As of June 28, 2019, 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 $4.66 million based on the closing price of $0.58 for the registrant’s
common stock as reported on the NASDAQ Capital Market.
As of May 29, 2020, there were 68,585,806
shares of the Company’s common stock issued and outstanding.
PART
I
Item 1. Description of Business.
Overview
and Corporate History
TD Holdings, Inc., (formerly known as
Bat Group, Inc.) has become a used luxurious car leasing business as well as a commodities trading business operating in China
since the disposition of its direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses,
farmers and individuals (the “Micro-lending Business”) in July 2018. Our current operations consist of leasing
of luxurious pre-owned automobiles and operation of a non-ferrous metal commodities trading business.
The Company operates a luxurious car business
that is conducted under the brand name “Batcar” through the Company’s VIE entity, Beijing Tianxing Kunlun Technology
Co. Ltd (“Beijing Tianxing”), from its headquarters in Beijing. The Company also conducts a commodities trading
business via its other VIE entity, Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”).
Our
Current Business
Used
Luxurious Car Leasing Business
During
the twelve months ended December 31, 2019, the Company, through Beijing Tianxing, offers our customers the opportunity to rent
luxurious pre-owned automobiles in Beijing, Shanghai, Zhejiang and Chengdu, China. Currently the Company has eleven used luxurious
cars with net book value of approximately US$ 2.43 million. To determine the model of vehicles to be purchased, we collect data
related to customers’ demands and preferences through sales and online promotions. Our professional procurement personnel
will then compare models of vehicles offered by different sellers. The decision to purchase a
specific vehicle is based on a number of considerations including time of delivery, vehicle condition, vehicle safety feature,
mileage, repairing and maintenance history, accidents history, market scarcity, and etc. For the years ended December 31, 2019
and 2018, the Company earned income from operating lease of $1,830,148 and $488,062, respectively.
Commodities
Trading Business
In
order to diversify the Company’s business, on November 22, 2019, the Company’s
indirectly wholly owned
subsidiary Hao Limo Technology (Beijing) Co., Ltd. (“Hao Limo”) entered into a series of agreements (the “Huamucheng
VIE Agreements”)
with Huamucheng and the shareholders of Huamucheng who collectively hold 100% of Huamucheng.
Through Huamucheng’s VIE structure,
the Company launched its commodities trading operations. Huamucheng focuses on trading of non-ferrous metal commodities such as
aluminum, copper, silver, and gold, and is striving 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 commodity trading business, the Company primarily generates revenues from sales of commodities products and providing
of supply chain management services such as loan recommendation and distribution services to customers in the PRC.
In December 2019, the
Company generated revenue of $100,427 from commodities trading business and $562,586
from supply chain management services (including loan recommendation service fee of $323,623 and distribution service fee
of $238,963), respectively.
Disposition
of the Micro-lending Business
Historically, our core business has been
the Micro-lending business conducted through Wujiang Luxiang Rural Microcredit Co., Ltd. (“Wujiang Luxiang”),
an entity we controlled via certain contractual arrangements and Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”),
our wholly owned subsidiary. However, since 2016, the microcredit companies in Wujiang area went through the most difficult time
since their inceptions in 2008. Twelve of fourteen microcredit companies in the Wujiang area went bankrupt while the remainder
are struggling with high default rates due to the poor economic condition, especially the slow-down in the textile industry. The
operations of Wujiang Luxiang were also affected. We did not have further funds to deploy in the financial leasing business and
held off expansion of the leasing business.
On
February 28, 2018, we received a letter (the “Notification Letter”) from The NASDAQ Stock Market LLC (“Nasdaq”)
notifying the Company that it is not in compliance with the minimum of $35 million Market Value of Listed Securities (MVLS) requirement
for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(2) requires listed securities to maintain a minimum
MVLS. The Company was provided one hundred and eighty calendar days, or until August 27, 2018, to regain compliance with the MVLS
requirement.
The
Company believed it is very difficult, if possible at all, to make collections on the default loans and guarantee obligations
paid on behalf of guarantees. As of March 31, 2018, the Company has a stockholder deficit (or so-called negative net asset) of
approximately $4.5 million. Management believes, if we keep operating the micro-lending, loan guarantee and financial leasing
business, we will not be able to achieve the necessary minimum stockholder equity requirement or the minimum of $35 million MVLS
requirement as required by the Nasdaq Listing Rules to regain compliance by August 27, 2018. As such, the Company sought to dispose
the Micro-lending Business while focusing on the luxurious car leasing or engage in other more profitable businesses.
On
June 19, 2018, the Company, HK Xu Ding Co, Limited, a private limited company duly organized under the laws of Hong Kong (the
“Purchaser”) and CCCR International Investment Ltd., a business company incorporated in the British Virgin
Islands with limited liability (“CCC BVI”) entered into certain Share Purchase Agreement (the “Purchase
Agreement”). CCC BVI is the sole shareholder of CCC International Investment Ltd. (“CCC HK”), a company
incorporated under the laws of the Hong Kong S.A.R. of the PRC, which is the sole shareholder of WFOE and PFL. WFOE, via a series
of contractual arrangements, controls Wujiang Luxiang. Pursuant to the Purchase Agreement, the Purchaser agreed to purchase CCC
BVI in exchange of cash purchase price of $500,000. The transaction contemplated by the Purchase Agreement is hereby referred
as Disposition.
The
Disposition was approved by the board of directors of the Company. Benchmark Company, LLC rendered a fairness opinion in connection
with the Disposition, indicating that the Consideration to be received by the Company in the transaction is fair to the Company’s
shareholders from a financial point of view,
On
July 10, 2018, the parties completed all the share transfer registration procedure as required by the laws of British Virgin Islands
and all the other closing conditions have been satisfied, as a result, the Disposition contemplated by the Purchase Agreement is
completed. Upon completion of the Disposition, Purchaser will become the sole shareholder of CCC BVI and as a result, assume all
assets and obligations of all the subsidiaries and VIE entities owned or controlled by CCC BVI.
2019
Registered Direct Offering
On
April 11, 2019, the Company and certain institutional investors (the “Purchasers”) entered into a securities
purchase agreement (the “April SPA”), pursuant to which the Company agreed to sell to such investors an aggregate
of 1,680,000 shares of Common Stock (“Common Stock”) in a registered direct offering and warrants to purchase
up to approximately 1,680,000 shares of the Company’s Common Stock in a concurrent private placement, for gross proceeds
of approximately $3.7 million. The warrants will be exercisable immediately following the date of issuance and have an exercise
price of $2.20. The warrants will expire 5 years from the earlier of the date on which the shares of Common Stock issuable upon
exercise of the warrants may be sold pursuant to an effective registration statement or may be exercised on a cashless basis and
be immediately sold pursuant to Rule 144. The purchase price for each share of Common Stock and the corresponding warrant is $2.20.
Each warrant is 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 contain a mandatory exercise right for the Company to
force exercise of the warrants if the Company’s common stock trades at or above $6.60 for 20 consecutive trading days provided,
among other things, that the shares issuable upon exercise of the warrants are registered or could be sold pursuant to Rule 144
and the daily trading volume exceeds 200,000 shares per trading day on each trading day in a period of 20 consecutive trading
days prior to the applicable date.
On
May 20, 2019, the Company and the Purchasers entered into a second securities purchase agreement (the “May SPA”),
pursuant to which the Company agreed to sell to such investors an aggregate of 1,440,000 shares of Common Stock in a registered
direct offering and warrants to purchase up to approximately 1,080,000 shares of the Company’s Common Stock in a concurrent
private placement, for gross proceeds of approximately $1.5 million. The warrants will be exercisable after 6 months of the date
of issuance and have an exercise price of $1.32. The warrants will expire 5.5 years from the date of issuance. The purchase price
for each share of Common Stock and the corresponding warrant is $1.05. Each warrant is 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 contain a mandatory exercise right for the Company to force exercise of the warrants if the Company’s
common stock trades at or above $3.96 for 20 consecutive trading days provided, among other things, that the shares issuable upon
exercise of the warrants are registered or could be sold pursuant to Rule 144 and the daily trading volume exceeds 200,000 shares
per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date. In addition, the
Company agreed to reduce the exercise of the warrants issued on April 15, 2019 from $2.20 to $1.32.
Nasdaq
Deficiencies
On
June 12, 2019, the Company received a notification letter (the “Notification”) from the Nasdaq Stock Market
Listing Qualifications Staff (the “Nasdaq Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”)
notifying the Company that it did not meet the following requirements: (i) because the exercise price for the warrants issued
on April 11, 2019 had been reduced from $2.20 to $1.32 on May 20, 2019, below the minimum price requirements set forth in Nasdaq
Listing Rule 5635(d)(1), the Company was required to obtain shareholder approval as set forth in Nasdaq Listing Rule 5635(d)(2);
(ii) Staff has determined to aggregate the offering pursuant to the Securities Purchase Agreement dated April 11, 2019 and the
offering pursuant to the Securities Purchase Agreement dated May 20, 2019 for purposes of the Nasdaq’s shareholder approval
rules; and (iii) the Company was also required to submit a Listing of Additional Shares Notification Form as set forth in Nasdaq
Listing Rule 5250(e)(2)(D) 15 days prior to issuing any common stock, or any security convertible into common stock in a transaction
that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10% of either
the total shares outstanding or the voting power outstanding on a pre-transaction basis.
The
notification received had no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing
Rules, the Company had until July 29, 2019 to submit a plan to regain compliance (the “Compliance Plan”). If
the Compliance Plan is accepted, Nasdaq can grant an extension of up to 180 calendar days from the date of the Notification. On
July 25, 2019, the Company submitted its Compliance Plan to the Nasdaq Staff and the Company received a written notification on
September 16, 2019 indicating that it had regained compliance with the shareholder approval requirements set forth in Listing
Rule 5635(d) and the Listing of Additional Shares notification requirements under Listing Rule 5250(e)(2)(D) for continued listing
on the Nasdaq Capital Market based on the Nasdaq Staff’s review of the Company’s submitted materials.
On
July 3, 2019, the Company received a notification letter from the Nasdaq Staff notifying the Company that the minimum bid price
per share for its common shares has been below $1.00 for a period of 30 consecutive business days and the Company therefore no
longer meets the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2).
The
notification received had no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing
Rules, the Company had until December 30, 2019 to regain compliance. If at any time during such 180-day period the closing bid
price of the Company’s common shares is at least $1 for a minimum of 10 consecutive business days, Nasdaq will provide the
Company written confirmation of compliance. On December 11, 2019, the Company received a written notification from the Nasdaq
Staff indicating that the Company has regained compliance with the bid price requirement for continued listing on the Nasdaq Capital
Market pursuant to Nasdaq Listing Rule 5550(a)(2) based on the closing bid price of the Company’s common stock being at $1.00
per share or greater for 10 consecutive business days from November 26 to December 10, 2019.
Amendment
and Exchange Agreement for the April 2019 Registered Direct Offering
Background
On
April 11, 2019, the Company and the purchasers entered into the April SPA, whereby the Company, among other things, issued to
the Purchasers warrants to purchase up to 1,680,000 shares of the Company’s Common Stock, exercisable immediately following
the date of issuance and with an exercise price of $2.20 (the “Original April Warrants”). On May 20, 2019,
the Company and the Purchasers entered into the May SPA, whereby the Company, among other things, agreed to issue to the Purchasers
amended and restated warrants reducing the exercise price of the Original April Warrants from $2.20 to $1.32 (the “Replacement
Warrants”).
The
Company’s issuance of the Replacement Warrants had resulted in noncompliance of Nasdaq Listing Rules 5635(d)(1) and 5635(d)(2),
subjecting the Company to a potential delisting from the Nasdaq Capital Market in the event the deficiency is not cured.
Amendment
and Exchange Agreement
On
August 30, 2019, the Company and the Purchasers entered into an amendment and exchange agreement (the “Exchange Agreement”),
pursuant to which the Company issued to the Purchasers exchange warrants (the “Exchange Warrants”) to purchase
up to 1,680,000 shares of Common Stock with an exercise price of $2.20 in exchange for the cancellation and termination of the
Replacement Warrants.
The
Company agreed in the Exchange Agreement that it would file with the Commission a registration statement on Form S-1 (or such
other form as the Company is then eligible to use) as soon as practicable providing for the resale by the Purchasers of the shares
of Common Stock issuable upon exercise of the Exchange Warrants, and that it would use commercially reasonable efforts to cause
such registration statement to become effective as soon as practicable.
October
2019 Private Placement
On October 8, 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 (the “Securities Act”) pursuant to which the Company sold an aggregate of 1,685,000
shares of its Common Stock, at a per share purchase price of $0.35 (the “October Offering”). The October Offering
closed on November 13, 2019 when all closing conditions were met and the net proceeds to the Company from the October Offering
was approximately $589,750.
Acquisition
of Hangzhou Yihe Network Technology Co., Ltd.
On
October 14, 2019, the Company entered into certain share purchase agreement (the “Zhuji SPA”) with Zhuji Xingmai
Network Technology Co., Ltd., (the “Zhuji Xingmai”), a limited liability company organized under the laws of
PRC, and Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou Yihe”), a limited liability company organized
under the laws of PRC. Zhuji Xingmai was the record holder and beneficial owner of all issued and outstanding capital stock of
Hangzhou Yihe. Pursuant to the Zhuji SPA the Company transferred to Zhuji Xingmai an aggregate of 1,253,814 shares of its Common
Stock, and Zhuji Xingmai transferred to the Company such number of shares which represents 20% of the capital stock of Hangzhou
Yihe. The transaction contemplated by the Zhuji SPA closed on December 17, 2019 when all closing conditions were met.
November
2019 Private Placement
On
November 21, 2019, 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 2,000,000 shares of its Common
Stock, at a per share purchase price of $0.80 (the “November Offering”). The November Offering closed on February
5, 2020 when all closing conditions were met and the net proceeds to the Company from the November Offering was approximately
$1,600,000.
Entering
the Commodities Trading Business
Despite
the Company’s rapid growth in total assets and stockholders’ equity attributed to the Company’s investment of
resources into the development of the luxury car leasing business during the first three quarters of 2019, the continuous net
loss incurred may negatively affect the Company’s ability to satisfy Nasdaq’s Continued Listing Requirements. As of
December 31, 2019, the only new city that the Company successfully expanded its operations into in 2019 was Chengdu. The Company
has attempted to operate its luxurious car leasing business in Shanghai and Wuhan, but did not achieve ideal results. The foregoing
factors indicate that it will be difficult to grow the luxurious car leasing business further in the near future.
Due
to management’s dissatisfaction with the performance of the used luxuries car leasing business, it started to seek other
business opportunities and/or acquisition targets in August 2019.
On
November 22, 2019, Hao Limo entered into the Huamucheng VIE Agreements with Huamucheng and certain shareholders of Huamucheng
who collectively hold 100% of Huamucheng and planned to conduct a new commodity trading business via Huamucheng.
Due
to China’s rapid development and urbanization over the past 30 years, it has created one of the world largest infrastructure
market. All of the ongoing and upcoming construction, renovations, and improvements to infrastructure will directly drive the
demand for steel, iron, and other commodities, thus promoting the development of the commodities trading market. Moreover, China
has implemented the Belt and Road Initiative (the “BRI”) in 2013, a global development strategy involving infrastructure
development and investments in 152 countries and international organizations in Asia, Europe, Africa, the Middle East, and the
Americas. The BRI has provided China with a platform to establish and participate in international commodities trading and resource
allocations. In addition, the implementation of the BRI requires a lot of construction metal and industrial raw materials which
provides a very good market and opportunity for developing commodity trade in energy products, basic industrial raw materials
and bulk agricultural products.
The
turnover of China’s commodity market has shown a rapid upward trend, and the management believes that entering into the
commodity trading business will bolster the Company’s income and increase shareholder value.
Our
current Chief Executive Officer (“CEO”) and Chairwoman of the Board, Ms. Renmei Ouyang, has accumulated substantial
industry expertise through years of experience in the commodities trading industry. Ms. Ouyang was initially introduced to our
former Chief Executive Officer, Mr. Jiaxi Gao, as an ideal candidate to provide expert guidance for the Company in its entry into
the commodities trading industry. The Company hired Ms. Ouyang as its Chief Operating Officer and Chairwoman of the Board on October
17, 2019, and later repositioned her as the new CEO on January 9, 2020.
Guangzhou
Chengji Loan Agreement
On
November 26, 2019, Hao Limo, a wholly-owned subsidiary of the Company, and Guangzhou Chengji Investment Development Co., Ltd.
(the “Lender”), entered into a loan agreement (the “Loan Agreement”). Under the Loan Agreement,
the Lender lent Hao Limo $970,318 (the “Loan”). The Loan has an annual interest rate of 8% and had a maturity
date of February 26, 2020 which was extended to September 4, 2020.
