practicable thereafter.

  

39

 

 

Inherent Limitations over Internal Controls

 

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:

 

  i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
     
  ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
     
  iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management, including the Company’s principal executive officer and principal financial officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management, including our Chief Executive Officer and our Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as of December 31, 2020. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control-Integrated Framework. Because of the material weaknesses described in the following paragraphs, management believes that, as of December 31, 2020, our internal control over financial reporting was not effective based on those criteria.

 

A “material weakness” is defined under the SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.

 

40

 

 

As a result of its review, management concluded that we had material weaknesses in our internal control over financial reporting process consisting of the following:

 

Certain personnel primarily responsible for the preparation of our financial statements require additional requisite levels of knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements. The management thought that in light of the inexperience of our accounting staff with respect to the requirements of U.S. GAAP-based reporting and SEC rules and regulations, we did not maintain effective controls and did not implement adequate and proper supervisory review to ensure that significant internal control deficiencies can be detected or prevented.

 

Management’s assessment of the control deficiency over accounting and finance personnel as of December 31, 2020 including:

 

  There is a lack of formal procedures with handling different types of revenue recognition.
     
 

Company management conducted extensive transactions with related parties without adequate control by the Audit Committee and the Board of Directors.

     
 

There is a lack of procedures and documentation for dealing with related parties.

     
  There was no accountant with adequate U.S. GAAP knowledge working in the Company’s Accounting Department. Part of the Company’s U.S. GAAP reporting function was outsourced to external consultant;
     
  The Company has insufficient written policies and procedures for accounting and financial reporting, which led to inadequate financial statement closing process.

 

Based on the above factors, management concluded that the control deficiency over accounting and finance personnel was the material weaknesses as of December 31, 2020, as our accounting staff continues to lack sufficient U.S. GAAP experience and requires further substantial training.

 

Management Plan to Remediate Material Weaknesses

 

We expect to implement the following measures in 2021 to continue to remediate the material weaknesses identified:

 

  To establish additional written policies and procedures for accounting and financial reporting to improve the Company’s financial statement closing process.

 

  To appoint a monitor to oversee corporate governance and legal compliance matters. The monitor should be appointed for a period of at least 18 months, and should report directly to the Audit Committee.

 

  To retain one or two additional independent, bilingual Chinese and English-speaking directors. They should assist and augment the efforts of the Company’s current independent directors.

 

  To establish an internal audit function to assist the Audit Committee with compliance requirements and improvement of overall internal control.

 

  To establish and maintain (i) a control process for the accounting implication assessment of all significant payments, particularly those that are non-routine; (ii) a control process for maintaining all supporting documentation regarding all non-routine transactions.

 

  To continue providing applicable training for our financial and accounting staff in the Company’s Accounting Department to enhance their understanding of U.S. GAAP and internal control over financial reporting.

 

  To continue providing applicable training for the Company’s accounting manager to improve the Company’s internal review process.

 

41

 

 

Changes in Internal Control over Financial Reporting

 

There were no changes (excluding corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting during the fourth quarter of 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

42

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Executive Officers, Key Employees and Directors

 

The following table sets forth certain information concerning our executive officers, key employees, and directors:

 

Name   Age   Position
Renmei Ouyang   53   Chief Executive Officer, President and Chairwoman of the Board
Wei Sun   37   Chief Financial Officer, Director
Qun Xie   57   Chief Strategy Officer and Director
Xiangjun Wang   48   Director
Heung Ming (Henry) Wong   51   Director
Kecen Liu   28   Director
Weicheng Pan   45   Director
Donghong Xiong   53   Director

 

The biographies of our current directors and officers are set forth below.

 

Ms. Renmei Ouyang, has served as the Chief Executive Officer (“CEO”) of the Company since January 9, 2020. From October 17, 2019 to January 9, 2020, Ms. Ouyang has served as the Chief operating Officer of the Company. Ms. Ouyang has served as the chairwoman of Tongdaw Group from 2011 to September 2019. She was the founder of Tongdaw E-Commerce in 2011. Ms. Ouyang was the founder of Zhonghui Daoming Group in 2006. She has served as the foreign exchange trading manager of CITIC Group, the deputy general manager in investment banking department of Beijing Securities, and the managing director of international department of First Venture Securities. She holds the Bachelor’s Degree of Statistics from Renmin University of China and the Master’s Degree of International Finance from Peking University.

 

Ms. Wei Sun, has served as the Company’s Chief Financial Officer (“CFO”) since July 28, 2020 and as a member of the Board since May 14, 2020. Ms. Sun has been serving as the executive director of China National Culture Group Limited in Hong Kong since 2014. She served as the financial accounting manager of China Highways Holdings Limited in Hong Kong from 2011 to 2014. She obtained her Bachelor’s Degree in English Education from Shanghai International Studies University and her Master’s Degree in Finance from Clark University in 2009.

 

Mr. Qun Xie, has served as the Chief Strategy Officer (“CSO”) of the Company since January 9, 2020. Mr. Xie served as the executive partner of Shanghai Zhenhe Investment Management Center from 2014 to 2019. From 2003 to 2013, he served as the chairman and CEO of Beijing Hualu Management Consulting Company. Mr. Xie served as the CEO of Shandong Sanlian Group from 1991 to 2002. He holds a Bachelor’s Degree from Anhui University of Technology in China.

 

Mr. Xianjun Wang, has served as a member of the Board since December 14, 2020 and as a partner and practicing lawyer of Beijing Junzejun (Shenzhen) Law Firm since 2010. From 2008 to 2010, he practiced as a lawyer of Guangdong Shenpeng Law Firm. Mr. Wang served as the managing director of Shenzhen Investment Banking Department of Pacific Securities Co., Ltd. from 2006 to 2008. He served as the deputy general manager of Ruigu Technology (Shenzhen) Co., Ltd. from 2003 to 2006. From 1999 to 2003, Mr. Wang worked in the supply chain management department and legal department of Huawei Technologies Co., Ltd. He is a licensed attorney and also a Certified Public Accountant in China. Mr. Wang obtained his Bachelor’s Degree in Theory of Mechanical System and Applied Mechanics from Lanzhou University and his Master’s Degree in Solid Mechanics from Lanzhou University in 1999.

 

43

 

 

Mr. Henry Heung Ming Wong, was the independent non-executive director of Shifang Holding Limited (stock code: 1831) and Raffles Interiors Limited (stock code: 1376) since 8 November 2010 and 30 March 2020 respectively. Both companies listed on the Hong Kong Main Board of the Stock Exchange. Mr. Wong has more than 27 years of experience in finance, accounting, internal controls and corporate governance in the United States, Singapore, China and Hong Kong. Prior to that, Mr. Wong was the CFO of a Nasdaq listed Company, Meten EdtechX Group Ltd (stock ticker: METX) from June 2020 to March 2021. Mr. Wong was also the CFO and senior finance executives of various company including being the CFO of the Frontier Services Group Limited, a company listed on the Main Board of the Stock Exchange (stock code: 0500) and the CFO of Beijing Oriental Yuhong Waterproof Technology Co., Ltd., the leading waterproof materials manufacturer in China and a company listed on the Shenzhen Stock Exchange (stock code: 2271). Mr. Wong began his career in an international accounting firm and moved along in audit fields by taking some senior positions both in internal and external audits including being a senior manager and a manager in PricewaterhouseCoopers, Beijing office and Deloitte Touche Tohmatsu, Hong Kong, respectively. Mr. Wong graduated from City University of Hong Kong in 1993 with a bachelor’s degree in Accountancy and also obtained a master’s degree in Electronic Commerce from The Open University of Hong Kong in 2003. He is a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants.

 

Ms. Kecen Liu, has served as a member of the Board since February 12, 2018. She has served as a Program Coordinator at United Nations ICTY from June, 2016 to February 2017. Ms. Liu has served as Marketing Manager at Jiuding Capital from June, 2015 to October, 2015. She has also served as Brand Manager at Jumei.com from November, 2013 to October, 2014. Form October 2012 to June 2014, she served as a Campus Embassador at Hong Kong XINHUA Education International Group. Ms. Liu obtained a Master’s degree in International Business from Southwestern University of Finance and Economics in 2017.

 

Mr. Weicheng Pan, has served as a member of the Board since October 17, 2019. Mr. Pan is the founder of Cheng Ji Group of Companies and Jewish Mindset Business School in China, and Zhanji Business Channel Sdn Bhd in Malaysia. He holds an Associate’s Degree from Wuhan Science and Technology University.

 

Mr. Donghong Xiong, has served as the managing director of Synergetic Innovation Fund Management Co., LTD. since 2014. He served as the M&A general manager at Shanghai Search Media Group from 2007 to 2013. Mr Xiong holds a Bachelor’s degree in philosophy from Sun Yat-Sen University and also received his MBA and PhD in Scientific Philosophy from Sun Yat-Sen University.

 

Director Independence

 

Our Board reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, it is determined that Kecen Liu, Henry Heung Ming Wong, Weicheng Pan, Xiangjun Wang and Donghong Xiong are “independent directors” as defined by NASDAQ.

 

Committees of the Board of Directors

 

We have established an audit committee, a compensation committee and a nominating and governance committee. Each of the committees of the Board has the composition and responsibilities described below.

 

Audit Committee

 

Messrs. Henry Wong, Xiangjun Wang and Kecen Liu are members of our Audit Committee, where Mr. Wong serves as the chairman. All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.

 

We have adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee shall perform several functions, including:

 

  evaluates the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
     
  approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to be provided by the independent auditor;

 

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  monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
     
  reviews the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
     
  oversees all aspects of our systems of internal accounting control and corporate governance functions on behalf of the Board;
     
  reviews and approves in advance any proposed related-party transactions and reports to the full Board on any approved transactions; and
     
  provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley Act implementation, and makes recommendations to the Board regarding corporate governance issues and policy decisions.

 

It is determined that Mr. Wong possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations of the SEC.

 

Compensation Committee

 

Messrs. Henry Wong, Xiangjun Wang and Kecen Liu are members of our Compensation Committee where Ms. Liu serves as the chairwoman. All members of our Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ. We have adopted a charter for the Compensation Committee. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and making recommendations to the Board regarding the salaries and other compensation of our executive officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices.

 

Nominating and Governance Committee

 

Messrs. Henry Wong, Xiangjun Wang and Kecen Liu are the members of our Nominating and Governance Committee where Mr. Wang serves as the chairman. All members of our Nominating and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ. Our Board adopted and approved a charter for the Nominating and Governance Committee. In accordance with the Nominating and Governance Committee’s Charter, the Nominating and Governance Committee is responsible to identify and propose new potential director nominees to the board of directors for consideration and review our corporate governance policies.

 

Risk Committee

 

Messrs. Henry Wong, Xiangjun Wang and Kecen Liu are the members of our Risk Committee where Mr. Wong shall serve as the chairman. All members of our Risk Committee are qualified as independent under the current definition promulgated by NASDAQ. On September 11, 2019, the Board adopted a resolution formally designating its Audit Committee to act concomitantly as a Risk Committee. The Risk Committee’s duties shall specifically include: Monitoring the Company and employee compliance with all risk assessment and reporting procedures; Identifying material risks relating to the Company’s internal controls, as well as relevant considerations relating to the Company’s disclosures of these risks; and Monitoring annual training sessions for the Board covering the topics including corporate governance, risk assessment; and public company reporting.

 

Code of Conduct and Ethics

 

We have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and NASDAQ rules.

 

Section 16 Compliance

 

Section 16(a) of the Exchange Act, requires our directors, officers and persons who own more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other of our equity securities. To our knowledge, based solely on review of the copies of such reports furnished to us, Section 16(a) filings applicable to officers, directors and greater than 10% shareholders were not timely made during fiscal year 2020.

 

45

 

 

Family Relationships

 

There are no family relationships by between or among the members of the Board or other executive officers of the Company.

 

Legal Proceedings Involving Officers and Directors

 

None.

 

Item 11. Executive Compensation.

 

The following table provides disclosure concerning all compensation paid for services to GLG in all capacities for our fiscal years ended 2020 and 2019 provided by (i) each person serving as our principal executive officer (“PEO”), (ii) each person serving as our principal financial officer (“PFO”) and (iii) our two most highly compensated executive officers other than our PEO and PFO whose total compensation exceeded $100,000 (collectively with the PEO, referred to as the “named executive officers” in this Executive Compensation section).

 

Summary Compensation Table 

 

Name and Principal Position  Fiscal
Year
   Salary
($)
   Bonus
($)
   Stock
Awards
($)
   Option
Awards
($)
   Other
Compensation
($)
   Total
($)
 
Renmei Ouyang (1)   2020    600,000    -    -    -    -    600,000 
(CEO, Former COO)   2019    50,000    -    -    -    -    50,000 
                                    
Wei Sun (2)   2020    50,000    -    -    -    -    50,000 
(CFO)   2019    -    -    -    -    -    - 
                                    
Qun Xie (3)   2020    300,000    -    -    -    -    300,000 
(CSO)   2019    -    -    -    -    -    - 
                                    
Jin Ding (4)   2020    -    -    -    -    -    - 
(Former CPO)   2019    40,000    -    -    -    -    40,000 
                                    
Yang An (5)   2020    -    -    -    -    -    - 
(Former CFO)   2019    30,000    -    -    -    -    30,000 
                                    
Jiaxi Gao (6)   2020    -    -    -    -    -    - 
(Former CEO)   2019    40,000    -    -    -    -    40,000 

 

 

(1) Ms. Renmei Ouyang was appointed as the CEO of the Company on January 9, 2020. Ms. Ouyang is entitled to an annual base salary of $600,000 pursuant to the employment agreement she has with the Company.