The
Loan Agreement also contains customary provisions, including using the Loan only for the specified use of proceeds in the Loan
Agreement, not using the Loan for any illegal activities, and an agreement to settle any potential disputes through negotiation
and mediation.
Hao
Limo intends to use the proceeds from the Loan for its daily operations to expand its business as well as to start the commodities
trading business.
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. HC High BVI wholly owns HC High Summit Limited (“HC
High HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC on April 16, 2018. HC High HK is
the sole shareholder of Hao Limo Technology (Beijing) Co., Ltd. (“Hao Limo”), a limited liability company formed
under the laws of the PRC on May 10, 2018, which controls Beijing Tianxing, a company established under the laws of the PRC on
April 17, 2018, and Huamucheng, company established under the laws of the PRC on December 30, 2013 through a series
of contractual arrangements.
On
January 11, 2019, the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Secretary of State
of Delaware to effect the following: (1) a name change from China Commercial Credit, Inc. to China Bat Group, Inc. and (2) a 1
for 5 reverse stock split (the “Reverse Split”) of the shares of the Company’s issued and outstanding
common stock, par value $0.001 (the “Common Stock”) (collectively, the “January Charter Amendment”).
The January Charter Amendment became effective on January 17, 2019.
On
June 3, 2019, 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 China Bat Group, Inc. to Bat Group, Inc. (the “June Charter Amendment”).
The June Charter Amendment became effective on June 3, 2019.
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
October 14, 2019, the Company entered into the Zhuji SPA with Zhuji Xingmai and Hangzhou Yihe. Zhuji Xingmai was the record holder
and beneficial owner of all issued and outstanding capital stock of Hangzhou Yihe. Pursuant to the Zhuji SPA the Company transferred
to Zhuji Xingmai an aggregate of 1,253,814 shares of its Common Stock, and Zhuji Xingmai transferred to the Company such number
of shares which represents 20% of the capital stock of Hangzhou Yihe. The transaction contemplated by the Zhuji SPA closed on
December 17, 2019 when all closing conditions were met.
As
of the date of this report, Beijing Tianxing has six wholly owned subsidiaries, which are Beijing Tianrenshijia Apparel Co., Ltd.,
Beijing Blue Light Marching Technology Co., Ltd. (formerly known as Beijing Tongxingyi Feed Co., Ltd.), Beijing Eighty Weili Technology
Co., Ltd., Beijing Bat Riding Technology Co., Ltd. (formerly known as Beijing Saikesheng Garments Co., Ltd.), Beijing Blue Light
Riding Technology Co., Ltd. (formerly known as Beijing Yimingzhu Restaurant Management Co., Ltd.) and Car Master (Beijing) Information
Consulting Co., Ltd. In addition, the Company has one subsidiary over which the Company has 60% ownership, Beijing Blue Light
Super Car Technology Co., Ltd (Formerly known as “Beijing Keao Jiye Commercial Co., Ltd.”). The remaining 40% of ownership
interest is owned by an employee of the Company. Each of Beijing Tianxing’s subsidiaries own a license to hold at least
one car in Beijing or Zhejiang.
Hao
Limo had previously entered into VIE agreements with Beijing Youjiao Technology Limited (“Beijing Youjiao”)
when its luxurious used car leasing business was launched during May and June of 2018. Those VIE agreements were later terminated
on June 19, 2018 and November 8, 2018, respectively, to improve efficiency and save administrative costs. The Company now exclusively
operates through Beijing Tianxing and Huamucheng which are controlled by Hao Limo through a series of contractual arrangements.
The
following diagram illustrates our corporate structure as of the date of this Annual Report:
(1)
|
Pursuant
to a series of contractual arrangements, Hao Limo effectively controls and manages the business activities of Beijing Tianxing.
|
|
|
(2)
|
Pursuant
to a series of contractual arrangements, Hao Limo effectively controls and manages the business activities of Huamucheng.
|
Contractual
Arrangements between Hao Limo and Beijing Tianxing
On
May 17, 2018, Hao Limo entered into a series of agreements (the “Tianxing VIE Agreements”) with Beijing Tianxing
Kunlun Technology Co. Ltd. (“Beijing Tianxing”) and the shareholders of Beijing Tianxing. The Tianxing 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 Beijing Tianxing, including absolute control rights and the rights to the management,
operations, assets, property and revenue of Beijing Tianxing. The purpose of the Tianxing VIE Agreements is solely to give Hao
Limo the exclusive control over Beijing Tianxing’s management and operations. Beijing Tianxing has the requisite license
to carry out used luxurious car leasing business in China.
Exclusive
Business Cooperation Agreement
Pursuant
to the Exclusive Business Cooperation Agreement between Beijing Tianxing and Hao Limo, Hao Limo provides Beijing Tianxing with
technical support, consulting services and management services on an exclusive basis, utilizing its advantages in technology,
human resources, and information. Additionally, Beijing Tianxing granted an irrevocable and exclusive option to Hao Limo to purchase
from Beijing Tianxing, any or all of Beijing Tianxing’s assets at the lowest purchase price permitted under the PRC laws.
Should Hao Limo exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services
rendered to Beijing Tianxing by Hao Limo under this agreement, Hao Limo is entitled to collect a service fee calculated based
on the time of services rendered multiplied by the corresponding rate, plus amount of the services fees or ratio decided by the
board of directors of Hao Limo based on the value of services rendered by Hao Limo and the actual income of Beijing Tianxing from
time to time, which is substantially equal to all of the net income of Beijing Tianxing.
The
Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by Hao Limo with 30-day
prior written notice. Beijing Tianxing does not have the right to terminate the agreement unilaterally. Hao Limo may unilaterally
extend the term of this agreement with prior written notice.
Share
Pledge Agreement
Under
the Share Pledge Agreement among Beijing Tianxing, Shun Li, Jialin Cui and Hao Limo, Shun Li and Jialin Cui pledged all of their
equity interests in Beijing Tianxing to Hao Limo to guarantee the performance of Beijing Tianxing’s obligations under the
Exclusive Business Cooperation Agreement. Under the terms of the agreement, in any event of default, as set forth in the Share
Pledge Agreement, including that Beijing Tianxing, Shun Li or Jialin Cui breach their respective contractual obligations under
the Exclusive Business Cooperation Agreement, Hao Limo, as pledgee, will be entitled to certain rights, including, but not limited
to, the right to dispose of the pledged equity interest in accordance with applicable PRC laws. Hao Limo shall have the right
to collect any and all dividends declared or generated in connection with the equity interest during the term of pledge.
The
Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been
paid by Beijing Tianxing. Hao Limo shall cancel or terminate the Share Pledge Agreement upon Beijing Tianxing’s full payment
of fees payable under the Exclusive Business Cooperation Agreement.
Exclusive
Option Agreement
Under
the Exclusive Option Agreement, Shun Li and Jialin Cui irrevocably granted Hao Limo (or its designee) an exclusive option to purchase,
to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Beijing
Tianxing. The option price is equal to the capital paid in by Shun Li and Jialin Cui subject to any appraisal or restrictions
required by applicable PRC laws and regulations.
The
agreement remains effective for a term of ten years and may be renewed at Hao Limo’s election.
Power
of Attorney
Under
the Power of Attorney, Shun Li and Jialin Cui authorized Hao Limo to act on their behalf as their exclusive agent and attorney
with respect to all rights as shareholder, including but not limited to: (a) attending shareholders’ meetings; (b) exercising
all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles
of Association of Beijing Tianxing, including but not limited to the sale or transfer or pledge or disposition of shares held
by Shun Li and Jialin Cui in part or in whole; and (c) designating and appointing on behalf of Shun Li and Jialin Cui the legal
representative, the executive director, supervisor, the chief executive officer and other senior management members of Beijing
Tianxing.
Although
it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that
of the Exclusive Option Agreement.
This
Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this
Power of Attorney, so long as Shun Li and Jialin Cui are shareholders of Beijing Tianxing.
Timely
Reporting Agreement
To
ensure Beijing Tianxing promptly provides all of the information that Hao Limo and the Company need to file various reports with
the SEC, a Timely Reporting Agreement was entered between Beijing Tianxing and the Company.
Under
the Timely Reporting Agreement, Beijing Tianxing agreed that it is obligated to make its officers and directors available to the
Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other
regulatory reports as required.
Although
it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the
Exclusive Business Cooperation Agreement.
The
Tianxing VIE Agreements became effective immediately upon their execution.
Contractual
Arrangements between Hao Limo and Huamucheng
On
November 22, 2019, Hao Limo entered into a series of agreements (the “Huamucheng VIE Agreements”) with Shenzhen
Huamucheng Trading Co., Ltd. (“Huamucheng”) and the shareholders of Huamucheng. 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 purpose of the Huamucheng VIE Agreements is solely to give Hao Limo the exclusive
control over Huamucheng’s management and operations. Huamucheng does not require any special licenses to carry out the commodities
trading business in China.
Exclusive
Business Cooperation Agreement
Pursuant
to an exclusive business cooperation agreement by and between Hao Limo and Huamucheng, Hao Limo agrees to provide Huamucheng with
complete technical support, business support and related consulting services during the term of the agreement and Huamucheng agrees
not to engage any other party for the same or similar consultation services without Hao Limo’s prior consent. Huamucheng
agrees to pay Hao Limo service fees substantially equal to all of its net income, subject to any requirement by PRC law and its
articles of association. The term of the exclusive business cooperation agreement is 10 years. Hao Limo may terminate the agreement
at any time with a 30-day advance written notice to Huamucheng.
Share
Pledge Agreement
Hao
Limo, Huamucheng and the Huamucheng Shareholders entered into a share pledge agreement, pursuant to which Huamucheng Shareholders
pledged all of their equity interest in Huamucheng to Hao Limo in order to guarantee the performance of Huamucheng’s obligations
under the exclusive business cooperation agreement between Hao Limo and Huamucheng. During the term of the pledge, Hao Limo is
entitled to any and all dividends declared on the pledged equity interest of Huamucheng. The share pledge agreement terminates
upon full payment of consulting and service fees and termination of Huamucheng’s contractual obligations under the exclusive
business cooperation agreement between Hao Limo and Huamucheng.
Exclusive
Option Agreement
Pursuant
to an exclusive option agreement by and among Hao Limo, Huamucheng and Huamucheng Shareholders, the Huamucheng Shareholders have
irrevocably granted Hao Limo an exclusive option to purchase at any time, in part or in whole, their equity interests in Huamucheng
for a purchase price equal to the capital paid by Huamucheng Shareholders, pro-rated for purchases of less than all their equity
interests. The exclusive option agreement has a term of ten years and can be renewed by Hao Limo at its discretion.
Powers
of Attorney
Each
of the Huamucheng Shareholders has entered into a power of attorney pursuant to which each of the Huamucheng Shareholders has
irrevocably authorized Hao Limo to act on his or her behalf as the exclusive agent and attorney with respect to all rights of
such individual as a shareholder, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all
the shareholder’s rights, including voting, that shareholders are entitled to under PRC law and the Articles of Association
of Huamucheng, including but not limited to the sale, transfer, pledge or disposition of the equity interests of Huamucheng owned
by such shareholder; and (c) designating and appointing on behalf of the shareholders the legal representative, executive director,
supervisor, chief executive officer and other senior management members of Huamucheng. The power of attorney shall be irrevocable
and continuously valid from the date of execution of the power of attorney, so long as the respective shareholder remains to be
a shareholder of Huamucheng.
Timely
Reporting Agreement
The
Company and Huamucheng have entered into a timely reporting agreement pursuant to which Huamucheng agrees to make its officers
and directors available to us and promptly provide all information required by us so that we can make necessary SEC and other
regulatory reports in a timely fashion.
Recent
Developments
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 $36,000,000 for the exercise of the Warrants by April 15, 2020. As a result, an aggregate of 40,000,000
shares of the Company’s Common Stock were issued on May 18, 2020.
Our
Business
As
of December 31, 2019, the Company has two business lines, the Used Luxurious Car Leasing Business and the Commodities Trading
Business.
Used
Luxurious Car Leasing Business
Our
Inventory and Vehicle Acquisition Process
During
the year ended December 31, 2019, we have 11 used luxurious cars valued at approximately US$ 2.43 million, including a white Ferrari
458, two white Land Rover (Range Rover Executive Edition), a blue Maserati Geberit dark, a blue McLaren 570GT, a red Ferrari 458
Spider, a Mercedes-Benz G63, a white Maserati Geberit, an Audi A6, a grey Lamborghini Hurricane and a silver Lamborghini Hurricane.
To determine the model of vehicles to be purchased, we collect data related to customers’ demands and preferences through
sales and online promotions. Our professional procurement personnel then compare models of vehicles offered by different sellers.
The decision to purchase a specific vehicle is based on a number of considerations including time of delivery, vehicle condition,
vehicle safety feature, mileage, repair and maintenance history, accidents history, market scarcity, and etc. All the sellers
of the 11 vehicles we own are individuals.
Pursuant
to local Beijing laws, each entity in Beijing has its quotas to purchase and own vehicles, even for auto leasing businesses. Therefore,
all the 11 vehicles are owned by Beijing Tianxing’s wholly-owned subsidiaries while managed by Beijing Tianxing. The purchase
price of the vehicles we currently own ranges from 50% to 80% of that of the new vehicles.
By the end of December 31, 2019, and as of the date of filing
this annual report on Form 10-K, the Company had 11 luxurious cars in stock, of which five were purchased in 2019.
Our
Services
Renting
Service
We
rent our luxurious cars to both our individual and corporate customers from our stores in Beijing, Shanghai, Zhejiang and Chengdu.
The rental price varies based on the rental term which ranges from one day to one month; the longer the rental term, the cheaper
the price. The daily rental price is the highest, while the average weekly rental prices and average monthly rental prices are
10% to 20% and 20% to 30% cheaper, respectively, than that of the daily rental price.
Customers
can confirm the time and place for vehicle delivery and rental term via SMS messages, phone calls or face-to-face communication
with our sales personnel, as well as through our website and WeChat Applet. Our sales personnel will then deliver the vehicle
to the customers as designated. The customer, before signing the car rental agreement, will inspect the vehicle in person and
pay the rent along with the deposit with their credit card, Wechat Pay or Alipay. The customer is responsible for the gas, toll,
and any other expenses related to the use of the vehicle during the rental term.
Our
operations for our luxury vehicle leasing business consists of the following 7 steps:
|
1)
|
Pre-lease
Preparation: Our asset management personnel are regularly scheduled to conduct comprehensive inspections, repairs, maintenance,
and cleaning of the vehicles.
|
|
2)
|
Lease
Preparation: Our sales personnel will introduce to the customer in detail information regarding our car rental conditions,
price, distance and time limit, required procedures, the main contents of the rental contract terms, other rental instructions,
and related services.
|
|
3)
|
Paperwork
Preparation: Individual customers are required to provide their original identification card, driver’s license,
and house or land ownership certificate. Corporate customers are required to provide their company’s business license,
enterprise organization code certificate, and the legal person’s power of attorney and driver’s license.
|
|
4)
|
Signing
the Contract: Before signing the contract, our personnel will repeat to the customer material terms of the rental contract.
After filling in the vehicle’s information and other rental terms, the customer will be required to enter their personal
information and sign the contract.
|
|
5)
|
Rent
and Deposit Prepayment: The prepayment of rental fees and the deposit must be paid by the customer prior to renting the
vehicle. The amount of the prepayment is determined by the rental duration and price of the vehicle.
|
|
6)
|
Delivery
Inspection: When the vehicle is delivered to the customer, the sales personnel will hand over the vehicle key, instructions,
and other accessories such as data cables and mobile phone holders. The sales personnel will then guide the customer through
a thorough vehicle inspection including the exterior, steering system, braking system, lubrication system, coolant, tires,
and lights. After the vehicle inspection is completed, the customer will be asked to fill in an inspection form, of which
both the customer and the sales department will retain a copy.
|
|
7)
|
Guidance
on Operating the Luxury Vehicle: The sales personnel will explain the operation of the luxury vehicle to the customer
according to its performance and characteristics so as to mitigate any damage caused by mishandling. Customers will also be
reminded to keep their communications open at all times during the rental period.
|
Car
Pooling Service with Peer Companies
In
addition to directly renting to customers, we also rent to other auto rental companies in a similar fashion but at a discounted
rate. We and our peer companies have formed a vehicle pool consisting of all available pre-owned vehicles. In the scenario where
a customer places a rental order with a company which does not currently have the requested vehicle in stock, another company
in the vehicle pool possessing the requested vehicle will rent it to the company at a discounted price upon its request.
Risk
Management
Credit
Risks
We
conduct comprehensive credit checks against customers who place orders. We work with credit rating platforms such as JD Wanxiang
and TYi Online to evaluate the customers’ credit. We may reject the order for any reason, including unacceptable credit
ratings. Once an order is accepted, we will require a deposit ranging from US$7,500 and US$15,000 based on the vehicle being ordered
and the customers’ credit score. The deposit consists of a vehicle deposit and a traffic violation deposit.
Damage
and Theft Risks
We
have installed five GPS trackers on each of our vehicles to track the location of the vehicle, and the locations of the vehicles
are monitored every hour. If it is discovered that the vehicle has been driven far away from its rental location, a warning will
be issued to the driver by phone to demand the return of the vehicle to the city of its rental location. Once the rental period
is over, the vehicle is to be returned to a designated location to our salesperson. In the event the vehicle is returned with
no damage other than normal wear and tear, we will process the refund of the vehicle deposit on the next business day. The traffic
deposit will be refunded after we receive traffic violation records associated with the vehicle from the local police (approximately
a month after the return) showing no traffic violation.
If
the following conditions occur, the corresponding fee will be deducted from the deposit. In the event that the amount of deposit
to be deduced by the Company to the customer is lower than the payment to the damage or repair cost, the customer shall pay such
deficiency to the Company. In the event that the amount of deposit to be paid by the Company is greater than the payment to the
damage or repair cost, the Company shall refund such differences to the customer:
|
a)
|
If
the vehicle is found to have any damage at the time of return, the vehicle deposit will be used for payment of repair cost;
|
|
|
|
|
b)
|
If
the mileage exceeds certain a threshold, the customer will be required to pay extra fees;
|
|
|
|
|
c)
|
If
the vehicle has less than 4/5 gasoline filled, a certain percentage of the deposit will not be refunded;
|
|
|
|
|
d)
|
If
the customer violates traffic laws during the rental term, the corresponding penalty will be deducted from the deposit.
|
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.
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 upstream 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.
|
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.
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.
Suppliers
We
source the non-ferrous metal from various sources including but not limited to smelters, non-ferrous metal wholesalers and metal
traders. Currently, we have purchased approximately 55 tons of aluminum ingots at a price of $1,818 per ton from a supply chain
management company based in Shenzhen.
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. Currently,
we have sold 55 tons of aluminum ingots at a price of $1,823 per ton to an import and export trade enterprise
located in Shenzhen, engaged in the trading of non-ferrous metals, coal, natural gas, crude oil, building materials and other
bulk commodities.
Supply Chain Management Services
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. In December 2019, the
Company generated revenue of $238,963 from its distribution services.
Loan Recommendation and Referral Services
We offer to our downstream 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.
In December 2019, the Company generated revenue of $323,623 from its loan recommendation
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
Used
Luxurious Car Leasing Business
Our
car rental business is subject to seasonal variations in customer demand patterns, with the spring and summer vacation periods
representing our peak seasons.
Business
Strategy
Used
Luxurious Car Leasing Business
Our
current business strategy is to maintain our stock and variety of luxurious cars and maintaining our operations in Beijing and
Shanghai. As of the date of this report, the Company has consolidated the operations in the above mentioned cities. We are also
actively seeking additional auto rental businesses to cooperate in adding to our growing vehicle pool so as to more efficiently
and effectively serve our customers’ needs.
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 2020, 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
Used
Luxurious Car Leasing Business
Although
the barriers to entry in this industry are relatively high in terms of the capital investment required to purchase the luxurious
vehicles, we operate in a competitive environment. Our competitors are located in the northern and eastern region of China, especially
in Beijing and Shanghai.
We
compete with car rental companies, many of which are more established and have more resources than us. Currently we compete primarily
with Benson, V-FLY Travel and Wagons.
Competitors
in our industry would also help increase the variety and quantity of high-end cars leasing industry, standardize and specialize
customer service processes, to standardize and create a higher transparency in the pricing of the high-end car leasing industry,
and to strengthen the risk control system of the entire industry.
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
Used
Luxurious Car Leasing Business
|
●
|
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
have strong risk control measures. By setting up a series of security measures, we can ensure the safety of our vehicles to
mitigate risk factors in the purchasing, maintenance, leasing and other aspects of the luxurious vehicle leasing business.
|
|
|
|
|
●
|
We
can guarantee the privacy and security of our customers’ information. The information has been encrypted, with only
authorized employees being able to gain access to it and only for a set authorized period of time.
|
|
|
|
|
●
|
Our
rental price system is transparent and stable. Although the rental prices of our vehicles will fluctuate during its peak and
off-peak season, we control it within a reasonable range and also provide discounts to customers who lease for a long period
(one week to one month) as well as return customers.
|
|
|
|
|
●
|
Our
customer service are highly qualified and the service system is constantly being upgraded. We have a professional pre-sale
consulting customer service, a post-sale car delivery service and a complete customer evaluation mechanism. We have established
a database of customer car rental information, which records the type, price and users’ experience of each car leasing,
which helps our sales team to recommend cost-effective vehicles based on our customers’ preferences.
|
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
Used
Luxurious Car Leasing Business
We
regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our
success, and we rely on trademark and trade secret law and confidentiality and invention assignment with our employees and
others to protect our proprietary rights. We currently have 4 trademarks pending in the application process from the
Trademark Office under the State Administration for Industry and Commerce of PRC. The copyright
of our service platform “蝙蝠超跑豪车租赁软件” (Bat
Luxurious Car Rental Software) was issued on September 17, 2019 and the registration number is 2019SR0962423. Our WeChat
applet “蝙蝠超跑” (Bat Luxurious Car) launched on November 27, 2019.
The
following table sets forth a brief description of the Company’s issued Chinese trademarks, including their respective trademark
numbers, issue date, expiration date and title:
Trademark
Number
|
|
Issue
Date
|
|
Expiration
Date*
|
|
Trademark
Title
|
31337945
|
|
October
6, 2019
|
|
October
6, 2029
|
|
蝙蝠超跑(运输储藏)
Bian
Fu Chao Pao (Transportation & Storage)
|
31341306
|
|
June
13, 2019
|
|
June
13, 2029
|
|
蝙蝠超跑(金融物管)
Bian
Fu Chao Pao (Financial Property Management)
|
31345252
|
|
October
6, 2019
|
|
October
6, 2029
|
|
蝙蝠出行(运输储藏)
Bian
Fu Chu Xing (Transportation & Storage)
|
31354390
|
|
June
13, 2019
|
|
June
13, 2029
|
|
蝙蝠出行(金融物管)
Bian
Fu Chu Xing
(Financial
Property Management)
|
|
*
|
Trademark
expiration dates are routinely subject to dispute in trademark infringement actions. No assurance can be given that third parties
infringing our trademark will not dispute the expiration dates of our trademarks or that we will be successful in defending against
such disputes.
|
Our
intellectual property includes domain names imbatcar.cn and imbatcar.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 2019 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 14 employees for our used luxurious car leasing business and 12 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.
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;
|
|
|
|
|
●
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Wholly
Foreign-Owned Enterprise Law and its implementation rules;
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Special
Administrative Measures (Negative List) for the Access of Foreign Investment;
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Road
Traffic Safety Law;
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Road
Transportation Regulation;
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Notice
on Promoting the Healthy Development of Car Rental Industry.
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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
Regulations
on foreign investment in rental industry
According
to the Category of Industry Guideline for Foreign Investment promulgated by MOFCOM and the NDRC, which was revised in 2007, 2011,
2015 and 2017, respectively and Special Administrative Measures (Negative List) for the Access of Foreign Investment promulgated
in 2018, foreign investment in car rental business is permitted.
Regulations
on car rental and car service industry
General
requirement on vehicles
Regulations
applicable to all automotive vehicles generally apply to rental vehicles. According to the Road Traffic Safety Law promulgated
by the NPC Standing Committee in October 2003, which was amended in December 2007 and April 2011, respectively, all automotive
vehicles are required to be registered with relevant local administration authorities. Vehicle registration certificates, vehicle
plates and vehicle licenses shall be obtained from the same authorities, and the compulsory traffic accident insurance shall be
purchased for each vehicle.
There
are additional requirements for rental vehicles. In most cities, the usage stated in the vehicle licenses of such vehicles shall
be registered as rental or operational. Some cities require additional licenses or vehicle plates for such vehicles. For instance,
in Shanghai, Nanchang, Suzhou, Wuxi, Shenyang, Dalian, Wuhan and Kunming, a special transport license or passenger rental vehicle
license is required for each rental vehicle. In Shanghai, special vehicle plates shall be obtained for rental vehicles. In Beijing,
Guangzhou, Hangzhou and Chongqing, filing with relevant local authority is required for rental vehicles. However, local practices
differ and some of these requirements are not strictly implemented or may be modified or suspended by the local administration
authorities in practice. If we fail to maintain such licenses needed for operation, our business may be adversely affected.
Car
rental related services
As
the car rental industry is at an early stage of development in China, the legislation of the car rental industry continues to
evolve. The MOT and the NPC, the predecessor of NDRC, promulgated the Interim Rules on Administration of Car Rental Industry
in 1998, which was abolished in 2007. Since then, there have been no national laws and regulations in place to specifically regulate
the car rental industry in China except the Notice on Promoting the Healthy Development of Car Rental Industry, or the 2011 MOT
Notice, promulgated in April 2011 by MOT. The 2011 MOT Notice sets forth general guidelines for the car rental industry in
China and requires local government authorities to (i) establish and improve local rules and regulations on car rental
business, (ii) promptly formulate local development plans for the car rental industry, (iii) encourage large and well-managed
car rental companies of good reputation to set up branches and establish national or regional networks without any restrictions
due to local protectionism, (iv) enhance the administration of the car rental business, including requirements to obtain
and carry a valid permit or license for each rental car, and prohibitions of car rental companies from engaging in road transportation
businesses without appropriate approval, (v) encourage car rental companies to innovate and develop new types of car rental
services, (vi) create a favorable environment for the development of the car rental industry, and (vii) enhance the
administration and supervision of the car rental industry.
The
Road Transportation Regulation promulgated by the State Council in 2004, and amended in 2012 and 2016, regulates road transportation
businesses (including road passenger transportation business and road freight transportation business) and other business operations
related to road transportation (including operations of transportation terminals (sites), vehicle maintenance and repair businesses
and training of drivers). However, the Road Transport Regulation does not include any provisions relating to car rental businesses.
The
Administrative Rules on Urban Taxis promulgated by the Ministry of Construction and the MPS, which became effective in 1998,
regulates the planning, operations, administration and services related to urban taxis, which was abolished in March 2016.
MOT promulgated the Parade Taxi Management Service Regulations in August 2016, which was implemented on November 1,
2016. According to such regulations, “Taxi” is an integral part of the city’s comprehensive transportation system
and supplement of urban public transportation and providing personalized transportation services to the public”. “Taxi
provider” should choose a reasonable route according to the destination specified by the passenger and use metering equipment
as required to protect passenger’s rights.
The
regulatory distinctions between car rental businesses and road transportation businesses or taxi businesses are not clear. As
a result, local government authorities in China have imposed different requirements on the operating entities and/or vehicles
that are involved in car rental businesses in the respective province or city.
Car
rental services not accompanied by driving services
Set
forth below is a summary of local rules and regulatory requirements in China regarding the provision of car rental services,
which generally do not contemplate the provision of car rental services concurrently with the provision of driving services.
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provinces and cities do not have any specific local rules regulating car rental services.
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Some
local authorities promulgated local rules specifically regulating the car rental businesses. For example, the relevant
local authority of Beijing promulgated specific local rules for car rental operations in Beijing. Car rental service
providers in Beijing are required to make filings with the local transportation authority before they may commence their car
rental businesses and make subsequent filings with the authority for any changes in the number of vehicles for rental and
other relevant operational conditions and car rental service providers are strictly prohibited from facilitating to illegal
operators.
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Although
the Road Transportation Regulation does not include any provisions relating to car rental businesses, the local road transportation
rules of certain provinces and cities, such as Shandong, Sichuan and Hubei and Suzhou require car rental service providers
to obtain road transportation licenses from local authorities or make filing with local authorities covering their car rental
businesses.
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In
some provinces and cities, local rules regulating taxi businesses also partially cover car rental operations, which may
impose different requirements on car rental service providers from taxi service providers. For example, according to Shanghai
Municipal Administrative Rules on Taxis, car rental service providers in Shanghai are required to obtain car rental licenses,
which are different from taxi operation licenses, from the local transportation authority before commencing car rental businesses.
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Some
local authorities promulgated local rules, such as those in Beijing, Guangdong Province, Hubei Province, Chongqing, Xi’an
and Kunming to require that the owner of a rental vehicle must be the same person operating the rental services.
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In
addition, among those provinces and cities that have promulgated local rules to regulate car rental business, the actual
practice of the local authorities may differ from their local rules.
Regulations
on penalties for violation of traffic laws and regulations
According
to Road Traffic Safety Law, penalties for violations of the law on road traffic safety include: disciplinary warning, fine, temporary
suspension or revocation of motor vehicle driver’s license and detention. The traffic administration department of the public
security authority may, on the basis of the technical traffic monitoring records, impose a penalty on the owner or manager of
the motor vehicle involved in violation of law. If the driver can be identified, it may impose a penalty on the driver. On December
29, 2016, the city government of Shanghai also revised its local regulations on road traffic administration, which took effect
on March 25, 2017, to enhance the road traffic management in the area of Shanghai including, among other things, imposing various
penalties on activities of violations of traffic rules and it also clarified that it is prohibited that using other person’s
driver’s license to deduct points, deducting points for other person and introducing the aforementioned behaviors. on November
1,2018, Beijing Municipal People’s Congress Standing Committee adopted the “Beijing Municipality Implementation of the Road
Traffic Safety Law of the People’s Republic of China” (2018 Amendment), which was implemented on September 28, 2018, to
enhance the road traffic management in the area of Beijing including, among other things, imposing various penalties on activities
of violations of traffic rules and forbid any drive without prior registration with relevant competent authorities.
Motor
vehicles are subject to periodic inspection. According to Rules on Motor Vehicle Registration promulgated on May 27, 2008
and amended on September 12, 2012 by the MPS, before owners of motor vehicles apply for inspection on their motor vehicles, all
the traffic violations related to their motor vehicles shall be settled.
Regulations
on vehicle insurance
Pursuant
to Road Traffic Safety Law, compulsory third-party liability insurance must be purchased for each vehicle. Pursuant to Regulations
on Compulsory Traffic Accident Liability Insurance for Motor Vehicles promulgated on March 21, 2006, amended on December 17,
2012 and February 6, 2016 by the State Council, owners or managers of motor vehicles driving on roads within China shall apply
for the compulsory traffic accident liability insurance for their motor vehicles.
Regulations
on limitation of use and purchase of motor vehicles
Certain
cities in China have issued local regulations or rules to control the number of motor vehicles. For example, Beijing imposes
an annual quota on the issuance of new vehicle license plates. Potential motor vehicle purchasers need to meet specific criteria
and enter into a monthly draw. Only candidates who have been allocated a plate in the draw can apply to have their motor vehicles
registered with the local vehicle administration. Shanghai is implemented an auction system for the issuance of new vehicle license
plates. Under this system, each applicant is required to submit a “blind” bid for a vehicle license plate. Only successful
bidders can apply to have their motor vehicles registered with the local vehicle administration. There are similar policies that
restrict the issuance of new vehicle license plates in Guangzhou, Tianjin, Hangzhou and Guiyang.
In
addition, some cities in China such as Beijing, Shanghai, Shijiazhuang, Nanjing, Wuhan, Harbin, Jinan, Nanchang, Chengdu, Guiyang,
Hangzhou, Changchun, Lanzhou, Guangzhou, Tianjin, Linfen, Langfang, Baoding and Dalian also have promulgated regulations or rules to
prohibit vehicles with certain license plate from driving on road. For instance, in Beijing vehicles with restricted tail number
of license plates are not allowed to drive within five rings road (excluding the fifth ring road) during 7:00 am to 20:00 pm each
workday, and the vehicles with non-Beijing license plates shall also be subject to such restrictions. In Shanghai vehicles bearing
non-Shanghai license plates are not allowed on certain roads during specified rush hours on workdays.
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.
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.
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.
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:
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Foreign-Owned Enterprise Law, as amended on September 3, 2016;
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Foreign-Owned Enterprise Law Implementing Rules, as amended on February 19, 2014; and
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Company
Law of China, as amended on December 28, 2013.
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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.
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.
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 Used Luxurious Car Leasing Business
Our
limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those
estimates of our future performance.
We
started the used luxurious car leasing business in May 2018. Because of the uncertainties related to our limited historical operations,
including the limited historical operations of Beijing Tianxing, we may be hindered in our ability to anticipate and timely adapt
to increases or decreases in revenues or expenses.
As
our business develops, or in response to competition, we may continue to introduce new services and products or make adjustments
to our existing services and products, or make adjustments to our business model. Any significant change to our business model
may not achieve expected results and may have a material and adverse impact on our financial conditions and results of operations.