(2) Ms. Wei Sun was appointed as the CFO of the Company on July 28, 2020. Ms. Sun is entitled to an annual base salary of $50,000 pursuant to the employment agreement she has with the Company.

(3) Mr. Qun Xie was appointed as the CSO of the Company on January 9, 2020. Mr. Xie is entitled to an annual base salary of $300,000 pursuant to the employment agreement he has with the Company.

(4) Mr. Jin Ding was appointed as the CPO of the Company on April 28, 2018. Mr. Jin Ding was entitled to an annual base salary of $60,000 pursuant to the employment agreement he has with the Company. Mr. Ding resigned on October 26, 2020.

(5) Ms. Yang An was appointed as the CFO of the Company on June 14, 2019. Ms. An is entitled to an annual base salary of $50,000 pursuant to the employment agreement she has with the Company. Ms. An resigned on July 28, 2020.

(6) Mr. Jiaxi Gao was appointed as the CEO of the Company on November 15, 2018. Mr. Gao was entitled to an annual base salary of $100,000 pursuant to the employment agreement he had with the Company. Mr. Gao resigned on January 9, 2020. 

 

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Grants of Plan Based Awards in the Fiscal Year Ended December 31, 2019

 

We currently have a 2019 equity incentive plan pursuant to which 1,290,000 shares were authorized. During the fiscal year ended December 31, 2020, no shares of Common Stock were granted to our officers and directors under the plan.

 

Outstanding Equity Awards at Fiscal Year-End

 

None.

 

Director Compensation

 

The following table represents compensation earned by our non-executive directors in 2020.

 

 

Name  Fees
earned in cash
($)
   Stock
awards
($)
   Option
awards
($)
   All other
compensation
($)
   Total
($)  
 
Xiangjun Wang (1)  $-    -    -    -    - 
Kecen Liu (2)  $-    -    -    -    - 
Henry Heung Ming Wong (3)  $-    -    -    -    - 
Weicheng Pan (4)  $-    -    -    -    - 
Donghong Xiong (5)  $-    -    -    -    - 
Jialin Cui (6)*  $-    -    -    -    - 
Siyuan Zhu (7)*  $-    15,000    -    -    15,000 
Jiaxi Gao (8)*  $-    -    -    -    - 

 

 

*Resigned in 2020

 

(1) Mr. Xiangjun Wang was appointed as a director of the Company on December 14, 2020 and shall receive annual compensation at $10,000 per year.

(2) Ms. Kecen Liu was appointed as a director of the Company on February 12, 2018 and shall receive annual compensation at $10,000 per year.

(3) Mr. Henry Wong was appointed as a director of the Company on April 27, 2021 and shall receive annual compensation of 30,000 shares of common stock of the Company per year.

(4) Mr. Weicheng Pan was appointed as a director of the Company on October 17, 2019 and shall receive annual compensation at $60,000 per year.

(5) Mr. Donghong Xiong was appointed as a director of the Company on February 8, 2021 and shall receive annual compensation of 10,000 shares of common stock of the Company per year.

(6) Mr. Jialun Cui was appointed as a director of the Company on August 31, 2018 and received annual compensation at $20,000 per year. Mr. Cui resigned on December 14, 2020.

(7) Ms. Siyuan Zhu was appointed as a director of the Company on May 6, 2019 and received annual compensation at $10,000 per year. Ms. Zhu resigned on April 27, 2021.

(8) Mr. Jiaxi Gao was appointed as a director of the Company on November 15, 2018 and did not receive any salary. Mr. Gao resigned on May 14, 2020.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth information regarding the beneficial ownership of our common stock as of June 4, 2021 by our officers, directors and 5% or greater beneficial owners of common stock. There is no other person or group of affiliated persons, known by us to beneficially own more than 5% of our common stock.

 

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Unless otherwise indicated, the person identified in this table has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to applicable community property laws.

 

Name and address of Beneficial Owner (1)  Number of
Shares of
Common
Stock
Beneficially
Owned
   Percent of
Class
Beneficially
Owned
 
5% stockholders:          
Shuxiang Zhang (2)   17,170,000    17.69%
           
Directors and Executive Officers:          
Renmei Ouyang   10,167,275    10.477%
Wei Sun   0     *
Qun Xie   0     *
Weicheng Pan   0     *
Donghong Xiong   0     *
Kecen Liu   160,000     *
Henry Heung Ming Wong   0     *
Xiangjun Wang   50,000     *
All officers and directors as a group (8 persons)   10,377,275    10.69%

 

 

* Less than 1%

 

(1) Unless otherwise indicated the address of the beneficial owners are c/o 25th Floor, Block C, Tairan Building, No. 31 Tairan 8th Road, Futian District, Shenzhen, Guangdong, PRC 518000
(2) Mr. Shuxiang Zhang’s address is Floor 7 Building D, No.28 Chengfu Road, Haidian District, Beijing, China.

 

48

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

1) Nature of relationships with related parties

 

Name   Relationship with the Company

Shenzhen Qianhai Baiyu Supply Chain Co., Ltd.

(“Qianhai Baiyu”)

  Controlled by Mr. Zhiping Chen, the legal representative of Huamucheng, prior to March 31, 2020

Guangzhou Chengji Investment Development Co., Ltd.

(“Guangzhou Chengji”)

  Controlled by Mr. Weicheng Pan, who is an independent director of the Company.

Yunfeihu International E-commerce Group Co., Ltd

(“Yunfeihu”)

  An affiliate of the Company, over which an immediate family member of Chief Executive Officer owns equity interest and plays a role of director and senior management

Shenzhen Tongdow International Trade Co., Ltd.

(“TD International Trade”)

  Controlled by an immediate family member of Chief Executive Officer of the Company
Beijing Tongdow E-commerce Co., Ltd. (“Beijing TD”)   Wholly owned by Tongdow E-commerce Group Co., Ltd. which is controlled by an immediate family member of Chief Executive Officer of the Company

Shanghai Tongdow Supply Chain Management Co., Ltd.

(“Shanghai TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company

Guangdong Tongdow Xinyi Cable New Material Co., Ltd.

(“Guangdong TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company

Yangzhou Tongdow E-commerce Co., Ltd.

(“Yangzhou TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company

Tongdow (Zhejiang) Supply Chain Management Co., Ltd.

(“Zhejiang TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company
Shenzhen Meifu Capital Co., Ltd. (“Shenzhen Meifu”)   Controlled by Chief Executive Officer of the Company
Shenzhen Tiantian Haodian Technology Co., Ltd. (“TTHD”)   Wholly owned by Shenzhen Meifu
Guotao Deng   Legal representative of Huamucheng before December 31, 2019

 

2) Balances with related parties

 

As of December 31, 2020 and 2019, the balances with related parties were as follows:

 

   December 31,
2020
   December 31,
2019*
 
Qianhai Baiyu (i)  $-   $2,840,728 
TD International Trade (ii)   4,592,698    - 
Yangzhou TD (iii)   3,041,180    - 
Zhejiang TD (iii)   8,734,024    - 
Yunfeihu (iv)   19,830,214    - 
TTHD (v)   19,640,929    - 
Total due from related parties  $55,839,045   $2,840,728 

 

*The balance due from related parties as of December 31, 2019 have been reclassified to conform to the consolidated balance sheets as of December 31, 2020, primarily for the effects of discontinued operations.

 

  (i)

The balance due from Qianhai Baiyu represented a loan principal and interest due from the related party. The Company charged the related party interest rates 10% per annum.

 

From December 2, 2019 to December 31, 2019, the Company lent loans aggregating $2,839,533 to Qianhai Baiyu, which was controlled by Mr. Zhiping Chen, the legal representative of the Company. The Company charged the related party interest rates 10% per annum. For the year ended December 31, 2019, the Company recognized interest income of $25,537. Principal and interest are repaid on maturity of the loan.

 

On March 31, 2020, Mr. Zhiping Chen transferred his controlling equity interest to an unrelated third party and Qianhai Baiyu was not a related party of the Company. On October 26, 2020, the Company acquired 100% equity interest in Qianhai Baiyu, and the balance due from Qianhai Baiyu was eliminated on the consolidation level. (Note 5). 

  (ii)

The balance due from TD International Trade consisted of loan receivable of $3,053,914, interest receivable of $8,000 and prepayments of $1,530,784 for commodity products.

 

In December 2020, the Company provided loans of approximately $2.9 million to TD International Trade with a loan term of one year. Both loan principal and internet were due in December 2021, with an interest rate of 10.95% per annum. The Company recognized interest receivable of $8,000 as of December 31, 2020. 

  (iii)

The balance due from Yangzhou TD and Zhejiang TD represented prepayments for commodity products. 

  (iv)

The balance due from Yunfeihu represented loans provided to the related party. Both the principal and interest will be due in August 2021, with an interest rate of 10.95% per annum. The Company recognized interest receivable of $195,000 as of December 31, 2020. 

  (v) The balance due from TTHD represented loans provided to the related party. Both the principal and interest will be due in December 2021, with an interest rate of 10.95% per annum. The Company recognized interest receivable of $50,000 as of December 31, 2020.

 

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Due to related parties

 

   December 31,
2020
   December 31,
2019*
 
Guangzhou Chengji (1)  $1,878,511   $164,897 
Yunfeihu (2)   4,235,680    - 
Guangdong TD (2)   612,313    - 
Shenzhen Meifu (2)   317,637    - 
Beijing TD   300,992      
Other related parties   888    - 
Guotao Deng (3)   -    1,435 
Total due to related parties  $7,346,021   $166,332 

 

 

*The balance due to related parties as of December 31, 2019 have been reclassified to conform to the consolidated balance sheets as of December 31, 2020, primarily for the effects of discontinued operations.

 

(1)

The balance due to Guangzhou Chengji represents loan principal and interest due to the related parties. For the year ended December 31, 2020 and 2019, the Company borrowed loans of $1,461,030 and $166,309, respectively, from Guangzhou Chengji. The loans bear annual interest rate of 8% and maturity date of December 4, 2020. For the years ended December 31, 2020 and 2019, the Company accrued interest expenses of $104,522 and $nil, respectively.

(2) The balance due to Yunfeihu, Guangdong TD, Shenzhen Meifu and Beijing TD represents the advance from these four related parties for supply chain management services.
(3)

The balances due to Guotao Deng represent the operating expenses paid by the related parties on behalf of the Company. The balance is payable on demand and interest free.

 

Mr. Guotao Deng was a legal representative before December 31, 2019, thus he was not a related party of the Company from January 1, 2020.

 

3) Transactions with related parties

 

Revenues generated from related parties

 

For the years ended December 31, 2020 and 2019, the Company generated revenues from below related party customers:

 

   For the Years Ended
December 31,
 
   2020   2019 
Revenue from sales of commodity products        
Yunfeihu  $10,515,531   $- 
Yangzhou TD   3,994,689    - 
Shanghai TD   1,024,546    - 
TD International Trade   709,011    - 
    16,243,777    - 
           
Revenue from supply chain management services          
Yunfeihu   1,443,667    - 
TD International Trade   423,722    - 
Guangdong TD   273,451    - 
    2,140,840    - 
Total revenues generated from related parties  $18,384,617   $- 

 

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Purchases from a related party

 

For the years ended December 31, 2020 and 2019, the Company purchased commodity products from below related party vendors:

 

   For the Years Ended
December 31,
 
   2020   2019 
Purchase of commodity products        
Yangzhou TD  $12,612,921   $- 
Yunfeihu   3,938,746    - 
TD International Trade   192,427    - 
Qianhai Baiyu   -    100,180 
   $16,744,094   $100,180 

 

In connection with sales of commodity products, the Company recorded cost of revenues with related parties of $16,744,094 and $100,180, respectively, for the years ended December 31, 2020 and 2019,

 

In connection with the supply chain management services provided customers, Qianhai Baiyu provided related services to support the Company’s loan recommendation services provided to customers and distribution services provided to suppliers. For the year ended December 31, 2020 and 2019, the Company recorded cost of revenue of $nil and $489,231 associated with the supply chain management services related to the support from Qianhai Baiyu.

 

Item 14. Principal Accountant Fees and Services.

 

The following table shows the fees that were billed for audit and other services during the fiscal years ended December 31, 2020 and 2019:

 

   For the Fiscal Years ended
December 31,
 
   2020   2019 
Audit Fees (1)  $208,500   $195,000 
Audit-related Fees (2)   -    - 
Tax Fees (3)   -    - 
All Other Fees (4)   -    - 
Total  $208,500   $195,000 

 

 

(1) Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
(2) Audit-Related Fees - This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.”
(3) Tax Fees - This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
(4) All Other Fees - This category consists of fees for other miscellaneous items.

 

The Audit Committee of our board of directors has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit, tax and non-audit services provided by BF Borgers CPA PC in 2020 Friedman LLP in 2019. Consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed services and fee estimates for these services. One or more independent directors serving on the Audit Committee may be delegated by the full Audit Committee to pre-approve any audit and non-audit services. Any such delegation shall be presented to the full Audit Committee at its next scheduled meeting. Pursuant to these procedures, the Audit Committee approved the foregoing audit services provided by BF Borgers CPA PC and Friedman LLP.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(1) Financial Statements

 

Financial Statements and Report of Independent Registered Public Accounting Firms are set forth on pages F-1 through F-36 of this report.

 

(2) Financial Statement Schedules

 

Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.