It is therefore difficult to effectively assess our future prospects. You should consider our business and prospects in light
of the risks and challenges we encounter or may encounter in this developing and rapidly evolving market. These risks and challenges
include our ability to, among other things:
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expand
our customer base;
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broaden
our service and product offerings;
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enhance
our risk management capabilities;
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improve
our operational efficiency;
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our
ability to raise sufficient fund to expand our operations;
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attract,
retain and motivate talented employees;
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a
decrease in demand for automobiles renting and weakness in the automotive industry generally;
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navigate
an evolving regulatory environment; and
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defend
ourselves against litigation, regulatory, privacy or other claims.
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If
we fail to educate potential consumers about the value of our products and services, if the market for our marketplace does not
develop as we expect, or if we fail to address the needs of our target market, our business and results of operations will be
adversely affected.
As
such we may incur losses in the future. If our revenues decrease, we may not be able to reduce costs in a timely manner because
many of our costs are fixed at least, in the short term. In addition, if we reduce variable costs to respond to losses, this may
limit our ability to acquire customers and grow our revenues. Accordingly, we may not achieve or maintain profitability and we
may continue to incur significant losses in the future.
We
depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our
ability to develop and successfully grow our business could be harmed.
We
believe our luxurious car leasing business has depended, and continues to depend, on the efforts and talents of our executives
and employees. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified
and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them.
In addition, the loss of any of our key employees or senior management, including Mr. Jin Ding, our Chief Product Officer, could
have a materially adverse effect on our ability to execute our luxurious car leasing business plan and strategy, and we may not
be able to find adequate replacements on a timely basis, or at all. In the event these key personnel terminate their employment
relationship with us, their knowledge of our business and industry would be extremely difficult to replace. We may not be able
to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified
employees or retaining and motivating existing employees, our business could be materially and adversely affected.
Our
business is subject to risks related to the larger automotive ecosystem, including consumer demand, global supply chain challenges
and other macroeconomic issues.
Decreases
in consumer demand could adversely affect the market for vehicle rentals and, as a result, reduce the number of consumers using
our services. Consumer rentals of vehicles generally decline during recessionary periods and other periods in which disposable
income is adversely affected. Rentals of vehicles are typically discretionary for consumers and have been, and may continue to
be, affected by negative trends in the economy and other factors, including rising interest rates, the cost of energy and gasoline,
the availability and cost of credit, reductions in business and consumer confidence, stock market volatility, increased regulation
and increased unemployment. Increased environmental regulation has made, and may in the future make, used luxurious cars more
expensive and less desirable for consumers. In addition, our business may be negatively affected by challenges to the larger automotive
ecosystem, including urbanization, global supply chain challenges and other macroeconomic issues. For example, car rideshare services,
such as Uber, DiDi, and other services that allow people to supplement transit trips and share vehicles are becoming increasingly
popular as a means of transportation and may decrease consumer demand for the pre-owned luxurious vehicles we rent, particularly
as urbanization increases. Any of the foregoing could have a material adverse effect on our business, results of operations and
financial condition.
The
concept of luxurious car leasing is relatively new and failure to acquire customers may negatively affect our results of operations.
Given
that the concept of luxurious car leasing is relatively new, it may take some time for the general public to become receptive
to our business. In addition, there is an inherent limit on the amount of customers who can afford our services. Failure to promote
the luxurious car services to general public or to continue increase our customer base may cause difficulty for our business expansion
and our results of operations.
We
participate in a highly competitive industry, and pressure from existing and new companies may adversely affect our business and
operating results.
We
face significant competition from existing and new companies that provide, among other things car rental services.
Our
current and future competitors may include:
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providers
of offline, membership-based car rental services;
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used
luxurious car dealers or marketplaces with e-commerce business or online platforms such as: Benson, V-FLY Travel and Wagons;
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national
rental car companies such as China Auto Rental, as well as local and regional car rental services;
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vehicle
rental services, and other pay-as-you-go services, such as DiDi and 1Hai; and
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other
automobile manufacturers that could change their rental models through technology and infrastructure investment.
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We
also expect that new competitors will continue to enter the online and traditional automotive rental market with competing brands,
business models, products and services, which could have an adverse effect on our revenue, business and financial results. Some
of these companies have significantly greater resources than we do and may be able to provide consumers access to a greater inventory
of vehicles at lower prices while delivering a competitive online experience.
Our
current and potential competitors may also develop and market new technologies that may adversely affect our business and operating
results.
Our
current and potential competitors may also develop and market new technologies that render our existing or future business model,
products and services less competitive, unmarketable or obsolete. For example, manufacturers are beginning to develop automated,
driverless vehicles that could eventually reduce the demand for, or replace, traditional vehicles, including the vehicles that
we currently provide. In addition, if our competitors develop business models, products or services with similar or superior functionality
to our solutions, it may adversely impact our business.
Our
competitors may also impede our ability to reach consumers or commence operations in certain jurisdictions. For example, our competitors
may increase their search engine optimization efforts and outbid us for search terms on various search engines. Additionally,
our competitors could use their political influence and increase lobbying efforts resulting in new regulations or interpretations
of existing regulations that could prevent us from operating in certain jurisdictions.
Our
current and potential competitors may have significantly greater resources than we do.
Our
current and potential competitors may have significantly greater financial, technical, marketing and other resources than we have,
and the ability to devote greater resources to the development, promotion and support of their business. Additionally, they may
have more extensive automotive industry relationships, longer operating histories and greater name recognition than we have. As
a result, these competitors may be able to respond to changes in the automotive industry more quickly with new technologies and
undertake more extensive marketing or promotional campaigns. If we are unable to compete with these companies, the demand for
our automobiles, products and services could substantially decline.
In
addition, if one or more of our competitors were to merge or partner with another one of our competitors, the change in the competitive
landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative
relationships with our current or future providers and suppliers, or other parties with whom we have relationships, thereby limiting
our ability to develop, improve and grow our business. We may not be able to compete successfully against current or future competitors,
and competitive pressures may harm our revenue, business and financial results.
Our
business is dependent upon access to a desirable vehicle inventory. Obstacles to acquiring attractive inventory, whether because
of supply, competition, or other factors, may have a material adverse effect on our business and results of operations.
Our
business requires that we have access to a large number of quality vehicles. We currently acquire vehicles for rent directly from
used luxury car owners. In the future we plan to acquire pre-owned luxurious cars from franchise dealerships as well as trade-ins
and wholesale auction. The source from which we can acquire vehicles of a quality and in a quantity acceptable to us are limited,
and there is substantial competition to acquire the vehicles we purchase. There can be no assurance that the supply of desirable
vehicles will be sufficient to meet our needs. A reduction in the availability of or access to sources of inventory, including
an increase in competition for quality vehicles, could diminish our ability to obtain sufficient inventory at a price that we
can reflect in retail market prices and would have a material adverse effect on our business and results of operations.
Additionally,
we evaluate potential vehicles regularly using third-party systems to predict mechanical soundness, consumer desirability and
relative value of prospective inventory. If we fail to adjust appraisal offers to stay in line with broader market trade-in offer
trends, or fail to recognize those trends, it could adversely affect our ability to acquire inventory effectively. Our ability
to source vehicles through our appraisal process could also be affected by competition, both from new and used car dealers directly
and through third party websites driving appraisal traffic to those dealers.
Our
business is dependent upon our ability to rent out inventory. Failure to rent out our inventory could have a material adverse
effect on our business and results of operations.
If
actual rentals are materially less than our forecasts, we would experience an over-supply of vehicle inventory. An over-supply
of vehicle inventory will generally cause downward pressure on our product rental prices and margins and increase our average
days to rent.
Pre-owned
vehicle inventory has typically represented, and will continue to represent, a significant portion of our total assets. Having
such a large portion of our total assets in the form of pre-owned vehicle inventory for an extended period of time subjects us
to depreciation and other risks that may affect our results of operations. Accordingly, if we have excess inventory or our average
days to rent increases, we may be unable to liquidate such inventory in a timely manner, or do so at prices that would allow us
to meet margin targets or to recover our costs, which could have a material adverse effect on our results of operations.
Our
business is sensitive to changes in the prices of pre-owned vehicles.
Any
significant changes in rental prices for pre-owned luxurious vehicles could have a material adverse effect on our revenues and
results of operations. For example, if rental prices for pre-owned vehicles rise relative to rental prices for new vehicles, it
could make renting a new vehicle more attractive to consumers than renting a used vehicle, which could have a material adverse
effect on our results of operations and could result in reduced used car rentals and lower revenue. Pre-owned vehicle prices may
also decline due to an increased number of new vehicle lease returns over the next several years. While lower prices of pre-owned
vehicles reduce our cost of acquiring new inventory, lower prices could also lead to reductions in the value of inventory that
we currently hold, which could have a negative impact on gross profit. Furthermore, any significant changes in wholesale prices
for pre-owned vehicles could have a material adverse effect on our results of operations by reducing our profit margins.
If
our inventory or other costs of operations increase and we are unable to pass along these costs to our customers, we may be unable
to maintain or grow our sales margins.
Our
inventory and other costs are variable and dependent upon various factors, many of which are outside of our control. A rise in
vehicle acquisition costs could erode our sales margins and negatively affect our results of operations. If we incur cost increases,
we may seek to pass those increases along to our customers. However, our consumers typically have limits on the maximum amount
they can afford, and we may be unable to pass these costs along to them in the form of higher rental prices, which would adversely
affect our ability to maintain or increase margins.
We
rely heavily on logistics in transporting vehicles for delivery from point of purchase to our facilities, and finally to the customers,
via our sales persons as well as third parties. Our ability to manage this process both internally and through our network of
transportation partners could cause a rise in inventory costs and a disruption in our inventory supply chain and distribution.
Further, any disruption in the vehicle transport industry or an increase in the cost of transport could adversely affect our results
of operations.
We
could be negatively affected if losses for which we do not have third-party insurance coverage increase or our insurance coverages
prove to be inadequate.
We
have third-party insurance coverage, subject to limits, for risks such as theft and damages to vehicles that are rented and are
not otherwise covered by renters’ insurance, and theft and damage to vehicles in our inventory. We self-insure (that is,
we do not have third-party insurance coverage) for bodily injury and property damage resulting from accidents involving our vehicles
that are rented. We account for vehicle damage or total loss at the time such damage or loss is incurred. As a result, we are
responsible for damage to our vehicles. A deterioration in claims management, whether by our management or by a third-party claims
administrator, could lead to delays in settling claims, thereby increasing claim costs. In the future, we may be exposed to liability
for which we self-insure at levels in excess of our historical levels and to liabilities for which we are insured that exceed
the level of our insurance. Claims filed against us in excess of insurance limits, or for which we are otherwise self-insured,
or the inability of our insurance carriers to pay otherwise-insured claims, could have an adverse effect on our financial condition.
For example, damages resulting from a significant natural disaster, such as a hurricane, fire or flood, or judgment against us
for liability for damages resulting from our rental program could have a material adverse impact on our business, operating results
and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Should we
be unable to renew our commercial insurance policies at competitive rates, this loss could have an adverse effect on our financial
condition and results of operations.
The
success of our business relies heavily on our marketing and branding efforts and these efforts may not be successful.
We
believe that an important component of our growth will be to successfully attract new visitors to our physical locations and our
online platform. Because we are a consumer brand “Batcar,” we rely on marketing and advertising to increase brand
visibility with potential customers. We intend to execute our sales and marketing efforts by utilizing a multi-channel approach
that utilizes brand building, as well as direct response channels in order to efficiently establish and grow both locally and
nationally and to increase the strength, recognition and trust in the “Batcar” brand.
Our
business model relies on our ability to scale rapidly and to decrease incremental customer acquisition costs as we grow. If we
are unable to recover our marketing costs through increases in customer traffic and in the number of transactions by users of
our platform, or if our broad marketing campaigns are not successful or are terminated, it could have a material adverse effect
on our growth, results of operations and financial condition.
We
face risks related to liabilities resulting from the use of our vehicles by our rental customers.
Our
business can expose us to claims for personal injury, death and property damage resulting from the use of vehicles by our rental
customers. For example, a rental customer may be using a vehicle that has worn tires, a mechanical issue or some other problem,
including a manufacturing defect, which could contribute to a motor vehicle accident resulting in serious bodily injury, death
or significant property damage for which we may be liable. In addition, since we cannot physically inspect our vehicles after
they are delivered to our customers, we depend on our rental customers and third-party service providers to inspect the vehicles
prior to driving in order to identify any potential damage or safety concern with the vehicle. To the extent that we are found
at fault or otherwise responsible for an accident, our insurance coverage would only cover losses up to a maximum amount.
In
addition, as the owner of the vehicle, there is the potential that we may have vicarious liability for any damages caused by our
renters, even if we are not found to be negligent. Any such liability may have a material adverse impact on our business.
We
anticipate that our business will be seasonal and any occurrence that disrupts our activity during our peak periods
could materially adversely affect our results of operations, financial
condition, liquidity and cash flows.
We
anticipate rental during summer and national holidays to be higher than other times. Significant components of our expenses are
fixed, including real estate taxes, rent, insurance, utilities, maintenance and other facility-related expenses, and staffing
costs. We anticipate that seasonal changes in our revenues will not affect those fixed expenses, which typically result in higher
profitability in periods when our revenues are higher, and lower profitability in periods when our revenues are lower. Any circumstance,
occurrence or situation that disrupts our activity during these periods could have a disproportionately material adverse effect
on our results of operations, financial condition, liquidity and cash flows due to a significant change in revenue.
We
operate in a highly regulated industry and are subject to a wide range of laws and regulations. Failure to comply with these laws
and regulations could have a material adverse effect on our business, results of operations and financial condition.
We
are subject to a wide range of laws and regulations. Our rental services and related activities are, or may potentially be, subject
to local licensing requirements, laws regulating vehicle advertising, and laws regulating vehicle rentals. Our facilities and
business operations are subject to laws and regulations relating to environmental protection and health and safety. The violation
of any of these laws or regulations could result in administrative, civil or criminal penalties or in a cease-and-desist order
against our business operations, any of which could damage our reputation and have a material adverse effect on our business and
results of operations. We have incurred and will continue to incur capital and operating expenses and other costs in order to
comply with these laws and regulations.
Our
business is subject to the local licensing requirements where we operate. Regulators may seek to impose punitive fines for operating
without a license, which may inhibit our ability to do business, increase our operating expenses and adversely affect our financial
condition and results of operations.
With
respect to our advertising, private plaintiffs, as well as regulatory and law enforcement authorities, continue to scrutinize
advertising, sales, financing and insurance activities in the leasing of pre-owned vehicles. If, as a result, other automotive
retailers adopt more transparent, consumer-oriented business practices, it may be difficult for us to differentiate ourselves
from other retailers.
The
foregoing description of laws and regulations to which we are or may be subject is not exhaustive, and the regulatory framework
governing our operations is subject to continuous change.
We
rely on internal and external logistics to transport our vehicle inventory throughout China. Thus, we are subject to business
risks and costs associated with the transportation industry. Many of these risks and costs are out of our control, and any of
them could have a material adverse effect on our business, financial condition and results of operations.
We
rely on our own sales persons as well as third parties to transport vehicles from point of purchase to our facilities, and finally
to the customers. As a result, we are exposed to risks associated with the transportation industry such as weather, traffic patterns,
gasoline prices, recalls affecting our vehicle fleet, local and federal regulations, vehicular crashes, insufficient internal
capacity, rising prices of external transportation vendors, fuel prices and taxes, license and registration fees, insurance premiums,
self-insurance levels, difficulty in recruiting and retaining qualified drivers, disruption of our technology systems, and increasing
equipment and operational costs. Failure to successfully manage our logistics and fulfillment process could cause a disruption
in our inventory supply chain and distribution, which may adversely affect our operating results and financial condition.
Our
business is sensitive to conditions affecting automotive manufacturers, including manufacturer recalls.
Adverse
conditions affecting one or more automotive manufacturers could have a material adverse effect on our results of operations, which
could impact the supply of vehicles. In addition, manufacturer recalls are a common occurrence that have accelerated in frequency
and scope in recent years. Recalls and the increased regulatory scrutiny surrounding selling pre-owned vehicles with open
safety recalls could (i) adversely affect pre-owned vehicle sales or valuations, (ii) cause us to temporarily remove vehicles
from inventory, (iii) cause us to rent affected vehicles at a loss, (iv) force us to incur increased costs and (v) expose us to
litigation and adverse publicity related to the rental of recalled vehicles, which could have a material adverse effect on our
business, financial condition and results of operations.
We
may rely on agreements with third parties to finance our vehicle inventory purchases. If we fail to maintain adequate relationships
with third parties to finance our vehicle inventory purchases, we may be unable to maintain sufficient inventory, which would
adversely affect our business and results of operations.
We
may rely on agreements with third party lenders to finance our vehicle inventory purchases. If we are unable to enter into agreements
on favorable terms or at all, or if the agreements expire and are not renewed, our inventory supply may decline, resulting in
fewer vehicles available for sale. New funding arrangements may be at higher interest rates or other less favorable terms. These
financing risks, in addition to rising interest rates and changes in market conditions, if realized, could negatively impact our
results of operations and financial condition.
Risk
Factors Related to the Commodities Trading Business
There
is no assurance that we will be able to manage the luxurious car leasing and commodities trading business effectively.
Integrating
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
are expanding our business from the luxurious car leasing business and 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.
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, 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.
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.
Our loan recommendation service and
its evolving regulatory framework makes it difficult to evaluate our future prospects.
As
part of our commodities trading business, we also offer loan recommendation services whereby we offer our customers loan recommendation
and referral services to third-party financial institutions and assume no credit risk. However, the consumer finance market in
the PRC is new and may not develop as expected. The regulatory framework for this market is also evolving and may remain uncertain
for the foreseeable future. If our loan recommendation business practices or the business practices of the third-party financial
institutions are deemed to violate any PRC laws or regulations, our loan recommendation services and its results of operations
and prospects would be materially and adversely affected.
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.
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 luxurious car leasing business through our rental centers located in Beijing, Shanghai, Zhejiang and Chengdu.
We currently hold all our vehicle inventory at our rental centers in Beijing, Shanghai, Zhejiang and Chengdu. While
we have insurance to cover certain losses on those vehicles, events such as theft, fire, flood, or hail could adversely impact
our business.
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 a transparent and simplified solution to luxurious car leasing
and 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.
We
currently hold rights to the “www.imbatcar.com” Internet domain name. The regulation of domain names in China is subject
to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify
the requirements for holding domain names. As a result, we may not be able to acquire or maintain all domain names that we believe
are important for our business.
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.
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.
Risks
Relating to Our Corporate Structure
We
conduct our pre-owned vehicle leasing business through Beijing Tianxing and our commodities trading business through
Huamucheng by means of contractual arrangements. If the PRC courts or administrative authorities determines that these
contractual arrangements do not comply with applicable regulations, we could be subject to severe penalties and our business
could be adversely affected. In addition, changes in such Chinese laws and regulations may materially and adversely affect
our business.
There are uncertainties
regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules
and regulations governing the validity and enforcement of the contractual arrangements between Hao Limo, Beijing Tianxing and
Huamucheng. Although we believe the structure for operating our business in China (including our corporate structure and contractual
arrangements with Beijing Tianxing and its shareholders and Huamucheng and its shareholders) comply with all applicable PRC laws,
rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations,
the PRC courts or regulatory authorities may determine that our corporate structure and contractual arrangements violate PRC laws,
rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in violation
of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable.
If
Hao Limo, Beijing Tianxing or Huamucheng or their ownership structure or the contractual arrangements, are determined to be in
violation of any existing or future PRC laws, rules or regulations, or if Hao Limo, Beijing Tianxing or Huamucheng fails to obtain
or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion
in dealing with such violations, including:
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revoking
the business and operating licenses of Hao Limo, Beijing Tianxing or Huamucheng;
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discontinuing
or restricting the operations of Hao Limo, Beijing Tianxing or Huamucheng;
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imposing
conditions or requirements with which we, Hao Limo, Beijing Tianxing or Huamucheng may not be able to comply;
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requiring
us, Hao Limo or Beijing Tianxing to restructure the relevant ownership structure or operations;
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restricting
or prohibiting our use of the proceeds from our financings to finance our business and operations in China; or
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imposing
fines.
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The
imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect
on our financial condition, results of operations and prospects.
On
or around September 2011, various media sources reported that the China Securities Regulatory Commission (the “CSRC”)
had prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies
with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions.
However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or
what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will
be adopted or what they would provide. If our ownership structure, contractual arrangements or businesses of Beijing Tianxing
or Huamucheng are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities,
including the CSRC, would have broad discretion in dealing with such violation, including levying fines, confiscating our income
or the income of Beijing Tianxing or Huamucheng, revoking the business licenses or operating licenses of Beijing Tianxing or Huamucheng,
discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive
restructuring, restricting or prohibiting our use of proceeds from overseas financings to finance our business and operations
in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could
cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and
adversely affect our business, financial condition and results of operations.
Our
contractual arrangements with Beijing Tianxing and Huamucheng may not be effective in providing control over Beijing Tianxing
and Huamucheng.
All
of our current revenue and net income is derived from Beijing Tianxing and Huamucheng. According to our inquiries with Beijing
and Shenzhen provincial authorities, provincial direct foreign controlling equity ownership in for-profit companies engaged in
vehicle rental services in Beijing and Shenzhen has never been approved and such position may not change in the foreseeable future .
Therefore, we currently do not intend to have an equity ownership interest in Beijing Tianxing and Huamucheng but rely on contractual
arrangements with Beijing Tianxing and Huamucheng to control and operate their businesses. However, these contractual arrangements
may not be effective in providing us with the necessary control over Beijing Tianxing and Huamucheng and their operations. Any
deficiency in these contractual arrangements may result in our loss of control over the management and operations of Beijing Tianxing
and Huamucheng, which will result in a significant loss in the value of an investment in our company. Because of the practical
restrictions on direct foreign equity ownership imposed by the Beijing and Shenzhen provincial government authorities, we must
rely on contractual rights through our VIE structure to effect control over and management of Beijing Tianxing and Huamucheng,
which exposes us to the risk of potential breach of contract by the shareholders of Beijing Tianxing and Huamucheng. In addition,
as Beijing Tianxing and Huamucheng are jointly owned by their respective shareholders, it may be difficult for us to change our
corporate structure if such shareholders refuse to cooperate with us.
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.
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, including restrictions on Hao Limo’s
ability to pay dividends or make distributions to us and on our ability to increase our investment in the Hao Limo.
Our
agreements with Beijing Tianxing and Huamucheng are governed by the laws of the PRC and we may have difficulty in enforcing any
rights we may have under these contractual arrangements.
As
all of our contractual arrangements with Beijing Tianxing and Huamucheng are governed by the PRC laws and provide for the resolution
of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved
in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in the United States. As a result,
uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. Furthermore,
these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene
PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these
contractual arrangements, we may not be able to exert effective control over Beijing Tianxing and Huamucheng, and our ability
to conduct our business may be materially and adversely affected.
Beijing
Tianxing’s two shareholders have potential conflicts of interest with us, which may adversely affect our business.
Shun
Li and Jialin Cui, who collectively own 100% of Beijing Tianxing’s outstanding equity interests, are the beneficial owners
of shares of Common Stock of the Company through the BVI entities. Equity interests held by these shareholders in the Company
is less than its interest in Beijing Tianxing as a result of our introduction of outside investors as shareholders of the Company.
In addition, such shareholders’ equity interest in our Company will be further diluted as a result of any future offering
of equity securities. As a result, conflicts of interest may arise as a result of such dual shareholding and governance structure.
If
such conflicts arise, these shareholders may not act in our best interests and such conflicts of interest may not be resolved
in our favor. In addition, these shareholders may breach or cause Beijing Tianxing to breach or refuse to renew the VIE Agreements
that allow us to exercise effective control over Beijing Tianxing and to receive economic benefits from Beijing Tianxing. Delaware
law provides that directors owe a fiduciary duty to a company, which requires them to act in good faith and in the best interests
of the company and not to use their positions for personal gain. If we cannot resolve any conflicts of interest or disputes between
us and such shareholders or any future beneficial owners of Beijing Tianxing, we would have to rely on arbitral or legal proceedings
to remedy the situation. Such arbitral and legal proceedings may cost us substantial financial and other resources and result
in disruption of our business, the outcome of which may adversely affect the Company.
If
Beijing Tianxing or Huamucheng fails to maintain the requisite registered capital, licenses and approvals required under PRC law,
our business, financial condition and results of operations may be materially and adversely affected.
Foreign
investment is highly regulated by the PRC government and the foreign investment in the vehicle rental industry is restricted by
local authorities. Numerous regulatory authorities of the central PRC government, provincial and local authorities are empowered
to issue and implement regulations governing various aspects of the vehicle rental industry. Foreign investment in the financial
leasing industry is also subject to foreign investment regulations. Each of Beijing Tianxing and Huamucheng are required to obtain
and maintain certain assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities
in order to provide their current services. These registered capital and licenses are essential to the operation of our business
and are generally subject to annual review by the relevant governmental authorities. Furthermore, Beijing Tianxing and Huamucheng
may be required to obtain additional licenses. If we fail to obtain or maintain any of the required registered capital, licenses
or approvals, our continued business operations in the vehicle rental industries may subject us to various penalties, such as
confiscation of illegal net revenue, fines and the discontinuation or restriction of our operations. Any such disruption in the
business operations of Beijing Tianxing and Huamucheng will materially and adversely affect our business, financial condition
and results of operations.
Risks
Related to Ownership of our Common Stock
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:
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the
perception of U.S. investors and regulators of U.S. listed Chinese companies;
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actual
or anticipated fluctuations in our quarterly operating results;
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changes
in financial estimates by securities research analysts;
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negative
publicity, studies or reports;
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changes
in the economic performance or market valuations of other microcredit companies;
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announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. dollar; and
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general
economic or political conditions in China.
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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:
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the
inability of stockholders to act by written consent or to call special meetings;
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the
ability of our board of directors to make, alter or repeal our by-laws; and
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the
ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.
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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.
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. However, our independent
registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial
reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the
SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act, if we take advantage of
the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to five years. However,
if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time,
our revenues exceed $1 billion, or we issue more than $1 billion in non-convertible debt in a three-year period, we would cease
to be an “emerging growth company” as of the following January 31. To comply with the requirements of being a public
company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting
or internal audit staff.
Our
independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control
over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the
date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm
may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed
or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.
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 Room 104, No. 33 Section D, No. 6 Middle Xierqi Road, Haidian District, Beijing, China,
where we leased approximately 401.91 square feet of office space pursuant to a lease agreement, which lasts from September 18,
2018 to September 17, 2020 with an annual rent in the amount of RMB 105,000 (approximately US$15,870) for the year of 2018, RMB425,250
(approximately US$61,552) for the year of 2019, and RMB330,750 (approximately US$47,467) for the year of 2020.
In
addition, we also lease an office at 3302, Zhongzhou Building, Jintian Road, Futian District, Shenzhen, China, where we leased
approximately 635.25 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.
We
do not own any real property or have any land use rights.
Item 3. Legal Proceedings.
The
Company is involved in various legal actions arising in the ordinary course of its business.
a) 2014 Class Action Litigation
On
August 6, 2014, a purported shareholder Andrew Dennison filed a putative class action complaint in the United States District
Court District of New Jersey (the “N.J. district court”) relating to a July 25, 2014 press release about the Company’s
progress in recovering a significant portion of the $5.4 million the Company paid in the first quarter of 2014 on behalf of loan
guarantee customers. The action, Andrew Dennison v. Bat Group, Inc., et al., Case No. 2:2014-cv-04956, alleges that the Company
and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Xiangdong Xiao, and John F.
Levy violated the federal securities laws by misrepresenting in prior public filings certain material facts about the risks associated
with its loan guarantee business. On October 2, 2014, purported shareholders Zhang Yun and Sanjiv Mehrotra (the “Yun Group”)
asserted substantially similar claims against the same defendants in a putative class action captioned Zhang Yun v. Bat Group,
Inc., et al., Case No. 2:14-cv-06136 (D. N.J.). Neither complaint states the amount of damages sought.
On
or about October 6, 2014, Dennison, the Yun Group and another purported shareholder, Jason Stark, filed motions to consolidate
the cases, be appointed as lead plaintiff and to have their respective counsel appointed as lead counsel.
On
October 31, 2014, the N.J. district court entered an order consolidating the cases under the caption “In re China Commercial
Credit Inc. Securities Litigation” and appointing the Yun Group as lead plaintiff (“Class Plaintiff”) and the
Yun Group’s counsel as lead counsel. On November 18, 2014, the Yun Group and the Company, which at that point was the only
defendant served, entered into a stipulation to transfer of the case to the Southern District of New York. On December 18, 2014,
Mr. Levy, who had by then been served, joined in the stipulation.
On
December 29, 2014, the N.J. district court entered an order transferring the action. The transfer was effected on January 22,
2015, and assigned docket number 1:15-cv-00557-ALC (S.D.N.Y.) (the “Securities Class Action”). Under the schedule
stipulated by the parties, the Yun Group was to file an amended complaint within 60 days of the date that the transfer was effected,
and the defendants’ date to answer or move was within 60 days of that filing.
On
April 7, 2015, the Class Plaintiff filed a Second Amended Class Action Complaint (the “CAC”). The CAC also asserts
securities law claims against defendants Axiom Capital Management, Inc., Burnham Securities Inc. and ViewTrade Securities, Inc.
(collectively, the “Underwriter Defendants”). The CAC alleges that the Company engaged in a fraudulent scheme by engaging
in undisclosed and improper lending practices and made misleading representations regarding its underwriting policies, the loan
portfolio quality, the loan loss allowance, compliance with U.S. GAAP and its internal control systems. In accordance with the
Court’s procedures, the Company and Mr. Levy and the Underwriter Defendants requested a Pre-Motion Conference in anticipation
of filing a motion to dismiss the CAC, which was held on June 25, 2015. At the conference, the Court adjourned the date to answer
or move in order to provide the Class Plaintiff with time to serve certain overseas defendants. After the conference, the Class
Plaintiff voluntarily dismissed Jianming Yin, Jinggen Ling and Xiangdong Xiao from the action, and Long Yi agreed to waive service,
which left Huichun Qin as the sole remaining defendant to serve.
On
November 22, 2016, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to settle
the Securities Class Action. The Stipulation resolved the claims asserted against the Company and certain of its current and former
officers and directors in the Securities Class Action without any admission or concession of wrongdoing or liability by the Company
or the other defendants. The Stipulation also provides, among other things, a settlement payment by the Company of $245,000 in
cash and the issuance of 950,000 shares of its common stock (the “Settlement Shares”) to the plaintiff’s counsel
and class members. The terms of the Stipulation were subject to approval by the Court following notice to all class members. The
issuance of the Settlement Shares are exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended. A fairness hearing was held on May 30, 2017, and the Court approved the settlement.
On
December 22, 2017, the Court entered a distribution order approving the distribution of the Settlement Stock to the class plaintiffs.
The $245,000 cash portion of the settlement has been paid in full. The 712,500 Class Settlement Shares were issued on or about
January 19, 2018. The settlement has been finalized, and that thereafter there are no remaining claims outstanding as against
the Company with respect to this litigation. On April 10, 2018, the 237,500 of plaintiff attorney fee shares were issued to plaintiff’s
attorney’s broker account.
Two
of the Underwriter Defendants, Axiom Capital Management, Inc., and ViewTrade Securities, Inc., have asserted their respective
rights to indemnification under the Underwriting Agreements entered into in connection with the Company’s initial public
offering and secondary offering. On or about March 16, 2016, CCCR entered into an Advance Funding and Escrow Agreement (“Advance
Funding Agreement”), under which the CCCR agreed to deposit shares into escrow to fund the advancement obligation, with
the initial deposit to be 637,592 shares which was valued at Two Hundred Thousand Dollars ($200,000), based upon 80% of the 30
day volume weighted average trading price for each of the 30 consecutive trading days prior to the date of the agreement. As of
the completion of the settlement, an aggregate of 527,078 shares are unused in the escrow account and the Underwriter Defendants
acknowledged there is no additional payment of fees and expenses owed to the Underwriter Defendants and the Advance Funding Agreement
shall be terminated. The Company has instructed the transfer agent to cancel the 527,078 shares and return them to authorized
shares. As of the date of this Form 10-Q, the Company is working with its counsel and the escrow agent to complete such cancelation.
b) 2015
Derivative Action
On
February 3, 2015, a purported shareholder Kiran Kodali filed a putative shareholder derivative complaint in the United States
District Court for the Southern District of New York, captioned Kiran Kodali v. Huichun Qin, et al., Case No. 15-cv-806. The action
alleges that the Company and its current and former officers and directors Huichun Qin, Long Yi, Jianming Yin, Jinggen Ling, Chunfang
Shen, John F. Levy, Xiaofang Shen and Chunjiang Yu 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. Kodali did not serve a demand upon the Company and alleges that demand is excused. The
Company and Mr. Levy are the only defendants who have been served. An amended derivative complaint was filed on April 20, 2015.
On
May 29, 2015, the Court “so ordered” a stipulation among Kodali, the Company, and Mr. Levy staying all proceedings
in the derivative case, except for service of process on individual defendants, until the earlier of thirty days of termination
of the stipulation, dismissal of the class action with prejudice or the date any of the defendants in the class action file an
answer to the CAC.