 

(3) Exhibits

 

Exhibit   Description
3.1   Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the draft registration statement on Form DRS filed on February 14, 2013
3.2   Bylaws of Registrant, incorporated herein by reference to Exhibit 3.2 of the draft registration statement on Form DRS filed on February 14, 2013
3.3   Articles of Association of Wujiang Luxiang Rural Microcredit Co. Ltd., incorporated herein by reference to Exhibit 3.3 of the registration statement on Form S-1/A filed on June 27, 2013
3.4   Certificate of Approval of Wujiang Luxiang Rural Microcredit Co. Ltd., incorporated herein by reference to Exhibit 3.4 of the registration statement on Form S-1 filed on June 7, 2013
3.5   Certificate of Amendment of the Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.5 of the registration statement on Form S-1/A filed on July 16, 2013
3.6   Certificate of Amendment to the Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on January 16, 2019
3.7   Certificate of Amendment to the Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on June 7, 2019
3.8   Certificate of Amendment to the Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on March 12, 2020
3.9   Certificate of Amendment to Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on April 21, 2021
10.1   Amended and Restated Employment Agreement dated January 9, 2020 by and between Registrant and Renmei Ouyang, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 10, 2020
10.2   Employment Agreement dated January 9, 2020 by and between Registrant and Qun Xie, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on January 10, 2020
10.3   Director Offer Letter dated January 9, 2020 by and between Registrant and Qun Xie, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on January 10, 2020
10.4   Form of Securities Purchase Agreement, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 22, 2020
10.5   Form of Note Securities Purchase Agreement, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on January 22, 2020
10.6   Unofficial Translation of Warehousing Agreement dated January 22, 2020, by and between Huamucheng and Foshan Nanchu Storage Management Co., Ltd., incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on January 22, 2020
10.7   Unofficial Translation of Purchase Agreement dated January 22, 2020, by and between Huamucheng and Shenzhen Qianhai Baiyu Supply Chain Co., Ltd., incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on January 22, 2020
10.8   Unofficial Translation of Sales Agreement dated January 22, 2020, by and between Huamucheng and Yunfeihu Cross-border E-Commerce Co., Ltd., incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed on January 22, 2020
10.9   Director Offer Letter dated May 14, 2020 by and between Registrant and Wei Sun, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on May 15, 2020

 

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10.10   Unofficial English Translation of the VIE Termination Agreement dated June 25, 2020, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 30, 2020
10.11   Unofficial English Translation of the Acquisition Agreement dated June 25, 2020, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 30, 2020
10.12   Employment Agreement, dated July 28, 2020 by and between the Company and Wei Sun, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on July 28, 2020
10.13   Share Purchase Agreement dated August 28, 2020 by and among the Company, Vision Loyal Limited, HC High Summit Limited and HC High Summit Holding Limited, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on August 28, 2020
10.14   Share Purchase Agreement by and entered into among Shenzhen Huamucheng Trading Co., Ltd., Shenzhen Xinsuniao Technology Co., Ltd. and Shenzhen Qianhai Baiyu Supply Chain Co., Ltd., dated October 26, 2020, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on October 29, 2020
10.15   Form of Securities Purchase Agreement by and among TD Holdings, Inc. and certain investors , incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on November 24, 2020
10.16   Director Offer Letter, dated December 14, 2020, 2020 by and between the Company and Xiangjun Wang, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on December 16, 2020
10.17   Securities Purchase Agreement between the Company and Streeterville Capital, LLC, dated as of January 6, 2021, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 8, 2021
10.18   Convertible Promissory Note dated January 6, 2021, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 8, 2021
10.19   Form of Securities Purchase Agreement, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 12, 2021
10.20   Common Stock Purchase Agreement between the Company and White Lion Capital, LLC dated as of January 19, 2021, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 20, 2021
10.21   Placement Agency Agreement between the Company and Univest Securities, LLC dated as of January 6, 2021, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on January 20, 2021
10.22   Escrow Agreement by and among the Company, Univest Securities, LLC, White Lion Capital, LLC, and Wilmington Trust, National Association dated as of January 19, 2021, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on January 20, 2021
10.23   Security purchase Agreement between TD Holdings, Inc. and Streeterville Capital, LLC, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 9, 2021
10.24   Convertible Promissory Note dated March 4, 2021, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on March 9, 2021
10.25   Form of Exercise Agreement between TD Holdings, Inc. and the Holder, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 10, 2021
21.1*   Subsidiaries of Registrant
23.1*   Consent of BF Borgers CPA PC
31.1*   Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302
31.2*   Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302
32.1*   Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2*   Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS *   XBRL Instance Document
101.SCH *   XBRL Taxonomy Extension Schema Document
101.CAL *   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *   XBRL Taxonomy Extension Label Linkbase Document XBRL
101.PRE *   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

* Filed herewith.

 

53

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  TD HOLDINGS, INC.
     
Date: June 4, 2021 By: /s/ Renmei Ouyang
  Name: Renmei Ouyang
  Title:

Chief Executive Officer and
Chairwoman of the Board

(Principal Executive Officer)

     
  By: /s/ Wei Sun
  Name: Wei Sun
  Title: Chief Financial Officer and Director
(Principal Financial and Accounting Officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Renmei Ouyang   Chief Executive Officer and Chairwoman of the Board   June 4, 2021
Renmei Ouyang   (Principal Executive Officer)    
         
/s/ Wei Sun   Chief Financial Officer and Director   June 4, 2021
Wei Sun   (Principal Financial Officer and
Principal Accounting Officer)
   
         
/s/ Qun Xie   Chief Strategy Officer and Director   June 4, 2021
Qun Xie        
         
/s/ Xiangjun Wang   Director   June 4, 2021
Xiangjun Wang        
         

/s/ Henry Heung Ming Wong

 

Director

  June 4, 2021
Henry Heung Ming Wong        
         
/s/ Kecen Liu   Director   June 4, 2021
Kecen Liu        
         
/s/ Weicheng Pan   Director   June 4, 2021
Weicheng Pan        
         
/s/ Donghong Xiong   Director   June 4, 2021
Donghong Xiong        

 

54

 

 

TD HOLDINGS, INC.

(FORMERLY BAT GROUP, INC.)

  

INDEX TO FINANCIAL STATEMENTS

  

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets at December 31, 2020 and 2019 F-5
   
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2020 and 2019 F-6
   
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2020 and 2019 F-7
   
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-8
   
Notes to the Consolidated Financial Statements F-9 - F-36

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the shareholders and the board of directors of TD Holdings, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of TD Holdings, Inc. (the “Company”) as of December 31, 2020, the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows, for the year ended December 31, 2020, 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, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

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.

 

Emphasis of Matters

 

Related party transactions

 

The Company has significant transactions and balances with related parties, including entities controlled by the immediate family member of the Company’s Chief Executive Officer, which are described in Note 12   to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis, as the requisite conditions of competitive, free market dealings may not exist.

 

Disposition of used luxurious car leasing business

 

As disclosed in Note 3   to the financial statements, the Company completed the disposition of its used luxurious car leasing business during the year ended December 31, 2020. The disposal loss was reported in the financial statements.

 

Critical Audit Matters

 

The critical audit matters communicated below 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) related to accounts or disclosures that were material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

F-2

 

 

Valuation of Loans Receivable

 

As described in Note 2 to the financial statements, the Company monitors all loans receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. As disclosed in the Note 5   and Note 12 to the financial statements, the balances of loans receivable from third parties and related parties were $18.4 million and $44.1   million, respectively, as of December 31, 2020.

 

The principal considerations for our determination that auditing management’s assessment of impairment of loans receivable is a critical audit matter included the significant judgment made by management when considering factors in assessing collectability of the loan receivables as described above, as well as the likelihood of the occurrence of these factors impacting the collectability. In turn, such management’s assessment led to challenging and subjective auditor judgment in performing our audit procedures.

 

Our audit of valuation of loans receivable included, but was not limited to, the following procedures:

 

understanding of controls relating to management assessment of the loans receivable allowance;

 

reviewing management’s impairment assessment, including its supporting evidence such as subsequent repayments;

 

examining original transaction related documents;

 

confirming balance with the borrowers;

 

searching public information for the operating and financial conditions of the borrowers;

 

evaluating the sufficiency of the Company’s disclosures to loans receivable.

 

Acquisition of Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Baiyu”) – Valuation of Intangible Assets Acquired

 

As described in Note 4 to the financial statements, the Company completed its acquisition of Baiyu for total consideration of $102.6 million during 2020, resulting in approximately $20.1 million in intangible assets and $69.3 million in goodwill being recorded. The intangible assets were mainly comprised of client relationships with definite lives of 6.2 years. Management applied judgment in estimating the fair value of the intangible assets using a discounted cash flow model, which involved the use of significant estimates and assumptions.

 

The principal considerations for our determination that performing procedures relating to the valuation of intangible assets acquired in connection with the acquisition of Baiyu is a critical audit matter were (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of intangible assets acquired due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates.

 

Our audit of the valuation of intangible assets acquired included, but was not limited to, the following procedures:

 

understanding of controls relating to the valuation of intangible assets acquired and controls over the development of the assumptions;

 

reading the purchase agreements, and testing management’s process for estimating the fair value of intangible assets;

 

evaluating the appropriateness of the discounted cash flow models, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions;

 

evaluating whether the assumptions and inputs used were reasonable considering the past performance of the acquiree as well as industry data.

 

evaluating the sufficiency of the Company’s disclosures regarding the intangible assets generated from the acquisition.

 

/s/ B F Borgers CPA PC

 
   
We have served as the Company’s auditor since 2020.  
   
Lakewood, Colorado  
June 4, 2021  

  

F-3

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

 

TD Holdings, Inc. (formerly Bat Group, Inc.)

 

Opinion on the Financial Statements

 

We have audited, before the effects of the adjustments to classify certain amounts due to the discontinued operations classification of HC High Summit Limited (“HC High Summit”), as described in Notes 1 and 3, the accompanying consolidated balance sheet of TD Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2019, and the related consolidated statements of operations and comprehensive income (loss), changes in equity (deficit), and cash flows for the year ended December 31, 2019 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the 2019 consolidated financial statements, before the effects of disposition of and related adjustments to reclassify certain amounts due to the discontinued operations classification of HC High Summit, as described in Notes 1 and 3, present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

We were not engaged to audit, review or apply any procedures to the discontinued operations classification of HC High Summit, as described in Notes 1 and 3, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by BF Borgers CPA PC (“BFB”).

 

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 consolidated 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/ Friedman LLP

 

We served as the Company’s auditor in 2019.

 

New York, New York

May 29, 2020

 

F-4

 

 

TD HOLDINGS CO., LTD.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2020 and 2019

 

   December 31,   December 31, 
   2020   2019 
ASSETS        
Cash  $2,700,013   $1,777,276 
Loans receivable from third parties   18,432,691    576,647 
Due from related parties   55,839,045    2,840,728 
Other current assets   1,310,562    39,960 
Assets of discontinued operations   -    5,743,789 
Total current assets   78,282,311    10,978,400 
           
Investments in equity investees   -    410,000 
Goodwill   69,322,325    - 
Intangible assets, net   19,573,846    - 
Total noncurrent assets   88,896,171    410,000 
           
Total Assets  $167,178,482   $11,388,400 
           
LIABILITIES AND EQUITY          
Current Liabilities          
Bank borrowings  $1,653,247   $- 
Third party loans payable   -    315,729 
Advances from customers   9,214,369    - 
Due to related parties   7,346,021    166,332 
Stock subscription advance   -    1,600,000 
Income tax payable   5,460,631    14,735 
Other current liabilities   3,197,147    200,602 
Acquisition payable   15,384,380    - 
Current liabilities of discontinued operations   -    3,290,140 
Total current liabilities   42,255,795    5,587,538 
           
Deferred tax liabilities   4,893,461    - 
Total noncurrent liabilities   4,893,461    - 
           
Total liabilities   47,149,256    5,587,538 
           
Commitments and Contingencies (Note 13)          
           
Equity          
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 79,131,207 and 11,585,111 shares issued and outstanding at December 31, 2020 and 2019, respectively)   79,131    11,585 
Additional paid-in capital   151,407,253    38,523,170 
Statutory reserve   913,292    - 
Accumulated deficit   (39,255,945)   (32,391,040)
Accumulated other comprehensive loss   6,885,495    (334,281)
Total TD Shareholders’ Equity   120,029,226    5,809,434 
           
Non-controlling interest   -    (8,572)
Total Equity   120,029,226    5,800,862 
           
Total Liabilities and Equity  $167,178,482   $11,388,400 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5

 

 

TD HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2020 and 2019

(Expressed in U.S. dollars, except for the number of shares)

 

    For the Years Ended  
    December 31,  
    2020     2019  
Revenues            
Sales of commodity products - third parties   $ 8,252,866     $ 100,427  
Sales of commodity products - related parties     16,243,777       -  
Supply chain management services - third parties     1,631,318       562,586  
Supply chain management services - related parties     2,140,840       -  
Total Revenues     28,268,801       663,013  
                 
Cost of revenues                
Commodity product sales - third parties     (7,853,215 )     -  
Commodity product sales - related parties     (16,744,094 )     (100,180 )
Supply chain management services - third parties     (43,162 )     -  
Supply chain management services – related parties     -       (489,231 )
Total operating costs     (24,640,471 )     (589,411 )
                 
Gross profit     3,628,330       73,602  
                 
Operating expenses                
Selling, general, and administrative expenses     (3,035,598 )     (2,334,315 )
Total operating expenses     (3,035,598 )     (2,334,315 )
                 
Other income (expenses), net                
Interest income     6,239,943       64,461  
Interest expenses     (185,106 )     -  
Amortization of beneficial conversion feature relating to issuance of convertible notes     (3,400,000 )     -  
Amortization of relative fair value of warrants relating to issuance of convertible notes     (3,060,000 )     -  
Impairment of investment securities     -       (200,000 )
Impairment of investment in an equity investee     (410,000 )     (1,809,251 )
Impairment of investment in financial products     -       (1,000,000 )
Total other expenses, net     (815,163 )     (2,944,790 )
                 
Net loss from continuing operations before income taxes     (222,431 )     (5,205,503 )
                 
Income tax expenses     (2,177,924 )     (14,861 )
                 
Net loss from continuing operations     (2,400,355 )     (5,220,364 )
                 
Net loss from discontinued operations, net of tax     (3,551,258 )     (1,722,158 )
                 
Net loss     (5,951,613 )     (6,942,522 )
Less: Net loss attributable to noncontrolling interest     -       8,572  
Net loss attributable to TD Holdings, Inc.’s Stockholders   $ (5,951,613 )   $ (6,933,950 )
                 
Other comprehensive loss                
Net loss   $ (5,951,613 )   $ (6,942,522 )
Foreign currency translation adjustment     7,219,776       176,776  
Comprehensive income (loss)     1,268,163       (6,765,746 )
Less: Total comprehensive loss attributable to non-controlling interests     -       8,572  
Comprehensive income (loss) attributable to TD Holdings, Inc. Stockholders   $ 1,268,163     $ (6,757,174 )
                 
Weighted Average Shares Outstanding-Basic and Diluted     51,273,048       7,776,306  
                 
Income (loss) per share- basic and diluted   $ (0.12 )   $ (0.89 )
Income (loss) per share continuing - basic and diluted   $ (0.05 )   $ (0.67 )
Income (loss) per share discontinued - basic and diluted   $ (0.07 )   $ (0.22 )

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6

 

 

TD HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

           Additional           Accumulated
other
         
   Common stock   paid-in   Surplus   Accumulated   comprehensive   Non-controlling   Total 
   Shares   Amount   capital   reserve   deficit   income (loss)   interest   Equity 
Balance as at December 31, 2018   5,023,906   $5,024   $28,765,346   $-   $(25,457,090)  $(511,057)  $-   $2,802,223 
Issuance of common stocks to service providers   502,391    502    883,706    -    -    -    -    884,208 
Issuance of common stocks pursuant to registered direct offering, net of transaction cost   3,120,000    3,120    4,650,320    -    -    -    -    4,653,440 
Issuance of common stocks in connection with acquisition of an equity investee   1,253,814    1,254    2,217,997    -    -    -    -    2,219,251 
Issuance of common stocks in connection with private placements   1,685,000    1,685    588,065    -    -    -    -    589,750 
Capital contribution from shareholders of a variable interest entity   -    -    1,417,736    -    -    -    -    1,417,736 
Net loss   -    -    -    -    (6,933,950)   -    (8,572)   (6,942,522)
Foreign currency translation adjustments   -    -    -    -    -    176,776    -    176,776 
Balance as at December 31, 2019   11,585,111   $11,585   $38,523,170   $-   $(32,391,040)  $(334,281)  $(8,572)  $5,800,862 
Issuance of common stocks in connection with private placements   19,000,000    19,000    20,081,000    -    -    -    -    20,100,000 
Issuance of common stocks in connection with registered direct offering   8,000,000    8,000    19,992,000    -    -    -    -    20,000,000 
Issuance of common stocks in connection with exercise of convertible notes   20,000,000    20,000    29,980,000    -    -    -    -    30,000,000 
Issuance of common stocks in connection with exercise of warrants   20,546,096    20,546    36,333,185    -    -    -    -    36,353,731 
Beneficial conversion feature relating to issuance of convertible notes   -    -    3,400,000    -    -    -    -    3,400,000 
Relative fair value of warrants relating to issuance of convertible notes   -    -    3,060,000    -    -    -    -    3,060,000 
Share based compensation   -    -    37,898    -    -    -    -    37,898 
Disposal of subsidiaries   -    -    -    -    -    (35,672)   8,572    (27,100)
Appropriation of statutory reserve   -    -    -    913,292    (913,292)   -    -    - 
Net loss   -    -    -    -    (5,951,613)   -    -    (5,951,613)
Foreign currency translation adjustments   -    -    -    -    -    7,255,448    -    7,255,448 
Balance as at December 31, 2020   79,131,207   $79,131   $151,407,253   $913,292   $(39,255,945)  $6,885,495   $-   $120,029,226 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7

 

 

TD HOLDINGS CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Years Ended 
   December 31, 
   2020   2019 
Cash Flows from Operating Activities:        
Net loss   (5,951,613)   (6,942,522)
Less: Net loss from discontinued operations   3,551,258    1,722,158 
Net loss from continuing operations   (2,400,355)   (5,220,364)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Impairment of right of use assets   176,225    - 
Amortization of intangible assets   514,618    - 
Impairment of financial product   -    1,000,000 
Stock-based compensation to service providers   -    884,208 
Stock-based compensation to senior management   37,899    - 
Amortization of beneficial conversion feature relating to issuance of convertible notes   3,400,000    - 
Amortization of relative fair value of warrants relating to issuance of convertible notes   3,060,000    - 
Impairment on investment securities   -    200,000 
Impairment of equity investments   410,000    1,809,251 
Deferred tax benefits   (135,930)     
Changes in operating assets and liabilities, (net of assets and liabilities acquired and disposed):          
Other current assets   (776,626)   (39,984)
Inventories   403,471    - 
Prepayments   13,317,930    - 
Due from related parties   (4,327,269)   - 
Advances from customers   6,692,708    - 
Due to related parties   5,321,874    - 
Income tax payable   2,313,853    14,861 
Other current liabilities   2,148,993    (1,451,853)
Lease liabilities   (176,225)   - 
Net cash provided by (used in) operating activities from continuing operations   29,981,166    (2,803,881)
Net cash (used in) provided by operating activities from discontinued operations   (125,133)   638,249 
Net cash provided by (used in) operating activities   29,856,033    (2,165,632)
           
Cash Flows from Investing Activities:          
Investments in financial products   -    (1,000,000)
Investment in one subsidiary, net of cash acquired   (82,227,328)   - 
Payment made on loan to related parties   (47,114,208)   (2,865,070)
Payment made on loans to third parties   (173,673,614)   (576,647)
Collection of loans from third parties   170,432,603    - 
Net cash used in investing activities from continuing operations   (132,582,547)   (4,441,717)
Net cash used in investing activities from discontinued operations   -    (4,432,199)
Net cash used in investing activities   (132,582,547)   (8,873,916)
           
Cash Flows from Financing Activities:          
Repayment of third party borrowings   (318,748)   - 
Proceeds from borrowings from third parties   -    318,434 
Proceeds from borrowings from related parties   1,613,696    212,193 
Capital injection from shareholders   -    1,417,736 
Stock subscription advance received from shareholders   -    1,600,000 
Proceeds from registered direct offering, net of transaction costs   20,000,000    4,653,440 
Proceeds from issuance of common stock under private placement transactions   18,500,000    589,750 
Proceeds from issuance of convertible promissory notes   30,000,000    - 
Proceeds from issuance of common stocks relating to exercise of warrants by warrant holders   36,353,731    - 
Net cash provided by financing activities from continuing operations   106,148,679    8,791,553 
Net cash provided by financing activities from discontinued operations   -    3,038,151 
Net cash provided by financing activities   106,148,679    11,829,704 
           
Effect of Exchange Rate Changes on Cash   (2,499,428)   172,411 
           
Net Increase in Cash   922,737    962,567 
Cash, Beginning of Year   1,777,276    1,484,116 
Cash, End of Year  $2,700,013   $2,446,683 
Less: Cash from discontinued operations   -    (669,407)
Cash from continuing operations  $2,700,013   $1,777,276 
           
Cash paid for interest expense  $18,073   $41,053 
Cash paid for income taxes  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities          
Right-of-use assets obtained in exchange for operating lease obligations  $186,191   $61,648 
Issuance of common stocks in connection with private placements, net of issuance costs with proceeds collected in advance in November 2019  $1,600,000   $- 
Issuance of common stocks in connection with conversion of convertible notes  $30,000,000   $- 
Issuance of common stocks in connection with cashless exercise of 962,022 warrants  $1,269,869   $- 
Fair value of HC High Summit assets disposed  $5,320,768   $- 
HC High Summit liabilities derecognized  $(2,606,257)  $- 
Issuance of common stocks in exchange of investments in one equity investee  $-   $410,000 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-8

 

 

TD HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND BUSINESS DESCRIPTION

 

TD Holdings, Inc. (“TD” or “the Company”), is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. On January 11, 2019, the Company changed its name to China Bat Group, Inc. and on June 3, 2019, further changed its name to Bat Group, Inc. On March 6, 2020, the Company amended its Certificate of Incorporation with the Secretary of State of Delaware to effect a name change to TD Holdings, Inc.

 

On April 2, 2020, HC High Summit Holding Limited (“HC High BVI”), the Company’s wholly owned subsidiary, established Tongdow Block Chain Information Technology Company Limited (“Tongdow Block Chain”), a holding company incorporated in accordance with the laws and regulations of Hong Kong. Tongdow Block Chain is wholly owned by HC High BVI. On April 2, 2020 and July 16, 2020, Tongdow Block Chain established Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”) and Tongdow Hainan Digital Technology Co., Ltd. (“Tondow Hainan”), respectively, as its wholly owned subsidiaries. Both Shanghai Jianchi and Tongdow Hainan are holding companies incorporated in accordance with the laws and regulations of People’s Republic of China (“PRC”).

 

On June 25, 2020, Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”), the Company’s wholly owned subsidiary incorporated in PRC, and Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”), a former VIE of the Company, entered into certain VIE Termination Agreement (the “VIE Termination Agreement”) to terminate the Huamucheng VIE Agreements. As such, Hao Limo will no longer have the control rights and rights to the assets, property and revenue of Huamucheng. On the same date, Shanghai Jianchi, Huamucheng and the shareholders of Huamucheng (the “Huamucheng Shareholders”) entered into certain Share Acquisition Agreement (the “Acquisition Agreement”) pursuant to which Shanghai Jianchi acquired 100% equity interest of Huamucheng from the Huamucheng Shareholders for nominal consideration.

 

As a result of the above reorganization, Huamucheng transitioned from being a variable interest entity (“VIE”) controlled by Company into a wholly owned subsidiary of the Company. The Company remained in control of Huamucheng both before and after the reorganization and its operating results are consolidated into the Company’s consolidated financial statements.

 

Disposal of HC High Summit Limited

 

On August 28, 2020, the Company closed the sales of HC High Summit Limited and its subsidiaries and Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”), the VIE with Vision Loyal Limited (“Vision Loyal”), at a nominal consideration of $1.00 based on a valuation report presented by a third party valuation firm.

 

Acquisition of subsidiaries

 

On September 11, 2020, the Company consolidated Zhong Hui Dao Ming Investment Management Limited (“ZHDM HK”) and its wholly owned subsidiary, Tongdow E-trading Limited (“Tongdow HK”). Both entities were holding companies incorporated in accordance with the laws and regulations of Hong Kong. The consideration was zero because both entities have not commenced any operations before the date of acquisition.

 

On October 26, 2020, the Company, through Huamucheng, closed acquisition of Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Qianhai Baiyu”) from Shenzhen Xinsuniao Technology Co., Ltd. (“Shenzhen Xinsuniao”). Shenzhen Xinsuniao was the record holder and beneficial owner of all registered paid-up capital of the Qianhai Baiyu. Huamucheng agreed to pay to the Shenzhen Xinsuniao an aggregate cash consideration of RMB670 million (approximately $102.6 million), of which 85% was paid before December 25, 2020 and the remaining 15% will be paid in installments on or before December 25, 2021.

 

As of December 31, 2020, the Company conducts business through Huamucheng, a subsidiary of the Company, which is engaged in the commodity trading business and providing supply chain management services to customers in the PRC. Supply chain management services consist of loan recommendation services and commodity product distribution services.

 

F-9

 

 

1. ORGANIZATION AND BUSINESS DESCRIPTION (CONTINUED)

 

The accompanying consolidated financial statements reflect the activities of Huamucheng and each of the following holding entities:

 

Name   Background   Ownership

HC High Summit Holding Limited

(“HC High BVI”)

  A BVI company   100% owned by the Company
  Incorporated on March 22, 2018  
  A holding company  
           

Tongdow Block Chain Information Technology Company Limited

(“Tongdow Block Chain”)

  A Hong Kong company   100% owned by HC High BVI 
  Incorporated on April 2, 2020  
  A holding company  
           

Zhong Hui Dao Ming Investment Management Limited

(“ZHDM HK”)

  A Hong Kong company   100% owned by HC High BVI
  Incorporated on March 28, 2007  
  A holding company  
           

Tongdow E-trading Limited

(“Tongdow HK”)

 

  A Hong Kong company   100% owned by HC High BVI
  Incorporated on November 25, 2010  
  A holding company  
           

Shanghai Jianchi Supply Chain Company Limited

(“Shanghai Jianchi”)

  A PRC company and deemed a wholly foreign owned enterprise (“WFOE”)   WFOE, 100% owned by Tongdow Block Chain
  Incorporated on April 2, 2020  
  Registered capital of $10 million  
  A holding company  
           

Tongdow Hainan Digital Technology Co., Ltd.