The
Company intends to vigorously defend against it. At this stage of the proceedings, the Company is not able to estimate the probability
of success or loss. The Court ordered GLG to answer or otherwise move with respect to this action on or before November 13, 2017.
Thereafter, GLG and Mr. Levy submitted a pre-motion letter to the Court requesting permission to move to dismiss the derivative
complaint; submission of this letter stayed the proceedings pending the Court’s review thereof. The Court held a hearing
on this pre-motion letter on January 22, 2018, denying permission to file a motion to dismiss the complaint without prejudice
and setting forth a schedule under which Kodali must serve the remaining defendants in the derivative litigation. On or about
August 22, 2018, our new litigation counsel noticed their appearance in the Action. The parties filed a Joint Status Report on
August 22, 2018, advising the Court that the parties continued to have discussions regarding a potential resolution of the matter.
The parties have come to a potential agreement regarding a monetary settlement. However, the parties continued to discuss the
non-monetary aspects of a potential resolution. On January 18, 2019, the parties to the derivative action entered into a Stipulation
of Settlement and Plaintiff filed an Unopposed Motion for Preliminary Approval of Proposed Derivative Settlement (“Motion”).
On April 4, 2019, the Court preliminarily approved the Stipulation and settlement set forth therein, including the terms and conditions
for settlement and dismissal with prejudice of the Derivative Action, subject to further consideration at the Settlement Hearing
to be held on July 11, 2019 at the United States District Court for the Southern District of New York.
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.
c) 2017
Class Action
The
Company and its directors were party to a lawsuit filed on September 1, 2017, by certain a stockholder of the Company on behalf
of himself and similarly situated stockholders of the Company GLG in the Chancery Court of the State of Delaware (the “Delaware
Chancery Court”) (Case No. 2017-0633-JTL) (the “Action”), Plaintiff stockholders which sought injunctive relief,
costs, and attorney’s fees. Plaintiff’s Verified Class Action Complaint (“Complaint”) alleged that the
Company’s directors breached their fiduciary duties to the Company’s stockholders by failing to disclose all necessary
material information relating to the Company’s entry into an Exchange Agreement (“Exchange Agreement”) with
Sorghum Investment Holdings Limited (“Sorghum”) on August 9, 2017, and preventing the Company’s stockholders
from casting a fully informed vote on the Company’s acquisition of Sorghum, and other proposals contained in the Company’s
preliminary proxy statement, dated August 14, 2017 (“Preliminary Proxy Statement”).
On
October 10, 2017, the Company filed Amendment No. 1 to its Preliminary Proxy Statement (the “Amended Preliminary Proxy”)
with the U.S. Securities and Exchange Commission (the “Commission”) in response to the Commission’s September
8, 2017 comment letter (“Comment Letter”). After reviewing the Amended Preliminary Proxy, Plaintiff determined that
the Company’s Amended Preliminary Proxy rendered the claims asserted in Plaintiff’s Complaint moot and/or otherwise
unsuitable for further pursuit. On October 19, 2017, the Company and Plaintiff entered into a stipulation (“Stipulation”)
wherein Plaintiff agreed to voluntarily dismiss his claims against the Company, and its directors, with prejudice. The Delaware
Chancery Court granted the Stipulation on October 20, 2017, and entered an Order dismissing the Action with prejudice. In accordance
with the Order, the Company will advise the Delaware Chancery Court within fifteen (15) days of the earlier of (a) the stockholder
vote on the Exchange Agreement relating to the proposals, or (b) the termination of the Exchange Agreement, and whether the parties
to the Action have reached an agreement with respect to Plaintiff’s anticipated request for fees and expenses. Currently,
no compensation in any form has passed from the Company, or its directors, to Plaintiff or Plaintiff’s attorneys in the
Action, and the Company has not made a promise to give any such compensation. On or about November 6, 2017, the Company filed
Amendment No. 2 to its Preliminary Proxy Statement with the Commission in further response to the Comment Letter. On December
29, 2017, the Company received notice from Sorghum notifying the Company that the Exchange Agreement is terminated. The Company
advised Plaintiff of the termination of the Exchange Agreement on January 9, 2018.
d) 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. The AAA has forwarded
the Company’s Arbitration Demand to Sorghum, and Sorghum’s response to the Arbitration Demand was due on or before
February 14, 2018. Sorghum has not provided a written response to the Company’s Arbitration Demand. In accordance with the
Commercial Arbitration Rules of the AAA (“Rules”), Sorghum’s failure to respond is deemed as a general denial
of the Company’s claims. On April 10, 2018, the AAA initially appointed Barbara Mentz, Esq. (“Arbitrator Mentz”)
as arbitrator in accordance with the arbitration clause contained in the Exchange Agreement. On March 28, 2018, the AAA conducted
an initial telephonic conference with Arbitrator Barbara Mentz, but neither Sorghum nor its counsel appeared for the call. On
March 28, 2018, after the Company’s counsel appeared for the initial telephonic conference, Sorghum and its counsel contacted
the AAA claiming that it was not in receipt of the AAA’s correspondence although the AAA forwarded its correspondence to
Sorghum’s Chief Executive Officer’s active email. In response, the AAA scheduled another telephonic conference for
April 9, 2018. All parties appeared at the April 9, 2018 conference, and approved Arbitrator Mentz’s appointment. On April
11, 2018, pursuant to the Rules, Sorghum filed its answer and counterclaim. The Company filed a written denial to Sorghum’s
counterclaim on April 26, 2018. On May 2, 2018, the parties jointly requested an extension of time to file their respective proposals
for resolution with the AAA, and Arbitrator Mentz granted the extension. On May 17, 2018, Sorghum requested another extension
and Arbitrator Mentz granted the extension. In accordance with Arbitrator Mentz’s Order, the parties’ proposals was
due May 31, 2018. On May 30, 2018, due to a delay in receiving additional evidence from a relevant third party, the Company requested
an extension of time to file its proposal for resolution, which Arbitrator Mentz granted extending the deadline to June 7, 2018.
To provide additional time to allow certain relevant documents to be translated due to the unavailability of the parties’
mutually accepted translator, the Company requested a final extension of time to June 14, 2018, to submit the parties’ proposal
for resolution. Arbitrator Mentz granted the Company’s request. On June 14, 2018, the Company submitted its proposal for
resolution to the AAA. On July 30, 2018, Arbitrator Mentz entered a reasoned award, accepting the Company’s proposal for
resolution, awarding the Company damages of $1,436,521.50 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 the arbitration
award is deemed to be vacated.
e) 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.
f)
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. Thereafter, 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.
Item 4. Mine Safety Disclosures.
Not
applicable.
The accompanying notes are an integral part
to the consolidated financial statements.
The accompanying notes are an integral
part to the consolidated financial statements.
The accompanying notes are an integral part
to the consolidated financial statements.
The accompanying notes are an integral part
to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
TD Holdings, Inc. (formerly known as China
Commercial Credit, Inc. or Bat Group, Inc.) (“GLG” 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.(see Note 20- Subsequent event).
The Company owns 100% equity interest of
HC High Summit Holding Limited (“HC High BVI”), an entity incorporated on March 22, 2018 in accordance with the laws
and regulations in British Virgin Islands (“BVI”).
HC High BVI owns 100% equity interest of
HC High Summit Limited (“HC High HK”), an entity incorporated on April 16, 2018 in accordance with the laws and regulations
in Hong Kong.
Hao Limo Technology (Beijing) Co., Ltd.
(“Hao Limo”) was formed on May 10, 2018, as a Wholly Foreign-Owned Enterprise (“WOFE”) in the People’s
Republic of China (“PRC”).
The Company previously was engaged in providing
direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses, farmers and individuals (the
“Micro-lending Business”). The Company discontinued the Micro-lending Business in July 2018. Currently, the Company
conducts business through two variable interest entities (“VIEs”), Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing
Tianxing”) and Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”).
Beijing Tianxing is primarily engaged in operating leasing business of used luxurious cars and Huamucheng is engaged in
commodity trading business and providing supply chain management services to customers in the People’s Republic of China
(“PRC”). Supply chain management services are further defined as loan recommendation service and commodity product
distribution services as disclosed in Note 2(l) “Revenue recognition” below.
The accompanying consolidated financial
statements reflect the activities of Beijing Tianxing, Shenzhen Huamucheng and each of the following holding entities:
Name
|
|
Background
|
|
Ownership
|
HC High Summit Holding Limited
(“HC High BVI”)
|
|
● A
BVI company
● Incorporated
on March 22, 2018
● A
holding company
|
|
100% owned by the Company
|
HC High Summit Limited
(“HC High HK”)
|
|
● A
Hong Kong company
● Incorporated
on April 16, 2018
● A
holding company
|
|
100% owned by HC High BVI
|
Hao Limo Technology (Beijing) Co. Ltd.
(“Hao Limo”)
|
|
● A
PRC company and deemed a wholly foreign owned enterprise (“WOFE”)
● Incorporated
on May 10, 2018
● Registered
capital of $15 million
● A
holding company
|
|
WOFE, 100% owned by HC High HK
|
Beijing Tianxing Kunlun Technology Co. Ltd.
(“Beijing Tianxing”)*
|
|
● A
PRC limited liability company
● Incorporated
on April 17, 2018
● Registered
capital of $31,839 (RMB 200,000)
● Engaged
in operating leasing business of used luxurious cars
|
|
VIE of Hao Limo
|
Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”)
|
|
● A
PRC limited liability company
● 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
|
|
VIE of Hao Limo
|
*
|
As of December 31, 2019, Beijing Tianxing has six
wholly owned subsidiaries, including:
|
|
●
|
Beijing Tianrenshijia Apparel Co., Ltd.
|
|
●
|
Beijing Blue Light Marching Technology Co., Ltd. (Formerly known as “Beijing Tongxingyi Feed Co., Ltd.”)
|
|
●
|
Beijing Eighty Weili Technology Co., Ltd.
|
|
●
|
Beijing Bat Riding Technology Co., Ltd (Formerly known as “Beijing Saikesheng Garments Co., Ltd.”)
|
|
●
|
Beijing Blue Light Riding Technology Co., Ltd. (Formerly known as “Beijing Yimingzhu Restaurant Management Co., Ltd.’), and
|
|
●
|
Car Master (Beijing) Information Consulting Co., Ltd.
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
|
In addition, the Company has one subsidiary
over which the Company has 60% ownership, Beijing Blue Light Super Car Technology Co., Ltd (Formerly known as “Beijing Keao
Jiye Commercial Co., Ltd.”). The remaining 40% of ownership interest is owned by an employee of the Company.
Each of these subsidiaries owns a license
to hold cars in Beijing or Zhejiang, and was either inactive or generated minimal revenues for the years ended December 31, 2019
and 2018.
On May 17, 2018, Hao Limo entered into
a series of agreements (the “Tianxing VIE Agreements”) with Beijing Tianxing and Shun Li and Jialin Cui, the shareholders
of Beijing Tianxing. The Tianxing 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 Beijing Tianxing, including absolute control rights
and the rights to the management, operations, assets, property and revenue of Beijing Tianxing. The purpose of the VIE Agreements
is solely to give Hao Limo the exclusive control over Beijing Tianxing’s management.
On
November 22, 2019, Hao Limo entered into a series of agreements (the “Huamucheng VIE Agreements”)
with Huamucheng and all shareholders of Huamucheng (“Huamucheng Shareholders”).
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 purpose of the VIE Agreements is solely to
give Hao Limo the exclusive control over Huamucheng’s management.
The
contractual agreements with both Tianxing and Huamucheng include exclusive business cooperation agreements, share pledge
agreements, exclusive option agreements, power of attorneys and timely reporting agreements (see Note 2(b) below).
VIE AGREEMENTS WITH BEIJING YOUJIAO
AND TERMINATION OF VIE AGREEMENTS WITH BEIJING YOUJIAO
On June 19, 2018, Hao Limo entered into
a series of agreements (the “Youjiao VIE Agreements”) with Beijing Youjiao and Aizhen Li. The Youjiao VIE Agreements
were 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 Beijing Youjiao, including absolute control rights and the rights to the management, operations,
assets, property and revenue of Beijing Youjiao. On November 8, 2018, the Youjiao VIE Agreements were terminated.
DISPOSITION OF GLG BVI
Historically, the Company’s core
business has been the Micro-lending business conducted through Wujiang Luxiang Rural Microcredit Co., Ltd. (“Wujiang Luxiang”),
an entity that the Company controlled via certain contractual arrangements, and Pride Financial Leasing (Suzhou) Co. Ltd. (“PFL”),
the Company’s wholly owned subsidiary.
On June 19, 2018, the Company, HK Xu Ding
Co, Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser”) and CCCR International
Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability which was previously 100%
owned by the Company (“GLG BVI”) entered into certain Share Purchase Agreement (the “Purchase Agreement”).
Pursuant to the Purchase Agreement, the Purchaser agreed to purchase GLG BVI in exchange of cash purchase price of $500,000.
GLG BVI is the sole shareholder of GLG
International Investment Ltd. (“GLG HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC,
which is the sole shareholder of WFOE. WFOE, via a series of contractual arrangements, controls Wujiang Luxiang. GLG HK is the
sole shareholder of PFL.
Upon closing of the disposition on June
21, 2018, the Purchaser became the sole shareholder of GLG BVI and as a result, assumed all assets and obligations of all the
subsidiaries and VIE entities owned or controlled by GLG BVI including but not limited to Wujiang Luxiang and PFL (see Note 18).
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
Basis of presentation and principle of consolidation
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 intercompany balances have been eliminated upon consolidation.
(b) Consolidation of variable interest entities
As of December 31, 2019, the Company’s
business was primarily conducted through its two VIEs,Beijing Tianxing and Huamucheng.
Material terms of the Tianxing VIE Agreements
and Huamucheng VIE Agreements are described below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive Business Cooperation
Agreements Hao Limo provides Beijing Tianxing and Huamucheng with technical support, consulting services and management services
on an exclusive basis, utilizing its advantages in technology, human resources, and information, respectively. Additionally, Beijing
Tianxing and Huamucheng each granted an irrevocable and exclusive option to Hao Limo to purchase from Beijing Tianxing and Huamucheng,
any or all of Beijing Tianxing’s and Huamucheng’s assets at the lowest purchase price permitted under the PRC laws.
Should Hao Limo exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services
rendered to Beijing Tianxing and Huamucheng by Hao Limo under this agreement, Hao Limo is entitled to collect a service fee calculated
based on the time of services rendered multiplied by the corresponding rate, plus amount of the services fees or ratio decided
by the board of directors of Hao Limo based on the value of services rendered by Hao Limo and the actual income of Beijing Tianxing
and Huamucheng from time to time, which is substantially equal to all of the net income of Beijing Tianxing and Huamucheng.
The Exclusive Business Cooperation Agreements
shall remain in effect for ten years unless it is terminated by Hao Limo with 30-day prior written notice. Beijing Tianxing or
Huamucheng do not have the right to terminate the agreement unilaterally. Hao Limo may unilaterally extend the term of these agreements
with prior written notice.
Share Pledge Agreement
Pursuant to the Share Pledge Agreements,
, the shareholders of Beijing Tianxing and Huamucheng pledged all of their respective equity interests in Beijing Tianxing and
Huamucheng to Hao Limo to guarantee the performance of their obligations under the Exclusive Business Cooperation Agreement.
Under the terms of the agreements, in any
event of default, including that Beijing Tianxing or the shareholders of Beijing Tianxing, and Huamucheng or the shareholders of
Huamucheng breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, Hao Limo, as pledgee,
will be entitled to certain rights, including, but not limited to, the right to dispose of the pledged equity interest in accordance
with applicable PRC laws. Hao Limo shall have the right to collect any and all dividends declared or generated in connection with
the equity interest during the term of pledge.
The Share Pledge Agreement shall be effective
until all payments due under the Exclusive Business Cooperation Agreement have been paid by Beijing Tianxing and Huamucheng. Hao
Limo shall cancel or terminate the Share Pledge Agreement upon Beijing Tianxing’s and Huamucheng’s full payment of
fees payable under the Exclusive Business Cooperation Agreement.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(b) Consolidation of variable interest entities (continued)
Exclusive Option Agreement
Under the Exclusive Option Agreements,
the shareholders of Beijing Tianxing and Humuacheng irrevocably granted Hao Limo (or its designee) an exclusive option to purchase,
to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Beijing
Tianxing and Huamucheng, respectively. The option price is equal to the capital paid in by the shareholders of Beijing Tianxing
and Huamucheng subject to any appraisal or restrictions required by applicable PRC laws and regulations.
Both agreements remain effective for a
term of ten years and may be renewed at Hao Limo’s election.