(“Tondow Hainan”)

  A PRC limited liability company   A wholly owned subsidiary of Shanghai Jianchi
  Incorporated on July 16, 2020  
  Registered capital of $1,417,736 (RMB 10 million) with registered capital fully paid-up  
  Engaged in commodity trading business and providing supply chain management services to customers  
           

Shenzhen Huamucheng Trading Co., Ltd.

(“Huamucheng”)

  A PRC limited liability company   VIE of Hao Limo before June 25, 2020, and a wholly owned subsidiary of Shanghai Jianchi
  Incorporated on December 30, 2013  
  Registered capital of $1,417,736 (RMB 10 million) with registered capital fully paid-up  
  Engaged in commodity trading business and providing supply chain management services to customers  
           
Qianhai Baiyu   A PRC limited liability company   A wholly owned subsidiary of Huamucheng
  Incorporated on August 17, 2016  
  Registered capital of $4,523,857 (RMB 30 million) with registered capital of $736,506 (RMB 5 million) paid-up  
  Engaged in commodity trading business and providing supply chain management services to customers  

 

 

F-10

 

 

1. ORGANIZATION AND BUSINESS DESCRIPTION (CONTINUED)

 

Disposition of HC High Summit Limited

 

Historically, one of the Company’s core businesses had been the used luxurious car leasing business conducted through Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”), an entity that the Company controlled via certain contractual arrangements.

 

On August 28, 2020, the Company entered into certain share purchase agreement (the “Disposition SPA”) with Vision Loyal, HC High Summit Limited (“HC High HK”) and HC High BVI. Pursuant to the Disposition SPA, Vision Loyal agreed to purchase HC High HK in exchange for nominal consideration of $1.00 based on a valuation report presented by an independent third party valuation firm, Beijing North Asia Asset Assessment Firm. The Company’s board of directors (the “Board”) approved the transaction contemplated by the Disposition SPA (the “Disposition”). The Disposition closed on August 28, 2020.

 

HC High HK is the sole shareholder of Hao Limo, and controls Beijing Tianxing via a series of contractual arrangements. The list of disposed entities are as follows:

 

Name   Relationship
HC High Summit Limited (“HC High HK”)   100% owned by HC High BVI before August 28, 2020

Hao Limo Technology (Beijing) Co. Ltd. (“Hao Limo”)

  WOFE, 100% owned by HC High HK
Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”)*   VIE of Hao Limo

 

* Upon disposition, Beijing Tianxing’ six wholly owned subsidiaries and one 60% owned subsidiary were also disposed.

 

  Beijing Tianrenshijia Apparel Co., Ltd.

 

Beijing Blue Light Marching Technology Co., Ltd.

 

  Beijing Eighty Weili Technology Co., Ltd.

 

  Beijing Bat Riding Technology Co., Ltd

 

  Beijing Blue Light Riding Technology Co., Ltd., and

 

  Car Master (Beijing) Information Consulting Co., Ltd.

 

  Beijing Blue Light Supercar Technology Co., Ltd. (over which the Company previously held 60% equity interest)

 

Upon closing of the Disposition on August 28, 2020, Vision Loyal became the sole shareholder of HC High HK and as a result, assumed all assets and obligations of all the subsidiaries and VIE entities owned or controlled by HC High HK. See Note 3 for details of assets and liabilities of discontinued operations.

 

F-11

 

 

1. ORGANIZATION AND BUSINESS DESCRIPTION (CONTINUED)

 

The following diagram illustrates our corporate structure as of the December 31, 2020.

 

 

F-12

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation.

 

Business combination

 

The Company accounted for its business combination using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews these estimates using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. Significant accounting estimates reflected in the financial statements include: (i) useful lives and residual value of long-lived assets; (ii) the impairment of long-lived assets and investments; (iii) the valuation allowance of deferred tax assets; (iv) estimates of allowance for doubtful accounts, including loans receivable from third parties and related parties, and (v) contingencies and litigation.

 

Fair value measurement

 

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in 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. It 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 financial items of the Company, including cash and cash equivalents, loans receivable due from third parties, accounts receivable, due from related parties, bank borrowings, third parties loans payable, other current liabilities and acquisition payable, approximate their fair values due to their short-term nature.

 

The inputs used to measure the estimated fair value of warrants are classified as Level 3 fair value measurement due to the significance of unobservable inputs using company-specific information. The valuation methodology used to estimate the fair value of warrant liabilities is discussed in Note 9.

 

F-13

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Cash and cash equivalents

 

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks. The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains most of its bank accounts in the PRC. Cash balances in bank accounts in the PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

 

Accounts receivable

 

Accounts receivable are presented net of allowance for doubtful accounts. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of December 31, 2020 and 2019, the Company did not accrue allowance for uncollectible balances.

 

Loans receivable due from third parties

 

The Company provided loans to certain third parties for the purpose of making use of its cash.

 

The Company monitors all loans receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. Management periodically assesses the collectability of these loans receivable. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of December 31, 2020 and 2019, the Company did not accrue allowance against loans receivables due from third parties.

 

Investments in an equity investee

 

On December 17, 2019, the Company issued 1,253,814 shares of common stock to acquire 20% of the equity ownership interest in Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou Yihe”) for the purpose of promoting car leasing business in Zhejiang province (see Note 6).

 

In accordance with ASC 323 “Investments — Equity Method and Joint Ventures,”, the Company accounted for the above mentioned investments using equity method, because the Company has significant influence but does not own a majority equity interest or otherwise control over these equity investees.

 

Under the equity method, the Company’s share of the post-acquisition profits or losses of the equity investee is recognized in the consolidated statements of operations and its share of post-acquisition movements in accumulated other comprehensive income (loss) is recognized in other comprehensive income (loss). The Company records its share of the results of the equity investees on a one quarter in arrears basis. The excess of the carrying amount of the investment over the underlying equity in net assets of the equity investee represents goodwill and intangible assets acquired, if applicable. When the Company’s share of losses in the equity investee equals or exceeds its interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments or guarantees on behalf of the equity investee.

 

The Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other-than-temporary. The primary factors the Company considers in its determination include the financial condition, operating performance and the prospects of the equity investee; other company specific information such as recent financing rounds; the geographic region, market and industry in which the equity investee operates; and the length of time that the fair value of the investment is below its carrying value. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.

 

F-14

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Investments in financial products

 

In May 2019, the Company invested an aggregate of $1,000,000 to purchase financial products from Harrison Fund, LLC (“Harrison Fund”), a private equity fund (“PE fund”) in order to earn investment income. These financial products bear variable return rate and are redeemable on each anniversary after the Company’s initial investment.

 

In accordance with ASU 2016-01, the Company accounts for its investments in financial products using the measurement alternative at cost, less impairment, with subsequent adjustments for observable price changes resulting from orderly transactions for identical or similar investments of the same issuer that were completed on or after January 1, 2019.

 

Intangible assets

 

The Company’s intangible assets consist primarily of customer relationships, which are generally recorded in connection with acquisitions at their fair value. Intangible assets with estimable lives are amortized, generally on a straight-line basis, over their respective estimated useful lives of 6.2 years to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

Goodwill

 

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.

 

The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the opinion to assess qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.

 

The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.

 

If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. The fair value of discounted cash flow was determined using management’s estimates and assumptions.

 

For the year ended December 31, 2020, the Company did not record an impairment loss against goodwill.

 

Impairment of long-lived assets other than goodwill

 

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

 

For the year ended December 31, 2020, the Company did not record an impairment loss against intangible assets.

 

F-15

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Operating lease as a lessee

 

The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.

 

The Company leases its offices which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The right-of-use asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment.

 

Revenue recognition

 

The Company generates revenue associated with commodity trading and revenue associated with supply chain management services are accounted for in accordance with ASC 606.

 

ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. This new guidance provides a five-step analysis in determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

 

Revenue from sales of commodity products

 

In December 2019, the Company started its commodity trading business through its VIE Huamucheng. The commodity trading business primarily involves purchasing non-ferrous metal product (such as aluminium ingots, copper, silver, and gold) from metal and mineral suppliers and then selling to customers. The Company makes advance payments to suppliers to purchase the metal products, requests suppliers to ship products to designated warehouse. Upon obtaining purchase orders and receipt of full advance payments from customers, the Company instructs warehouse agent to transfer ownership of products to customers. The transaction is normally completed within a short period of time, ranging from a few days to a month.

 

The Company’s contracts with customers for metal commodity trading are fixed-price contracts. The Company does not grant customers with incentives or return rights, and therefore, there is no variable considerations derived from the contracts. The Company acts as the principal because the Company is responsible for fulfilling the promise to provide the specified metal products to customers, is subject to inventory risk before the product ownership and risk are transferred and has the discretion in establishing prices. As a result, revenue is recognized on a gross basis. The Company recognizes revenue when the product ownership is transferred to its customers.

 

F-16

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue recognition (continued)

 

Revenue from supply chain management services

 

In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help metal and mineral suppliers to sell their metal products, the Company launched its supply chain management service business as defined below:

 

Loan recommendation service fees

 

The Company recommends customers who have financing need for commodity trading to various financial institutions and assist these customers to obtain loans from the financial institutions. The Company’s services include conducting customer screening and credit check, matching customer with right financial institution and assisting in customer’s applications and related paperwork etc. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by customer.

 

Commodity distribution service fees

 

The Company utilizes its sales and marketing expertise and customer network to introduce customers to large metal and mineral suppliers, and facilitate metal product sales between the suppliers and the customers. The Company merely acts as an agent in this type of transaction and earns a commission fee based on the percentage of volume of metal products that customers purchase. Distribution service fees are recognized as revenue when the Company successfully facilitates sales transactions between suppliers and customers. For the year ended December 31, 2020 and 2019, the Company earned commodity distribution service fees $1,631,318   and $238,963 from facilitating such sales transactions with third party customers and earned distribution service fees of $2,140,840 and $nil from facilitating such sales transactions with related party customers  .

 

Contract liabilities

 

The supply chain management service fees are collected either in advance to provision of services or after the services. In cases where fees are collected in advance, the fees are recorded as “advances from customers” in the consolidated balance sheets. Advance from customers is recognized as revenue when the Company delivers the supply chain management services to its customers.

 

Income taxes

 

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

 

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

 

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

 

F-17

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income taxes (continued)

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company did not have unrecognized uncertain tax position or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of December 31, 2020 and 2019. As of December 31, 2020, all of the Company’s income tax returns for the tax years ended December 31, 2015 through December 31, 2019 remain open for statutory examination by relevant tax authorities.

 

Loss per share

 

Basic loss per share is computed by dividing the net loss income by the weighted average number of common shares outstanding during the period. Diluted loss income per share is the same as basic loss income per share due to the lack of dilutive items in the Company. The number of warrants is excluded from the computation because of its anti-dilutive effect.

 

Share-based compensation

 

Share-based compensation granted to the Company’s senior management and nonemployees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying shares.

 

At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based compensation changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.

 

Discontinued operation

 

In accordance with ASC 205-20, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

 

F-18

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Segment reporting

 

The Company had two operating business lines, including business with metal products trading and supply chain management services business conducted by Huamucheng (“Commodity Trading and Supply Chain Management Services”) and used luxurious car leasing business (“Used Car Leasing”) conducted by Beijing Tianxing. However, due to changes in our organizational structure associated with the used luxurious car leasing business as a discontinued operation (Note 3 – Discontinued operation), management has determined that the Company now operates in one operating segment with one reporting segment. The accounting policies of our one reportable segment are the same as those described in this Note 2.

 

Reclassification

 

Certain items in the financial statements of comparative period have been reclassified to conform to the financial statements for the current period, primarily for the effects of discontinued operations.

 

Recent accounting pronouncement

 

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) “Financial Instruments - Credit Losses” (“ASC 326”): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASC 2019-10,”) which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for public entities which meet the definition of a smaller reporting company. The Company will adopt ASU 2016-13 effective January 1, 2023. Management is currently evaluating the effect of the adoption of ASU 2016-13 on the consolidated financial statements. The effect will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. Step two of the goodwill impairment test measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. As amended by ASU 2019-10, annual or interim goodwill impairment tests are performed in fiscal years beginning after December 15, 2022. We do not expect that the adoption of this guidance will have a material impact on our financial position, results of operations and cash flows.

 

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company will adopt ASU 2020-06 effective January 1, 2024. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

 

F-19

 

 

3. DISPOSITION OF HC HIGH SUMMIT LIMITED

 

On August 28, 2020, the Company entered into the Disposition SPA by and among Vision Loyal, HC High HK and HC High BVI. Pursuant to the Disposition SPA, Vision Loyal agreed to purchase the HC High HK in exchange for nominal consideration of $1.00 based on a valuation report presented by a third party valuation firm. The Board approved the transaction contemplated by the Disposition SPA. The Disposition closed on August 28, 2020.

 

Upon completion of the Disposition, the Company does not bear any contractual commitment or obligation to the used luxurious car leasing business or the employees of HC High HK, nor to Vision Loyal.

 

On August 28, 2020, management was authorized to approve and commit to a plan to sell HC High HK, therefore the major assets and liabilities relevant to the disposal are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes, are reported as components of net income (loss) separate from the net loss of continuing operations in accordance with ASC 205-20-45. The following is a reconciliation of net loss of $3.0 million from disposition in the consolidated statements of operations and comprehensive income (loss):

 

   Fair value 
Consideration in exchange for the disposal  $1 
Noncontrolling interest of HC High Summit Limited   (15,645)
Less: Net assets (comprised of assets of $5,320,768 and liabilities of $2,606,257)   (2,714,511)
    (2,730,155)
Impairment of amounts due HC High Summit Limited   (321,180)
Foreign currency translation adjustment   45,697 
Net loss from disposal of discontinued operations  $(3,005,638)

 

F-20

 

 

3. DISPOSITION OF HC HIGH SUMMIT LIMITED (CONTINUED)

 

The following is a reconciliation of the carrying amounts of major classes of assets and liabilities held for sale in the consolidated balance sheet as of August 28, 2020 and December 31, 2019. 

 

   August 28,
2020
   December 31,
2019
 
Carrying amounts of major classes of assets held for sale:          
Cash  $84   $669,407 
Loans receivable from third parties   1,568,418    1,429,280 
Due from related parties   463,391    470,155 
Other current assets   488,911    126,657 
Investments in equity investees   554,711    562,807 
Leasing business assets, net   2,229,819    2,426,109 
Other noncurrent assets   15,434    59,374 
Total assets of disposal group  $5,320,768   $5,743,789 
Carrying amounts of major classes of liabilities held for sale:          
Third party loans payable  $1,168,660   $2,052,238 
Due to related parties   1,056,249    1,003,154 
Other current liabilities   381,348    234,748 
Total liabilities of disposal group  $2,606,257   $3,290,140 

 

The following is a reconciliation of the amounts of major classes of operations classified as discontinued operations in the consolidated statements of operations and other comprehensive income (loss) for the years ended December 31, 2020 and 2019.

 

   For the Years Ended
December 31,
 
   2020   2019 
Discontinued Operations        
Income from operating leases  $13,946   $1,830,148 
Cost of operating lease   (323,608)   (1,544,120)
Total operating cost and expenses   (168,888)   (1,642,240)
Total other expenses, net   (67,070)   (365,946)
Net loss from disposal of discontinued operations   (3,005,638)   - 
Net Loss from Discontinued Operations  $(3,551,258)  $(1,722,158)

 

F-21

 

 

4. ACQUISITION OF QIANHAI BAIYU

 

As of December 31, 2019, Qianhai Baiyu was identified as a related party of the Company, as Qianhai Biayu was controlled by Mr. Zhiping Chen, the legal representative of Huamucheng before March 31, 2020. On March 31, 2020, Mr. Zhiping Cheng transferred its equity interest in Qianhai Baiyu to Shenzhen Xinsuniao, and Qianhai Baiyu became a third party to the Company.

 

On October 26, 2020, the Company, through Huamucheng, entered into certain share purchase agreements (the “SPA”) with Shenzhen Xinsuniao, to acquire 100% equity interest of Qianhai Baiyu, which is primarily engaged in sales of commodity products and provision of supply chain management services in the PRC.

 

On the same date, the Company closed acquisition of Qianhai Baiyu for an aggregated cash consideration of RMB670 million (approximately $102.6 million), of which 85% was paid before December 25, 2020 and the remaining 15% or $15.4 million, which was recorded in the account of “acquisition payable”, will be paid in installments on or before December 25, 2021.

 

The transaction was accounted for as a business combination using the purchase method of accounting in accordance with ASC 805-10-20. The purchase price allocation of the transaction was determined by the Company with the assistance of an independent appraisal firm based on the fair value of the assets acquired and liabilities assumed as of the acquisition date.

 

The following table presents the purchase price allocation to assets acquired and liabilities assumed for Qianhai Baiyu as of the acquisition date:

 

   As of
October 26,
2020
 
Cash and cash equivalents  $287,129 
Inventories   406,503 
Prepayments   27,917,158 
Other current assets   374,300 
Intangible assets (customer relationship)   20,117,564 
Bank borrowings   (1,653,247)
Advances from customers   (2,302,998)
Taxes payable   (4,173,333)
Other current liabilities   (2,703,477)
Deferred tax liabilities   (5,029,391)
Goodwill   69,322,325 
Total purchase consideration  $102,562,533 

 

The intangible assets mainly include customer relationship of $20.1 million, with definite lives of 6.2 years. Amortization expenses of $514,618 related to the customers relationship was recorded for the year ended December 31, 2020. Estimated amortization expense related to the intangible assets for each of the years subsequent to December 31, 2020 is as follows:

 

For the year ended December 31  Amortization
expenses
 
2021  $3,262,308 
2022   3,262,308 
2023   3,262,308 
2024   3,262,308 
2025 and thereafter   6,524,614 
   $19,573,846 

 

The goodwill of $69.3 million arising from the acquisition consists largely of the synergies and economics of scales expected from combining the commodity trading business of both Huamucheng and Qianhai Baiyu. The goodwill from the acquisition represents future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is not expected to be deductible for tax purposes for the acquisition. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequent if certain indicators of impairment are present. As of December 31, 2020, the Company did not note indicators of impairment and did not record an impairment against goodwill.

 

Deferred tax liabilities arose from the temporary difference of intangible assets acquired from the acquisition.

 

F-22

 

 

4. ACQUISITION OF QIANHAI BAIYU (CONTINUED)

 

The amounts of revenue and net loss of Qianhai Baiyu included in the Company’s consolidated statement of operations from the acquisition date to December 31, 2020 are as follows:

 

  

From acquisition date to
December 31,

2020

 
Net revenue  $13,859,161 
      
Net income  $720,871 

 

The following table presents the Company’s unaudited pro forma results for the years ended December 31, 2020 and 2019, respectively, as if the Qianhai Baiyu was acquired on January 1, 2019. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.

 

    For the years ended
December 31,
 
    2020     2019  
Pro forma revenue   $ 93,249,822     $ 22,115,560  
Pro forma net income (loss)   $ 2,515,744 (1)(2)     (3,412,879 )(1)(2)
Pro forma net income (loss) attributable to TD Holdings, Inc.   $ 2,515,744 (1)(2)     (3,404,307 )(1)(2)
Pro forma income (loss) per share - basic and diluted   $ 0.05       $ (0.48 )
Weighted average shares - basic and diluted     51,273,048       7,122,560  

 

 

(1)Includes intangibles asset amortization expense of $2,265,491 and $3,262,308 for the years ended December 31, 2020 and 2019, respectively.

 

(2)Includes deferred tax benefits relating to the intangible asset amortization of $566,373 and $815,577 for the years ended December 31, 2020 and 2019, respectively.

 

F-23

 

 

5.LOANS RECEIVABLE FROM THIRD PARTIES

 

   December 31,
2020
   December 31,
2019
 
Loans receivable from Shenzhen Xinsuniao  $-   $- 
Loans receivable from Qianhai Baiyu   -    - 
Loans receivable from others   18,432,691    576,647 
Loan receivable from other third parties  $18,432,691   $576,647 

 

Loans receivable from Shenzhen Xinsuniao

 

On March 25, 2020, the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao. Shenzhen Xinsuniao was reputable for their extensive experiences in supply chain services for commodities trading.

 

Pursuant to the loan agreement, the proceeds should solely be used for the operations of the commodity trading business including sales and purchase of commodity products, and supply chain management services. Each loan was repayable in twelve months from disbursement, with a per annum interest rate of 10%. However in practice, the loans are generally revolving every three months, which matches the transaction turnover of Shenzhen Xinsuniao.

 

The revolving credit facility lasted for a period of two years. Shenzhen Xinsuniao pledged 100% of its equity interest in Qianhai Baiyu, which enterprise value was estimated at approximately $106 million. Upon the Company’s acquisition of Qianhai Baiyu on October 26, 2020, the Company terminated the revolving credit facility agreement with Shenzhen Xinsuniao. For the year ended December 31, 2020, the Company provided revolving loans aggregating $157,965,155 and fully collected outstanding balance as of December 31, 2020. As of December 31, 2020, the Company had no loan receivable due from Shenzhen Xinsuniao. For the year ended December 31, 2020, the Company collected and recognized interest income of $4,691,905 from Shenzhen Xinsuniao.

 

Loans receivable from Qianhai Baiyu

 

The Company had a balance of $1,669,342 due from Qianhai Baiyu, which was recorded as a balance due from a related party because Qianhai Biayu was controlled by Mr. Zhiping Chen, the legal representative of Huamucheng before March 31, 2020. On March 31, 2020, Mr. Zhiping Cheng transferred its equity interest in Qianhai Baiyu to Shenzhen Xinsuniao, and Qianhai Baiyu became a third party to the Company. On October 26, 2020, the Company acquired 100% equity interest in Qianhai Baiyu, and the balance due from Qianhai Baiyu was eliminated on the consolidation level.

 

For the loans before acquisition date, the Company charged an interest rate of 10% per annum. Prior to October 26, 2020, the Company collected and recognized interest income of $84,034.

 

Loans receivable from other third parties

 

For the year ended December 31, 2020, the Company entered into four loan agreements with five third parties, four of which were customers of the Company. The Company provided loans aggregating $17,424,696 for the purpose of making use of idle cash and maintaining long-term customer relationship. These loans will mature in May 2021 through December 2021, and charges interest rate of 10.95% per annum on these customers.

 

F-24

 

 

5.LOANS RECEIVABLE FROM THIRD PARTIES (CONTINUED)

 

As of December 31, 2020, the Company had loan receivable balance of $18,432,691 due from the four customers. For the year ended December 31, 2020, the Company recognized interest income of $107,000   from four customers. As of December 31, 2020, there was no allowance recorded as the Company considers all of the loans receivable fully collectible.

 

As of December 31, 2019, the Company had balance of $576,647 due from three third party individuals who were engaged in used luxurious car leasing business. Pursuant to the loan agreements, these loans matured before December 2020, and the Company charged the third parties interest rates ranging between 11% and 13% per annum. Principal and interest are repaid on maturity of the loan. Upon disposition of the used luxurious car leasing business, the management assessed the collectability of these third-party loans receivable was remoted and wrote off the balance of $576,647 into “net loss from discontinued operations”.

 

Interest income of $6,239,012   and $37,112 was recognized for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the Company recorded an interest receivable of $1,290,864 and $37,112 as reflected under “other current assets” in the consolidated balance sheets.

 

6. INVESTMENTS IN AN EQUITY INVESTEE

 

As of December 31, 2020, the Company’s investments in equity investees were comprised of the following:

 

   Investment   % of ownership   Investment dates  
Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou Yihe”)   410,000    20%  December 17, 2019  
Less: Impairment of investment in Hangzhou Yihe   (410,000)          
   $-           

 

October 14, 2019, the Company entered into an agreement with Hangzhou Yihe and agreed to issue 1,253,814 shares of the Company’s common stock to acquire 20% equity interest in Hangzhou Yihe. On December 17, 2019, the Company closed the acquisition.

 

For the year ended December 31, 2020, Hangzhou Yihe did not resume operations as affected by COVID-19. As a result, the Company had no share of results of equity investees for the period. Because the resume of business was unknown and the Company did not further focus on used luxurious car leasing business, the management determined the decline in fair value below the carrying value is other-than-temporary. As of December 31, 2020, the Company provided full impairment against the investment in the equity investee.

 

7.OTHER CURRENT LIABILITIES

 

   December 31,
2020
   December 31,
2019
 
Other payable  $-   $128,301 
Accrued interest expenses   -    163 
Accrued payroll and benefit   993,985    29,466 
Other tax payable   2,181,938    35,169 
Others   21,224    7,503 
   $3,197,147   $200,602 

 

F-25

 

 

8.STOCK SUBSCRIPTION ADVANCE FROM SHAREHOLDERS

 

On November 21, 2019, the Company entered into a securities purchase agreement with certain investors (the “Purchasers”), pursuant to which the Company agreed to sell an aggregate of 2,000,000 shares of its common stock, at a per share purchase price of $0.80. As of December 31, 2019, the Company received the proceeds of $1,600,000 in advance from the Purchasers and recorded the amount as “stock subscription advance from shareholder”. On February 5, 2020, the Company issued 2,000,000 shares of Common Stock to the Purchasers. 

 

9.EQUITY

 

Common Stock

 

The Company is authorized to issue up to 100,000,000 shares of Common Stock, par value $0.001 per share.

 

Common stock issued in private placements

 

On November 21, 2019, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell an aggregate of 2,000,000 shares of its common stock, at a per share purchase price of $0.80. The Company received proceeds of $2,000,000 in November 2019. On February 5, 2020, the Company issued 2,000,000 shares of Common Stock to the investors.

 

On January 22, 2020, the Company entered into certain securities purchase agreement with certain investors, pursuant to which the Company agreed to sell an aggregate of 15,000,000 shares of Common Stock, at a per share purchase price of $0.90. The transaction was consummated in March 2020 by issuance of 15,000,000 shares of Common Stock. The Company received proceeds of $13,500,000 in April 2020.

 

On September 1, 2020, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell an aggregate of 2,000,000 shares of its common stock, par value $0.001 per share, at a per share purchase price of $2.50. The transaction was consummated in September 2020 by issuance of 2,000,000 shares of Common Stock. The Company received proceeds of $5,000,000 in November 2020.

 

Common stock issued in registered direct offering

 

On November 20, 2020, the Company and certain investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors an aggregate of 8,000,000 shares of common stock in a registered direct offering, for gross proceeds of approximately $20 million. The purchase price for each share of Common Stock is $2.50. The transaction was consummated in November 2020 by issuance of 8,000,000 shares of Common Stock. The Company received proceeds of $20,000,000 in November 2020.