Power of Attorneys
Under the Power of Attorney, both the shareholders
of Beijing Tianxing and Huamucheng authorized Hao Limo to act on their behalf as their exclusive agent and attorney with respect
to all rights as shareholder, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the
shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association
of Beijing Tianxing and Huamucheng, including but not limited to the sale or transfer or pledge or disposition of shares held by
the shareholders of Beijing Tianxing and Huamucheng in part or in whole; and (c) designating and appointing on behalf of the shareholders
of Beijing Tianxing and Huamucheng the legal representative, the executive director, supervisor, the chief executive officer and
other senior management members of Beijing Tianxing and Huamucheng.
Although it is not explicitly stipulated
in the Power of Attorney, the term of the Power of Attorneys shall be the same as the term of that of the Exclusive Option Agreements.
This Power of Attorneys are coupled with
an interest and shall be irrevocable and continuously valid from the date of execution of these Power of Attorneys, so long as
the shareholders of Beijing Tianxing and Huamucheng are shareholders of Beijing Tianxing and Huamucheng, respectively.
Timely Reporting Agreements
To ensure Beijing Tianxing and Huamucheng
promptly provide all of the information that Hao Limo and the Company need to file various reports with the SEC, Timely Reporting
Agreements were entered between Beijing Tianxing and Huamucheng with the Company , respectively.
Under the Timely Reporting Agreements,
Beijing Tianxing and Huamucheng agreed that they are obligated to make its officers and directors available to the Company and
promptly provide all information required by the Company so that the Company can file all necessary SEC and other regulatory reports
as required.
Although it is not explicitly stipulated
in the Timely Reporting Agreements, the parties agreed its term shall be the same as that of the Exclusive Business Cooperation
Agreements. The Tianxing VIE Agreements and Huamucheng VIE Agreement became effective immediately upon their execution.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(b) Consolidation of variable interest entities (continued)
VIE is an entity that have either a total
equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights,
right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable
interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate
the VIE. Hao Limo is deemed to have a controlling financial interest and be the primary beneficiary of Beijing Tianxing and Humucheng,
because it has both of the following characteristics:
|
1.
|
power to direct activities of a VIE that most significantly impact the entity’s economic performance, and
|
|
2.
|
obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE.
|
Pursuant to the VIE Agreements, Beijing
Tianxing and Huamucheng pay service fees equal to all of its net income to Hao Limo. At the same time, Hao Limo is entitled to
receive all of expected residual returns. The VIE Agreements are designed so that Beijing Tianxing and Huamucheng operate for the
benefit of the Company. Accordingly, the accounts of Beijing Tianxing are consolidated in the accompanying financial statements
pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s
consolidated financial statements.
In addition, as all of these VIE agreements
are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in
accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the
PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system
could further limit the Company’s ability to enforce these VIE agreements. Furthermore, these contracts may not be enforceable
in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise
not enforceable for public policy reasons. In the event the Company is unable to enforce these VIE agreements, it may not be able
to exert effective control over Beijing Tianxing or Huamucheng and its ability to conduct its business may be materially and adversely
affected.
All of the Company’s main current
operations are conducted through Beijing Tianxing and its subsidiaries since June 2018, and through Huamucheng since November 2019.
Current regulations in China permit Beijing Tianxing and Huamucheng to pay dividends to the Company only out of their accumulated
distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations.
The ability of Beijing Tianxing and Huamucheng to make dividends and other payments to the Company may be restricted by factors
including changes in applicable foreign exchange and other laws and regulations.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(b) Consolidation of variable interest entities (continued)
The following financial statement balances
reflect the financial positions of Beijing Tianxing and Huamucheng, which were included in the consolidated balance sheets as of
December 31, 2019 and 2018, respectively:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Beijing Tianxing VIE
|
|
|
Huamucheng VIE
|
|
|
Total
|
|
|
Beijing
Tianxing VIE
|
|
|
Huamucheng VIE
|
|
|
Total
|
|
|
|
(Car leasing)
|
|
|
(Commodity
Trading and Supply Chain Management)
|
|
|
|
|
|
(Car leasing)
|
|
|
(Commodity trading and Supply Chain Management)
|
|
|
|
|
Cash
|
|
$
|
94,380
|
|
|
$
|
1,730,793
|
|
|
$
|
1,825,173
|
|
|
$
|
991,385
|
|
|
$
|
-
|
|
|
$
|
991,385
|
|
Loans receivable from third parties
|
|
|
1,364,125
|
|
|
|
-
|
|
|
|
1,364,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Due from GLG and Hao Limo*
|
|
|
966,882
|
|
|
|
-
|
|
|
|
966,882
|
|
|
|
145,397
|
|
|
|
-
|
|
|
|
145,397
|
|
Due from related parties
|
|
|
470,154
|
|
|
|
2,840,729
|
|
|
|
3,310,883
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other current assets
|
|
|
164,922
|
|
|
|
2,848
|
|
|
|
167,770
|
|
|
|
87,922
|
|
|
|
-
|
|
|
|
87,922
|
|
Investment in equity investees
|
|
|
562,807
|
|
|
|
-
|
|
|
|
562,807
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease assets, net
|
|
|
2,426,109
|
|
|
|
-
|
|
|
|
2,426,109
|
|
|
|
1,634,018
|
|
|
|
-
|
|
|
|
1,634,018
|
|
Other noncurrent assets
|
|
|
18,186
|
|
|
|
-
|
|
|
|
18,186
|
|
|
|
5,524
|
|
|
|
-
|
|
|
|
5,524
|
|
Total Assets
|
|
$
|
6,067,565
|
|
|
$
|
4,574,370
|
|
|
$
|
10,641,935
|
|
|
$
|
2,864,246
|
|
|
$
|
-
|
|
|
$
|
2,864,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from customers
|
|
$
|
15,249
|
|
|
$
|
-
|
|
|
$
|
15,249
|
|
|
$
|
6,209
|
|
|
$
|
-
|
|
|
$
|
6,209
|
|
Other current liabilities
|
|
|
218,688
|
|
|
|
207,834
|
|
|
|
426,522
|
|
|
|
102,549
|
|
|
|
-
|
|
|
|
102,549
|
|
Third parties loans
|
|
|
2,080,941
|
|
|
|
315,729
|
|
|
|
2,396,670
|
|
|
|
218,100
|
|
|
|
-
|
|
|
|
218,100
|
|
Due to related parties
|
|
|
197,733
|
|
|
|
166,332
|
|
|
|
364,065
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Due to GLG and Hao Limo **
|
|
|
5,197,531
|
|
|
|
2,577,356
|
|
|
|
7,774,887
|
|
|
|
3,083,324
|
|
|
|
-
|
|
|
|
3,083,324
|
|
Total Liabilities
|
|
$
|
7,710,142
|
|
|
$
|
3,267,251
|
|
|
$
|
10,977,393
|
|
|
$
|
3,410,182
|
|
|
$
|
-
|
|
|
$
|
3,410,182
|
|
*
|
Receivable due from GLG and Hao Limo is eliminated upon
consolidation.
|
|
|
|
**
|
Payable due to GLG and Hao Limo is eliminated upon consolidation.
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(b) Consolidation of variable interest entities (continued)
The following financial statement amounts
reflect the financial performances and cash flows of Beijing Tianxing and Huamucheng, which were included in the consolidated financial
statements for the year ended December 31, 2019and 2018, respectively:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Beijing Tianxing VIE
|
|
|
Huamucheng VIE
|
|
|
Total
|
|
|
Beijing
Tianxing VIE
|
|
|
Huamucheng VIE
|
|
|
Total
|
|
|
|
(Car leasing)
|
|
|
(Commodity
Trading
and Supply Chain Management)
|
|
|
|
|
|
(Car
leasing)
|
|
|
(Commodity Trading and Supply Chain Management)
|
|
|
|
|
Revenue
|
|
$
|
1,830,148
|
|
|
$
|
663,013
|
|
|
$
|
2,493,161
|
|
|
$
|
488,062
|
|
|
$
|
-
|
|
|
$
|
488,062
|
|
Operating expenses
|
|
$
|
(3,092,738
|
)
|
|
$
|
(629,044
|
)
|
|
$
|
(3,721,782
|
)
|
|
$
|
(1,001,154
|
)
|
|
$
|
-
|
|
|
$
|
(1,001,154
|
)
|
Net (loss) income
|
|
$
|
(1,631,580
|
)
|
|
$
|
44,583
|
|
|
$
|
(1,586,997
|
)
|
|
$
|
(536,694
|
)
|
|
$
|
-
|
|
|
$
|
(536,694
|
)
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Beijing Tianxing VIE
|
|
|
Huamucheng VIE
|
|
|
Total
|
|
|
Beijing
Tianxing VIE
|
|
|
Huamucheng VIE
|
|
|
Total
|
|
|
|
(Car leasing)
|
|
|
(commodity
Trading and Supply Chain Management)
|
|
|
|
|
|
(Car
leasing)
|
|
|
(commodity Trading and Supply Chain Management)
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
$
|
1,019,990
|
|
|
$
|
2,677,074
|
|
|
$
|
3,697,064
|
|
|
$
|
2,806,292
|
|
|
$
|
-
|
|
|
$
|
2,806,292
|
|
Net Cash Used in by Investing Activities
|
|
|
(3,992,794
|
)
|
|
|
(2,865,070
|
)
|
|
|
(6,857,864
|
)
|
|
|
(2,002,468
|
)
|
|
|
-
|
|
|
|
(2,002,468
|
)
|
Net Cash Provided by Financing Activities
|
|
|
2,081,085
|
|
|
|
1,903,926
|
|
|
|
3,985,011
|
|
|
|
226,713
|
|
|
|
-
|
|
|
|
226,713
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
(5,286
|
)
|
|
|
14,863
|
|
|
|
9,577
|
|
|
|
(39,152
|
)
|
|
|
-
|
|
|
|
(39,152
|
)
|
Net Increase in Cash
|
|
|
(897,005
|
)
|
|
|
1,730,793
|
|
|
|
833,788
|
|
|
|
991,385
|
|
|
|
-
|
|
|
|
991,385
|
|
Cash at Beginning of Period
|
|
|
991,385
|
|
|
|
-
|
|
|
|
991,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash at End of Period
|
|
$
|
94,380
|
|
|
$
|
1,730,793
|
|
|
$
|
1,825,173
|
|
|
$
|
991,385
|
|
|
$
|
-
|
|
|
$
|
991,385
|
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
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.
(d)
|
Foreign currency translation
|
The reporting currency of the Company is
United States Dollars (“US$”), which is also the Company’s functional currency. HC High BVI and HC High HK maintain
their book and records in US$, which is also their functional currency. The Company’s PRC subsidiaries and VIEs maintain
their books and records in its local currency, the Renminbi Yuan (“RMB”), which is their functional currencies as being
the primary currency of the economic environment in which these entities operate.
For financial reporting purposes, the financial
statements of the PRC subsidiaries and VIEs prepared using RMB, are translated into the Company’s reporting currency, US$,
at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet
date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’
equity is translated at historical exchange rates, except for the change in accumulated deficit during the year which is the result
of the income statement translation process. Adjustments resulting from the translation are recorded as a separate component of
accumulated other comprehensive loss in stockholders’ equity.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.9680
|
|
|
|
6.8776
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Items in the statements of operations and comprehensive (loss) income, and statements of cash flows
|
|
|
6.9088
|
|
|
|
6.6163
|
|
Transactions denominated in currencies
other than the functional currency are translated into prevailing functional currency at the exchange rates prevailing at the dates
of the transactions. The resulting exchange differences are included in the consolidated statements of comprehensive income (loss).
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(e)
|
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, due from related parties, third
parties loans payable and other current liabilities, approximate their fair values due to their short-term nature. Noncurrent loan
receivable due from a third party, a noncurrent related party loan, and investments in financial products are held to their maturities
and are carried at amortized cost, which approximates their fair values.
During the year ended December 31,
2018, the Company recorded $166,540 in “Changes in fair value of noncurrent liabilities”. This is related to distribution
of the Settlement Shares to the class plaintiffs approved by the Court in December 2017. On January 19, 2018 and April 10, 2018,
the Company issued 712,500 and 237,500 class settlement shares (equivalent to 142,500 and 47,500 class settlement shares upon stock
reverse split in January 2019), at the market share price of $1.68 and $1.18 per share, respectively. As the Company is a public
entity with quoted market price, the fair value of other noncurrent liabilities were classified as level 1. The expenses were accrued
by reference to the quoted market share price per share on each reporting date.
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 13.
Investment
security represents the Company’s investment in one equity investee that is not accounted for under the equity method or
cost method. On June 3, 2019, the Company invested $200,000 into Orient Xingyao (Beijing) Technology Co., Ltd (“Orient Xingyao”),
an operator of digital currency marketplace facilitating coin transactions, for 4.22% of its ownership interest. The purpose of
this investment is to use the marketplace operated by Orient Xingyao as a channel to promote the Company’s car leasing services
to potential customers (see Note 6).
Beginning
on January 1, 2019, the Company adopted ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities,” including related technical corrections and improvements
issued within ASU 2018-13. ASU 2016-01 amended various aspects of the recognition, measurement, presentation, and disclosure
for financial instruments, and simplified the impairment assessment and enhanced the disclosure requirements of equity investments.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(f)
|
Investment security (continued)
|
Prior
to the adoption of ASU 2016-01, the cost method was used to account for certain equity investments in privately held companies
over which the Company neither has control nor significant influence through investments in common stock or in-substance common
stock. Upon the adoption of ASU 2016-01, the Company elected to record a majority of equity investments in privately held companies
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.
For
the year ended December 31, 2019, Orient Xingyao suffered net losses and working capital deficit, and the Company’s management
assessed it was remote for Orient Xingyao to make profit within the foreseeable future. As a result, the Company determined that
the loss is other-than-temporary, and accordingly, a full impairment of $200,000 has been
applied against the Company’s investment security as of December 31, 2019, which was reflected in the consolidated statements
of operation and comprehensive income (loss).
(g)
|
Investments in equity investees
|
On
June 28, 2019 and July 4, 2019, the Company invested $287,026 (RMB 2,000,000) each to acquire 40% of the ownership interests in
Chendu Jianluo Technology Co., Ltd. (“Chengdu Jianluo”), Shanghai Huxin Technology Co., Ltd. (“Shanghai Huxin”)
and Shanghai Yaoku Technology Co., Ltd. (“Shanghai Yaoku”), respectively, with the remaining 60% of the ownership interest
held by unrelated parties in each of these investees. The purpose of such investment is to establish a cooperative business
partnership with these investees and utilize their marketing strength and customer network to bring in more customers for the Company’s
car leasing services in Chengdu and Shanghai markets.
In addition, 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 7).
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.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(h)
|
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 (see Note 8).
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.
(i)
|
Operating lease asset, net
|
Operating lease asset, net, represents
the automobiles that are underlying our automotive lease contracts and is reported at cost, less accumulated depreciation and net
of impairment charges and origination fees or costs. Depreciation of vehicles is recorded on a straight-line basis to an estimated
residual value over the useful life of nine years. We periodically evaluate our depreciation rate for leased vehicles based on
expected residual values and adjust depreciation expense over the remaining life of the lease if deemed necessary.
We have significant investments in the
residual values of the assets in our operating lease portfolio. The residual values represent an estimate of the values of the
assets at the end of the lease contracts. At contract inception, we determine pricing based on the projected residual value of
the lease vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage,
seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts
in used vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Realization
of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the
life of the lease, we evaluate the adequacy of our estimate of the residual value and make adjustments to the depreciation rates
to the extent the expected value of the vehicle at lease termination changes. In addition to estimating the residual value at lease
termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent necessary when
there is an indication of impairment based on market considerations and portfolio characteristics. Impairment is determined to
exist if fair value of the leased asset is less than carrying value and it is determined that the net carrying value is not recoverable.
The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows
expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets
are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the
fair value as estimated by discounted cash flows. For the years ended December 31, 2019 and 2018, we provided impairment of $148,143
and $184,645, respectively, for several of our operating lease assets, because, by reference to the market price, we determined
the fair value of these used luxurious cars was below the original carrying amount of the leased asset. We recognize rental income
on our operating leases when collection is reasonably assured.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(j)
|
Income from operating lease
|
Income from operating lease represents
lease origination fees and rental fee, netting off lease origination costs. In accordance with ASC 842, Leases, the Company recognized
the income from operating lease on a straight-line basis over the scheduled lease term. For the years ended December 31, 2019
and 2018, the Company generated income from operating lease of $1,830,148 and $488,062, respectively.
(k)
|
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. No impairment for right-of-use lease assets as of December 31, 2019.