 

Common stock issued in connection with exercise of convertible notes and warrants

 

On January 22, 2020, the Company also agreed to sell unsecured senior convertible promissory notes (“Notes”) in the aggregate principal amount of $30,000,000 accompanied by warrants to purchase 20,000,000 shares of Common Stock issuable upon conversion of the Notes at an exercise price of $1.80 (the “2020 Warrants”). On March 23, 2020, the Company issued the Notes and 2020 Warrants to the investors. In April 2020, the Company received the proceeds of $30,000,000 from the issuance of Notes and 2020 Warrants.

 

The Notes have a maturity date of 12 months with an interest rate of 7.5% per annum. Holders have the right to convert all or any part of the Notes into shares of Common Stock at a conversion price of $1.50 per share 30 days after its date of issuance. The Company retains the right to prepay the Note at any time prior to conversion with an amount in cash equal to 107.5% of the principal that the Company elects to prepay.

 

F-26

 

 

9.EQUITY (CONTINUED)

 

Common Stock (continued)

 

Issuance and exercise of convertible notes and warrants

 

The Company applied Black-Scholes model to determine the fair value of the 2020 Warrants at $3.42 million. Significant estimates and assumptions used included stock price on January 22, 2020 of $1.52 per share, risk-free interest rate of six month of 1.52%, time to maturity of 2.5 years, and volatility of 25.99%.

 

The proceeds of $30 million must be allocated between the Note and the 2020 Warrants, based on the relative fair value. The ratio of the relative fair values of the Notes and the Warrants was 89.8% to 10.2%. After allocating 10.2%, or $3.06 million, of the proceeds to the 2020 Warrants, the Company estimated the embedded conversion option within the Notes is beneficial to the holders, because the effective conversion price was $1.35 ($27.0 million/20 million shares), which was below the Company’s share price of $1.52 on January 22, 2020. The fair value of this beneficial conversion feature was estimated to be $3.4 million, and was recorded to debt discount, to be amortized to interest expense using the effective interest method over the term of the Note.

 

The total note discount was recognized at $6.46 million ($3.06 million from the allocation of proceeds to the Warrants and an additional $3.4 million from the measurement of the intrinsic value of the conversion option). The Note discount was initially recognized as a reduction to the carrying amount of the Notes and an addition to paid-in capital, and was to be subsequently amortized to interest expense using the effective interest method over the Note period.

 

In April 2020, the Holders elected to convert the Notes at a conversion price of $1.50 per share and also exercise the Warrants at an exercise price of $1.80 per share, and paid cash consideration of $36,000,000 for the exercise of the Warrants by April 15, 2020. As a result, an aggregate of 40,000,000 shares of the Company’s Common Stock were issued on May 18, 2020. The Company received proceeds aggregating $66,000,000 from the transaction, and upon settlement of the Note and the 2020 Warrants, the Company immediately expensed the Note discount of $6.46 million For the year ended December 31, 2020, the Company recognized amortization of beneficial conversion feature relating to issuance of convertible notes of $3.4 million and amortization of relative fair value of warrants relating to issuance of conversion notes of $3.06 million.

 

Common stocks issued for exercise of warrants by holders of warrants

 

During July 2020 through August 2020, the holders of warrants issued in direct offerings closed on April 11, 2019 (“April Offer”) elected to exercise 150,000 shares of warrants at an exercise price of $2.2. The Company received proceeds of $330,000 through escrow account and issued 150,000 shares of common stocks.

 

During July 2020 through August 2020, the holders of warrants issued in direct offerings closed on May 20, 2019 (“May Offer”) elected to exercise 17,978 shares of warrants at an exercise price of $1.32, and exercise 962,022 shares of warrants at cashless exercise. The Company received proceeds of $23,731 through escrow account and issued 396,096 shares of common stocks.

 

Warrants

 

A summary of warrants activity for the years ended December 31, 2020 and 2019 was as follows:

 

   Number of shares   Weighted average life (Years)  Weighted
average
exercise
price
 
Balance of warrants outstanding as of December 31, 2018   273,370   3.94 years   21.00 
Grants of Warrants on April 11, 2019   1,680,000   5.00 years   2.20 
Grants of Warrants on May 20 2019   1,080,000   5.50 years   1.32 
Balance of warrants outstanding as of December 31, 2019   3,033,370   4.38 years   3.58 
Grants of Warrants on January 22, 2020   20,000,000       1.80 
Exercise of Warrants granted on April 11, 2019   (150,000)  5.00 years   2.20 
Exercise of Warrants granted on May 20, 2019   (980,000)  5.50 years   1.32 
Exercise of Warrants granted on January 22, 2020   (20,000,000)      1.80 
Balance of warrants outstanding as of December 31, 2020   1,903,370   3.13 years   4.85 

 

F-27

 

 

9.EQUITY (CONTINUED)

 

Warrants (continued)

 

As of December 31, 2020, the Company had 1,903,370 shares of warrants, among which 273,370 shares of warrants were issued to two individuals in private placements, and 1,630,000   shares of warrants were issued in two direct offerings closed on May 20, 2019 (“May Offering”) and April 11, 2019 (“April Offering”). The intrinsic value of warrants as December 31, 2020 amounted to $27,000. As of December 31, 2019, the Company had 3,033,370 shares of warrants, among which 273,370 shares of warrants were issued to two individuals in private placements, 1,680,000 shares of warrants were issued in April Offering and 1,080,000 shares of warrants were issued in May Offering.

 

In connection with April Offering, the Company issued warrants to investors to purchase a total of 1,680,000 ordinary shares with a warrant term of five (5) years. The warrants have an exercise price of $2.20 per share. On May 20, 2019, the exercise price was reduced to $1.32, and on August 30, 2019 the exercise price was revised to $2.20.

 

In connection with May Offering, the Company issued warrants to investors to purchase a total of 1,080,000 ordinary shares with a warrant term of five and a half (5.5) years. The warrants have an exercise price of $1.32 per share.

 

On August 30, 2019, the Company updated the estimation of fair value of warrants issued on April 11, 2019 as a result of the change in exercise price of the warrants from $1.32 to $2.20. Accordingly the fair value of the Replacement Warrant decreased from $1,638,000 to $1,357,440. 

 

Both warrants are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as a result of future securities offerings at lower prices. The warrants did not meet the definition of liabilities or derivatives, and as such they are classified as equity.

 

On April 11, 2019 and May 20, 2019, the Company estimated fair value of the both warrants at $1,638,000 and $762,480, respectively, using the Black-Scholes valuation model, which took into consideration the underlying price of ordinary shares, a risk-free interest rate, expected term and expected volatility. As a result, the valuation of the warrant was categorized as Level 3 in accordance with ASC 820, “Fair Value Measurement”. 

 

The key assumptions used in estimates are as follows:

 

   April 11,   August 30,   May 20, 
   2019   2019   2019 
    (Replacement Warrants) 
Terms of warrants   60 months    55.3 months    66 months 
Exercise price   1.32    2.20    1.32 
Risk free rate of interest   2.77%   2.77%   2.77%
Dividend yield   0.00%   0.00%   0.00%
Annualized volatility of underlying stock   55.6%   63.45%   57.04%

 

Statutory reserve

 

The Company is required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, the Company may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends.

 

As of December 31, 2020 and 2019, the Company’s PRC profit generating subsidiaries accrued statutory reserve funds of $913,292 and $nil, respectively.

 

F-28

 

 

10.LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted loss per common share for the years ended December 31, 2020 and 2019, respectively:

 

    For the Years Ended
December 31,
 
    2020     2019  
Net loss attributable to TD Holdings, Inc.’s Stockholders   $ (5,951,613 )   $ (6,933,950 )
                 
Weighted Average Shares Outstanding-Basic and Diluted     51,273,048       7,776,306  
                 
Income (loss) per share - basic and diluted   $ (0.12 )   $ (0.89 )
Net loss per share from continuing operations – basic and diluted   $ (0.05 )   $ (0.67 )
Net loss per share from discontinued operations – basic and diluted   $ (0.07 )   $ (0.22 )

 

Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is the same as basic loss per share due to the lack of dilutive items in the Company for the years ended December 31, 2020 and 2019. The number of warrants is excluded from the computation as the anti-dilutive effect.

 

The following table includes the number of shares that may be dilutive potential common shares in the future. The holders of these shares do not have a contractual obligation to share in our losses and thus these shares were not included in the computation of diluted loss per share because the effect was antidilutive.

 

   December 31,
2020
   December 31,
2019
 
Warrants   1,903,370    3,033,370 
    1,903,370    3,033,370 

 

11.INCOME TAXES

 

The United States of America

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law, which has made significant changes to the Internal Revenue Code. Those changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017. Accordingly, the Company reevaluated its deferred tax assets on net operating loss carryforward in the U.S. As of December 31, 2020, due to uncertainties surrounding future utilization, the Company recorded a full valuation allowance against the deferred tax assets based upon management’s assessment as to their realization. 

 

PRC

 

Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestic enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of 25%. Under the PRC tax law, companies are required to make quarterly estimate payments based on 25% tax rate; companies that received preferential tax rates are also required to use a 25% tax rate for their installment tax payments. The overpayment, however, will not be refunded and can only be used to offset future tax liabilities.

 

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11.INCOME TAXES (CONTINUED)

 

Income tax expenses consist of the following:

 

   For the Years Ended December 31, 
   2020   2019 
Current income tax expenses  $(2,313,854)  $(14,861)
Deferred income tax benefits   135,930    - 
Income tax expenses  $(2,177,924)  $(14,861)

 

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the years ended December 31, 2020 and 2019, the Company had no unrecognized tax benefits. Due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future income to realize the deferred tax assets. The Company maintains a full valuation allowance on its net deferred tax assets as of December 31, 2020 and 2019.

 

   December 31,   December 31, 
   2020   2019 
Deferred tax assets        
Net operating loss carryforwards in the PRC  $1,742   $- 
Federal Net operating loss carryforwards in the U.S.   1,858,126    1,421,677 
State Net operating loss carryforwards in the U.S.   1,150,269    880,096 
Amortization of beneficial conversion feature relating to issuance of convertible notes   714,000    - 
Amortization of relative fair value of warrants relating to issuance of convertible notes   642,600    - 
Impairment of investment securities   -    200,000 
Impairment of equity investment   86,100    221,943 
Impairment of financial products   -    210,000 
Less: valuation allowance   (4,452,837)   (2,933,716)
   $-   $- 
Deferred tax liabilities          
Amortization of intangible assets acquired in business combination  $4,893,461   $- 
   $4,893,461   $- 

 

Below is a reconciliation of the statutory tax rate to the effective tax rate of continuing operations: 

 

   For the Years Ended
December 31,
 
   2020   2019 
PRC statutory tax rate   25%   25%
Impact of different income tax rates in other jurisdictions   (157.8)%   (4.0)%
Effect of non-deductible expenses   (0.8)%   0%
Effect of valuation allowance for deferred tax assets   (845.6)%   (21.3)%
Effective tax rate   (979.2)%  $(0.3)%

 

As of December 31, 2020 and 2019, the Company had U.S. domestic cumulative tax loss carryforwards of $8.8 million and $6.8 million, respectively, which may be available to reduce future income tax liabilities and will expire in the years 2027 through 2037. In addition, the Company had minimal PRC tax loss carryforwards will expire beginning year 2021 to year 2025.

 

Realization of the Company’s net deferred tax assets is dependent upon the Company’s ability to generate future taxable income in the respective tax jurisdictions to obtain benefit from the reversal of temporary differences and net operating loss carryforwards. Full valuation allowance of $4,452,837 was recorded against deferred tax assets.

 

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11.INCOME TAXES (CONTINUED)

 

Uncertain tax positions

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. 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 on audit, including resolution of related appeals or litigation processes, 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. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Company is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. There were no uncertain tax positions as of December 31, 2020 and 2019 and the Company does not believe that its unrecognized tax benefits will change over the next twelve months.

 

12.RELATED PARTY TRANSACTIONS AND BALANCES

 

1)Nature of relationships with related parties

 

Name   Relationship with the Company

Shenzhen Qianhai Baiyu Supply Chain Co., Ltd.

(“Qianhai Baiyu”)

  Controlled by Mr. Zhiping Chen, the legal representative of Huamucheng, prior to March 31, 2020

Guangzhou Chengji Investment Development Co., Ltd.

(“Guangzhou Chengji”)

  Controlled by Mr. Weicheng Pan, who is an independent director of the Company.

Yunfeihu International E-commerce Group Co., Ltd

(“Yunfeihu”)

  An affiliate of the Company, over which an immediate family member of Chief Executive Officer owns equity interest and plays a role of director and senior management

Shenzhen Tongdow International Trade Co., Ltd.

(“TD International Trade”)

  Controlled by an immediate family member of Chief Executive Officer of the Company
Beijing Tongdow E-commerce Co., Ltd. (“Beijing TD”)   Wholly owned by Tongdow E-commerce Group Co., Ltd. which is controlled by an immediate family member of Chief Executive Officer of the Company

Shanghai Tongdow Supply Chain Management Co., Ltd.

(“Shanghai TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company

Guangdong Tongdow Xinyi Cable New Material Co., Ltd.

(“Guangdong TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company

Yangzhou Tongdow E-commerce Co., Ltd.

(“Yangzhou TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company

Tongdow (Zhejiang) Supply Chain Management Co., Ltd.

(“Zhejiang TD”)

  Controlled by an immediate family member of Chief Executive Officer of the Company
Shenzhen Meifu Capital Co., Ltd. (“Shenzhen Meifu”)   Controlled by Chief Executive Officer of the Company
Shenzhen Tiantian Haodian Technology Co., Ltd. (“TTHD”)   Wholly owned by Shenzhen Meifu
Guotao Deng   Legal representative of Huamucheng before December 31, 2019

 

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12.RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

2)Balances with related parties

 

As of December 31, 2020 and 2019, the balances with related parties were as follows:

 

- Due from related parties

 

   December 31,
2020
   December 31,
2019*
 
Qianhai Baiyu (i)  $-   $2,840,728 
TD International Trade (ii)   4,592,698    - 
Yangzhou TD (iii)   3,041,180    - 
Zhejiang TD (iii)   8,734,024    - 
Yunfeihu (iv)   19,830,214    - 
TTHD (v)   19,640,929    - 
Total due from related parties  $55,839,045   $2,840,728 

  

*The balance due from related parties as of December 31, 2019 have been reclassified to conform to the consolidated balance sheets as of December 31, 2020, primarily for the effects of discontinued operations.

 

(i)

The balance due from Qianhai Baiyu represented a loan principal and interest due from the related party. The Company charged the related party interest rates 10% per annum.

 

From December 2, 2019 to December 31, 2019, the Company lent loans aggregating $2,839,533 to Qianhai Baiyu, which was controlled by Mr. Zhiping Chen, the legal representative of the Company. The Company charged the related party interest rates 10% per annum. For the year ended December 31, 2019, the Company recognized interest income of $25,537. Principal and interest are repaid on maturity of the loan.

 

On March 31, 2020, Mr. Zhiping Chen transferred his controlling equity interest to an unrelated third party and Qianhai Baiyu was not a related party of the Company. On October 26, 2020, the Company acquired 100% equity interest in Qianhai Baiyu, and the balance due from Qianhai Baiyu was eliminated on the consolidation level. (Note 5).

 

(ii)

The balance due from TD International Trade consisted of loan receivable of $3,053,914, interest receivable of $8,000 and prepayments of $1,530,784 for commodity products.

 

In December 2020, the Company provided loans of approximately $2.9 million to TD International Trade with a loan term of one year. Both loan principal and internet were due in December 2021, with an interest rate of 10.95% per annum. The Company recognized interest receivable of $8,000 as of December 31, 2020.

 

(iii)

The balance due from Yangzhou TD and Zhejiang TD represented prepayments for commodity products.

 

(iv)

The balance due from Yunfeihu represented loans provided to the related party. Both the principal and interest will be due in August 2021, with an interest rate of 10.95% per annum. The Company recognized interest receivable of $195,000 as of December 31, 2020.

 

(v) The balance due from TTHD represented loans provided to the related party. Both the principal and interest will be due in December 2021, with an interest rate of 10.95% per annum. The Company recognized interest receivable of $50,000 as of December 31, 2020.

 

-Due to related parties

 

   December 31,
2020
   December 31,
2019*
 
Guangzhou Chengji (1)  $1,878,511   $164,897 
Yunfeihu (2)   4,235,680    - 
Guangdong TD (2)   612,313    - 
Shenzhen Meifu (2)   317,637    - 
Beijing TD (2)   300,992    - 
Other related parties   888    - 
Guotao Deng (3)   -    1,435 
Total due to related parties  $7,346,021   $166,332 

 

*The balance due from related parties as of December 31, 2019 have been reclassified to conform to the consolidated balance sheets as of December 31, 2020, primarily for the effects of discontinued operations.

 

(1) The balance due to Guangzhou Chengji represents loan principal and interest due to the related parties. For the year ended December 31, 2020 and 2019, the Company borrowed loans of $1,461,030 and $166,309,   respectively, from Guangzhou Chengji. The loans bear annual interest rate of 8% and maturity date of December 4, 2020. For the years ended December 31, 2020 and 2019, the Company accrued interest expenses of $104,522 and $nil, respectively.

 

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12.RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

2)Balances with related parties (continued)

 

(2) The balance due to Yunfeihu, Guangdong TD, Shenzhen Meifu and Beijing TD represents the advance from these four related parties for supply chain management services.
(3)

The balances due to Guotao Deng represent the operating expenses paid by the related parties on behalf of the Company. The balance is payable on demand and interest free.

 

Mr. Guotao Deng was a legal representative before December 31, 2019, thus he was not a related party of the Company from January 1, 2020.

 

3)Transactions with related parties

 

-Revenues generated from related parties

 

For the years ended December 31, 2020 and 2019, the Company generated revenues from below related party customers:

 

   For the Years Ended December 31, 
   2020   2019 
Revenue from sales of commodity products        
Yunfeihu  $10,515,531   $- 
Yangzhou TD   3,994,689    - 
Shanghai TD   1,024,546    - 
TD International Trade   709,011    - 
    16,243,777    - 
           
Revenue from supply chain management services          
Yunfeihu   1,443,667    - 
TD International Trade   423,722    - 
Guangdong TD   273,451    - 
    2,140,840    - 
Total revenues generated from related parties  $18,384,617   $- 

 

-Purchases from a related party

 

For the years ended December 31, 2020 and 2019, the Company purchased commodity products from below related party vendors:

 

   For the Years Ended
December 31,
 
   2020   2019 
Purchase of commodity products        
Yangzhou TD  $12,612,921   $  
Yunfeihu   3,938,746    - 
TD International Trade   192,427    - 
Qianhai Baiyu   -    100,180 
   $16,744,094   $100,180 

 

In connection with sales of commodity products, the Company recorded cost of revenues with related parties of $16,744,094 and $100,180, respectively, for the years ended December 31, 2020 and 2019,

 

In connection with the supply chain management services provided customers, Qianhai Baiyu provided related services to support the Company’s loan recommendation services provided to customers and distribution services provided to suppliers. For the year ended December 31, 2020 and 2019, the Company recorded cost of revenue of $nil and $489,231 associated with the supply chain management services related to the support from Qianhai Baiyu.

 

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13.COMMITMENTS AND CONTINGENCIES

 

1)Lease Commitments

 

The Company leases offices which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Leases with initial term of 12 months or less are not recorded on the balance sheet.

 

During the year ended December 31, 2020, the Company early terminated one operating lease arrangement, the Company provided full impairment of $176,225 for right-of-use lease assets for the year ended December 31, 2020.   Accordingly the lease liabilities relating to the operating lease arrangement was extinguished.

 

As of December 31, 2020, the Company had one lease arrangement with an unrelated third party with a monthly rental fee of approximately $7,200. The lease term was within 12 months, which will be due in August 2021. As of the date of this report, the Company cannot reasonably assess whether it will renew the lease term.

 

Lease expenses for the year ended December 31, 2020 and 2019 was $192,594 and $ nil, respectively. 

 

2)Contingencies

 

a2015 Derivative Action

 

On February 3, 2015, a purported shareholder Kiran Kodali filed a putative shareholder derivative complaint against the Company, alleging that the Company and its former officers and directors violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints.

 

On July 16, 2019, the Company received a copy of the final order and judgment that the Court entered on July 11, 2019, approving the settlement set forth in the Stipulation. The Stipulation provides for dismissal of the Derivative Action as to the Company and the Individual Defendants, and the Company agrees to adopt or maintain certain corporate governance reforms for at least three years. The Stipulation also provides for attorneys’ fees and expenses to be paid by the Individual Defendants’ insurance carriers to plaintiffs’ counsel. 

 

b2017 Arbitration with Sorghum

 

On December 21, 2017, the Company delivered notice (“Notice”) to Sorghum notifying Sorghum that certain recent actions of Sorghum constituted breaches of Sorghum’s covenants under the Exchange Agreement. Specifically, we believe that Sorghum is in breach of Section 6.9 (a and Section 6.11 (b of the Exchange Agreement which required Sorghum to use commercially reasonable efforts and to cooperate fully with the other parties to consummate the transactions contemplated by the Exchange Agreement and to make its directors, officers and employees available in connection with responding in a timely manner to SEC comments. According to the terms of the Exchange Agreement, the Company is entitled to terminate the Exchange Agreement if the breach is not cured within twenty (20 days after the Notice is provided to Sorghum.

 

On January 25, 2018, the Company filed an arbitration demand (“Arbitration Demand” with the American Arbitration Association (“AAA” against Sorghum in connection with Sorghum’s breach of the Exchange Agreement.

 

On July 30, 2018, Arbitrator entered a reasoned award, accepting the Company’s proposal for resolution, awarding the Company damages of $1,436,522 against Sorghum and denying Sorghum’s Counterclaim against the Company in its entirety with prejudice. Sorghum has sought to vacate the arbitration award by filing a petition to vacate the arbitration award in the Supreme Court for the State of New York, New York County. The Court heard the Company and Sorghum’s arguments on May 1, 2019, and entered an order vacating the arbitration award. The Company vigorously opposed and moved to confirm the arbitration award on May 6, 2019. On June 5, 2019, the Company filed a notice of appeal with the New York Supreme Court Appellate Division First Department. The appeal was scheduled to be mediated on November 20, 2019. On November 15, 2019, the Company withdrew its appeal filed June 5, 2019, upon the stipulation of the parties and accordingly, the arbitration award is deemed to be vacated.

 

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13.COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

2)Contingencies (continued)

 

c2018 Court Matter with Shanghai Nonobank Financial Information Service Co. Ltd.

 

On August 2, 2018, the Company became party to an action filed by Shanghai Nonobank Financial Information Service Co. Ltd. (“Plaintiff”) in the Supreme Court for the State of New York, New York County (“NY Supreme Court” (Index No. 653834/2018 (the “Action”). Plaintiff’s complaint seeks to recover approximately $3.5 million of Plaintiff’s funds that were allegedly required to be held in escrow in New York pursuant to an agreement by and between Plaintiff, Yang Jie and Yi Lin (the “Complaint”). Plaintiff has alleged that the funds were required to be held in escrow in a New York attorney trust account pending the alleged consummation of a merger between Plaintiff’s parent company and the Company. Plaintiff alleged two causes of action against the Company for fraud/fraudulent inducement and conversion. On August 30, 2018, the Company filed a motion to dismiss Plaintiff’s causes of action against the Company. The Court has scheduled oral arguments on the Company’s motion to dismiss for May 1, 2019.

 

On July 15, 2019, the Company received a copy of the decision and order the Court entered on July 12, 2019, granting the Company’s motion to dismiss the Complaint in its entirety as against the Company without prejudice, with costs and disbursements to the Company as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of the Company. 

 

d2020 Court Matter with Harrison Fund

 

On April 6, 2020, the Company filed a law suit against Harrison Fund, LLC (“Harrison Fund”) in the United States District Court for the Northern District of California (the “District Court”) (Case No. 3:20-cv-2307). The Company had invested $1,000,000 in Harrison Fund around May 2019. However, Harrison Fund had been reluctant to disclose related investment information to the Company and it was discovered that certain information presented on Harrison Fund’s brochure appeared to be problematic. The Company demanded a return of its investment from Harrison Fund. When the Company failed to obtain a response from Harrison Fund, it filed the complaint against Harrison Fund seeking to recover the $1,000,000 investment.

 

Due to the uncertainty arising from this pending legal proceeding, a full impairment has been applied against the Company’s investment in financial products.

 

14.RISKS AND UNCERTAINTIES

 

1)Credit risk

 

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As of December 31, 2020, approximately $2.64 million was primarily deposited in financial institutions located in Mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

 

The Company’s operations are carried out in Mainland China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among other factors.

 

2)Liquidity risk

 

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

 

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14.RISKS AND UNCERTAINTIES (CONTINUED)

 

3)Foreign currency risk

 

Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts.

 

The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Where there is a significant change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected.

 

Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:

 

   December 31,   December 31, 
   2020   2019 
Balance sheet items, except for equity accounts   6.5326    6.9680 

 

   For the years ended
December 31,
 
   2020   2019 
Items in the statements of operations and comprehensive income (loss), and statements of cash flows   6.9020    6.9088 

 

15.SUBSEQUENT EVENTS

 

On January 6, 2021, the Company entered into a securities purchase agreement with Streeterville Capital, LLC, a Utah limited liability company (“Streeterville Capital”), pursuant to which the Company issued Streeterville Capital an unsecured promissory note on January 6, 2021 in the original principal amount of $1,670,000, convertible into shares of common stock of the Company, for $1,500,000 in gross proceeds.

 

On January 7, 2021, the Company entered into certain securities purchase agreement (the “SPA”) with Ms. Renmei Ouyang, the Chief Executive Officer and Chairwoman of the Company, and Mr. Shuxiang Zhang, both of whom are “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company agreed to sell an aggregate of 15,000,000 shares of its common stock, at a per share purchase price of $1.63, which is the closing price of the Common Stock on the date immediate prior to the date of the SPA. The gross proceeds from such Offering will be $24,450,000. Since Ms. Ouyang and Mr. Zhang are affiliates of the Company, the offering was approved by the Audit Committee of the Board of Directors of the Company, which solely consistent of independent directors, as well as the Board of Directors of the Company.

 

On January 19, 2021, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with White Lion Capital, LLC, a Nevada limited liability company (“White Lion Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Investor is committed to purchase up to 15,700,000 shares (the “Purchase Notice Shares”) of the Company common stock with an aggregate of forty million dollars ($40,000,000) (the “Commitment Amount”) from time to time during a certain commitment period (the “Commitment Period”) as defined in the Purchase Agreement, at a purchase price (the “Purchase Price”) of 90% of the lowest daily volume-weighted average price of the Company’s Common Stock during a valuation period of three business days prior to the closing of each Purchase Notice received by the Investor.

 

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