The Company generates income or revenue
from the following source (1) income from operating lease of luxurious cars, which is accounted for in accordance with ASC 842,
Leases, the Company recognized the income from operating lease on a straight-line basis over the scheduled lease term. (2) Revenue
associated with commodity trading and revenue associated with supply chain management services are accounted for in accordance with
ASC 606.
On January 1, 2019, the Company adopted
ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective approach. 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. The Company has assessed
the impact of the new guidance by reviewing its existing customer contracts and current accounting policies and practices to identify
differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction
price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded
that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606
and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(l)
|
Revenue recognition (continued)
|
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 upstream metal and mineral suppliers and then selling to
downstream customers. The Company makes advance payments to upstream 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 downstream 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.
Since this is a relatively new line of
business, the Company only sold non-ferrous metal products to one customer in December 2019 and generated revenue of 100,247 for
the year ended December 31, 2019.
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 upstream
metal and mineral suppliers to sell their metal products, in December 2019, 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. For the year ended December 31, 2019, the Company earned $323,623 from loan recommendation
services.
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,
2019, the Company earned distribution service fees $238,963 from facilitating such sales transactions.
Contract assets and liabilities
As of December 31, 2019 and 2018, other
than advances from customers, the Company had no other material contract assets, contract liabilities or deferred contract costs
recorded on its consolidated balance sheets.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(l)
|
Revenue recognition (continued)
|
Disaggregation of revenue
The Company disaggregates its revenue
from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the
revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the years ended December 31,
2019 and 2018 is as follows:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Income from operating lease
|
|
$
|
1,830,148
|
|
|
$
|
488,062
|
|
Revenue from commodity sales and supply management services:
|
|
|
|
|
|
|
|
|
Revenue from sales of commodity products
|
|
|
100,427
|
|
|
|
-
|
|
Revenue from supply loan recommendation service fees
|
|
|
323,623
|
|
|
|
-
|
|
Revenue from distribution service fees
|
|
|
238,963
|
|
|
|
-
|
|
Subtotal of revenue from commodity sales and supply management services
|
|
|
663,013
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,493,161
|
|
|
$
|
488,062
|
|
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.
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 positions or any unrecognized liabilities,
interest or penalties associated with unrecognized tax benefit as of December 31, 2019 and 2018. As of December 31, 2019, all of
the Company’s income tax returns for the tax years ended December 31, 2014 through December 31, 2018 remain open for statutory
examination by relevant tax authorities.
(n)
|
(Loss) Income per share
|
Basic (loss) income 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 for the years ended
December 31, 2019 and 2018. The number of warrants is excluded from the computation because of its anti-dilutive effect.
Share-based awards granted to the Company’s
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.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(o)
|
Share-based
awards (continued)
|
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 awards changes significantly,
share-based compensation expense may differ materially in the future from that recorded in the current reporting period.
The Company issued warrants to four individuals
in private placements and to three external investors in registered direct offering, through which the Company issued both common
shares and warrants as separable units, and both instrument is registered when issued. Warrants requiring share settlement are
classified as equity (Note 13).
Certain reclassifications have been made
in the 2018 financial statements to conform to the 2019 presentation, including reclassification of third-party loans payable
out of other current liabilities, and reclassification of certain selling, general and administrative expenses to conform with
the 2019 presentation. These reclassifications have no impact on the total liabilities and total operating expenses as of and
for the year ended December 31, 2018.
(r)
|
Recent accounting pronouncement
|
Recently
announced accounting standards
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This
ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments
held by financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates
and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’s
portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts
recorded in the financial statements. Its mandatory effective dates are as follows: 1. Public business entities that meet the definition
of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; 2. All
other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal
years; and 3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal years. On November 15, 2019, FASB issued ASU 2019-10
which provides a framework to stagger effective dates for future major accounting standards (including ASC 326 Financial instrument-credit
losses) and amends the effective dates to give implementation relief to certain type of entities: 1. Public business entities that
meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies, or SRC, as defined by the SEC,
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; and 2. All other entities
for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an “emerging
growth company,” or EGC, the Company has elected to take advantage of the extended transition period provided in the Securities
Act Section 7(a)(2)(B) for complying with new or revised accounting standards applicable to private companies. The Company will
adopt ASU 2016-13 and its related amendments effective January 1, 2023, and the Company is in the process of evaluating the potential
effect on its consolidated financial statements.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(r)
|
Recent accounting
pronouncement (continued)
|
In August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,”
to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value
measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, policies for
timing of transfers between different levels for fair value measurements, and the valuation processes for Level 3 fair value measurements.
The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level
3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019. The Company does not expect that the adoption of this ASU will have a material
impact on its financial statements.
In October 2018, the FASB issued ASU2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 expands
the accounting alternative that allows private companies the election not to apply the variable interest entity guidance to qualifying
common control leasing arrangements. ASU 2018-17 broadens the scope of the private company alternative to include all common control
arrangements that meet specific criteria (not just leasing arrangements). ASU 2018-17 also eliminates the requirement that entities
consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making
fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a proportionate basis. The amendments
are effective for public business entities for fiscal years ending after December 15, 2019. Early adoption is permitted. The Company
is currently assessing the timing and impact of adoption of this ASU to its consolidated financial statements.
In April 2019, the FASB issued ASU
2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging,
and Topic 825, Financial Instruments.” Apart from the amendments to ASU 2016-13 as mentioned below, the ASU also included
subsequent amendments to ASU 2016-01, which we adopted in January 1, 2018. The guidance in relation to the amendments to ASU 2016-01 is
effective for us for the year ending December 31, 2020 and interim reporting periods during the year ending December 31, 2020.
Early adoption is permitted. The Company does not expect that the adoption of this ASU will have a material impact on its financial
statements.
Recently
adopted accounting standards
In February 2018, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220). The new guidance permits, but does not require, companies to reclassify the stranded tax effects
of the Tax Cuts and Jobs Act (the “Act”) on items within accumulated other comprehensive income to retained earnings.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Company adopted this standard in the first quarter of 2019 and did not elect to reclassify the stranded tax effects of the
Act on items within accumulated other comprehensive income to retained earnings. The Company uses the portfolio method for releasing
the stranded tax effects from accumulated other comprehensive income.
In June 2018, the FASB issued ASU
2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting,” which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services
from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs
to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment
transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing
share-based payment awards. We adopted the new guidance beginning on January 1, 2019. The adoption of this guidance did not
have a material impact on our financial position, results of operations and cash flows.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(r)
|
Recent accounting
pronouncement (continued)
|
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued an accounting standard update (ASC Topic 842) that amends the accounting guidance on
leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability
on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating,
with classification affecting the pattern of expense recognition in the income statement. We adopted this accounting standard
effective January 1, 2019, using the optional transition method with no restatement of comparative periods.. Our adoption of the
new standard did not result in a cumulative effect adjustment to retained earnings.
Consequently, upon adoption and as of December
31, 2019, we recognized right-of-use lease assets, net of $41,188 and operating lease liabilities of $nil (Note 16).
For the year ended December
31, 2019, the Company incurred net loss from continuing operations of approximately $6.94 million, and reported cash outflows
of approximately $2.17 million from operating activities. These factors caused concern as to the Company’s liquidity as
of December 31, 2019.
In assessing the Company’s liquidity,
the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating
and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating
expenses obligations.
As
of December 31, 2019, the Company had cash balance of $2,446,683 and a positive working capital of $2,444,466. As of
December 31, 2019, the Company’s balance sheets also reflected current
third-party loans receivable of $1,955,697 and due from related parties of $3,310,883. As of the date of filing, the
$3,310,883 due from related parties balance has been fully collected. The Company also terminated certain third-party loan
receivable contracts and collected approximately $1.0 million loans receivable from these third-parties. The Company’s
Board of Directors passed a resolution to require the remaining balance of loans receivable from third-parties to
be collected by June 30, 2020 (see Note 5). The collection of the third-party loans receivable and balances due from related
parties increased the available cash to be used as the Company’s working capital. As of December 31, 2019, the
Company’s major current liabilities included third party loans payable of $2,367,967, due to related parties of
$1,017,362 and subscription advance from
shareholders of $1,600,000. The Company believes that most of these third party loan payables can be renewed or extended upon
maturity based on the Company’s good relationship with these third parties. The Company’s due to related parties
balance can also be extended upon demand and remain interest free. The Company’s Chief Executive Officer and major
shareholder also pledged to provide continuous financial support to the Company for at least next 12 months from the date of
this filing. The subscription advance from shareholders of $1,600,000 will be settled by issuance of common stocks rather
than in cash. During the year ended December 31, 2019, the Company was able to raise funds from equity financing,
including $4.65 million from direct registered offerings, and $2.19 million from private placement transactions.
Subsequently, in January 2020, the Company entered into additional private placement
agreement with certain private investors and issued 15,000,000 shares of common stock at $0.90 per share and also sold 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. On
April 14 and 15, 2020, the holders of Notes exercised warrants and paid cash consideration of $36,000,000 to
the Company. Total equity financing from this transaction was
$79.5 million. The Company received $79.5 million proceeds by April 15, 2020 (see Note
20). The Company expects to use the proceeds from this equity financing as working capital to expand its commodity trading
business.
Going forward, the Company plans to fund
its operations through revenue generated from its commodity trading business, operating lease income, funds from its private placements
as well as financial support commitments from the Company’s Chief Executive Officer and major shareholders.
Based on above operating plan, the management
believes that the Company will continue as a going concern in the following 12 months.
The Company’s ability to support
its operating and capital expenditure commitments will depend on its future performance, which will be subject in part to general
economic, competitive and other factors beyond its control. Recent COVID-19 outbreak and spread is causing lockdowns, quarantines,
travel restrictions, and closures of businesses and schools. Due to COVID-19 outbreak, the Company’s facilities remained
closed or had limited business operations after the Chinese New Year holiday until early March 2020. In addition, COVID-19 has
caused severe disruptions in transportation, limited access to the Company’s facilities and limited support from workforce
employed in the Company’s operations, and as a result, the Company may experience the inability to lease its luxurious cars
to customers or delay the delivery of the metal products to customers. Although the Company has taken all possible measures to
overcome the adverse impact derived from the COVID-19 outbreak and have resumed its normal business activities in early March
2020, it is expected that the Company will generate a lower amount of revenue and profit during the period from February to April
2020. The extent to which the coronavirus impacts the Company’s operation results for fiscal year 2020 will depend on certain
future developments, including the duration and spread of the outbreak, emerging information concerning the severity of the coronavirus
and the actions taken by governments and private businesses to attempt to contain the coronavirus, all of which is uncertain at
this point.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019, approximately $46,500 was deposited with a bank in the United
States which was insured by the government up to $250,000. As of December 31, 2019 and 2018, approximately $2,399,300 and
$1,067,700, respectively, were 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.
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.
(c)
|
Foreign currency risk
|
Substantially all of the Company’s
operating activities and the Company’s major assets and liabilities are denominated in RMB, except for the cash deposit of
approximately$46,500 which was in U.S. dollars as of December 31, 2019, 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.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c)
|
Foreign currency
risk (continued)
|
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.
It is possible
that the Company’s VIE agreements with Beijing Tianxing, and Huamucheng would not be enforceable in China if PRC government
authorities or courts were to find that such contracts contravene PRC laws and regulations or are otherwise not enforceable for
public policy reasons. In the event that the Company were unable to enforce these contractual arrangements, the Company would not
be able to exert effective control over the VIEs. Consequently, the VIEs’ results of operations, assets and liabilities would
not be included in the Company’s consolidated financial statements. If such were the case, the Company’s cash flows,
financial position, and operating performance would be materially adversely affected.
(e) Other risk
The Company’s business, financial
condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions,
health epidemics and other catastrophic incidents, such as the COVID-19 outbreak and spread, which could significantly disrupt
the Company’s operations (see Note 20- Subsequent Events ).
5.
|
LOANS RECEIVABLE FROM THIRD PARTIES
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Loans receivable from third parties
|
|
$
|
2,005,927
|
|
|
$
|
-
|
|
Less: loan receivable from third parties, current
|
|
|
1,955,697
|
|
|
|
-
|
|
Loan receivable from a third party, noncurrent
|
|
$
|
50,230
|
|
|
$
|
-
|
|
During
the year ended December 31, 2019, the Company entered into loan agreements with ten third parties and advanced an aggregate
of approximately $2.2 million to these third parties
as interest-bearing loans, with loan principal and interest payment due through August 2021. The interest rate ranges between
9% and 16% per annum. Management periodically assesses the collectability of these third-party 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, 2019, there was no allowance recorded as the Company considers all of the loans receivable
fully collectible. In March and April 2020, the Company terminated certain third-party loan receivable contracts and collected
approximately $1.0 million loans receivable from these third-parties. The Company’s Board of Directors also passed a resolution
to require the remaining balance of loans receivable from third-parties to be collected by June 30, 2020.
Interest income of $134,570 was accrued for the year ended December 31,
2019. As of December 31, 2019, the Company recorded an interest receivable of $133,742 as reflected under “other current
assets” in the consolidated balance sheets.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, the Company had
investment security of $200,000 in one privately held company, Orient Xingyao, over which
the Company owns 4.22% equity interest, with remaining 95.78% equity interest owned by unrelated third parties. Orient Xingyao
owns a marketplace facilitating coin transactions. The purpose of the Company’s investment is to utilize the marketplace
held by Orient Xinyao as a channel to promote the Company’s car leasing services to potential customers. The Company neither
has control nor significant influence through investments in common stock or in-substance common stock.
As
of December 31, 2019, based on the financial condition and operating performance of Orient Xinyao, it suffered significant net
loss and working capital deficit. Management assessed that the likelihood of future profitability of Orient Xinyao is remote, and
the fair value of the Company’s investment security is below its carrying value. As a result, a full impairment loss of $200,000
has been applied against this investment. as reflected in the consolidated statements of operations and comprehensive income (loss)
for the year ended December 31, 2019.
7.
|
INVESTMENTS IN EQUITY INVESTEES
|
As of December 31, 2019, the Company’s
investments in equity investees were comprised of the following:
|
|
Investment
|
|
|
% of ownership
|
|
|
Investment
dates
|
|
|
|
|
|
|
|
|
|
Chengdu Jianluo Technology Co., Ltd. (“Chengdu Jianluo”)
|
|
$
|
287,026
|
|
|
|
40
|
%
|
|
June 28, 2019
|
Shanghai Huxin Technology Co., Ltd. (“Shanghai Huxin”)
|
|
|
287,026
|
|
|
|
40
|
%
|
|
July 4, 2019
|
Shanghai Yaoku Technology Co., Ltd. (“Shanghai Yaoku”)
|
|
|
287,026
|
|
|
|
40
|
%
|
|
July 4, 2019
|
Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou Yihe”)
|
|
|
2,219,251
|
|
|
|
20
|
%
|
|
December 17, 2019
|
|
|
|
3,080,329
|
|
|
|
|
|
|
|
Less: Impairment on investment in Shanghai Yaoku
|
|
|
(287,026
|
)
|
|
|
|
|
|
|
Impairment on investment in Hangzhou Yihe
|
|
|
(1,809,251
|
)
|
|
|
|
|
|
|
Share of results of equity investees
|
|
|
(11,245
|
)
|
|
|
|
|
|
|
|
|
$
|
972,807
|
|
|
|
|
|
|
|
In order to expand the Company’s
car leasing business into extended geographic areas, on June 28, 2019 and July 4, 2019, the Company entered into investment agreements
with Chengdu Jianluo, Shangha Huxin and Shanghai Yaoku, to invest $287,026 (RMB 2,000,000), $287,026 (RMB 2,000,000) and $287,026
(RMB 2,000,000), for 40% of the ownership interest in each of these three investees, respectively. The purpose of such investment
is to establish a cooperative business partnership with these investees and utilize their marketing strength and customer network
to bring in more customers for the Company’s car leasing services in Chengdu and Shanghai markets.
In addition, on 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. Hangzhou Yihe was engaged in car leasing business, and the acquisition was for the purpose
of producing synergy between the Company and Hangzhou Yihe so as to promote car leasing business in Zhejiang province.
On December 17, 2019, upon receipt of
NASDAQ approval, the Company issued 1,253,814 shares of its common stock, which was valued at $2,219,251 based on the closing
share price of the Company’s common stock at the date of issuance. As of December 31, 2019, the fair value of the 20%
equity interest of Hangzhou Yihe was determined to be $410,000 due to recurring losses of Hangzhou Yihe, the Company recorded
an investment impairment loss of $1,809,251 as a result of this transaction, which was
reflected in the consolidated statements of operation and comprehensive income (loss).
As
of December 31, 2019, based on the financial condition and operating performance of Shanghai Yaoku, it reported significant net
loss and large balance of uncollectible accounts receivable. As a result, the shareholders of Shanghai Yaoku made a decision to
dissolve its business in early 2020. Given the Company’s investment loss in Shanghai Yaoku and the uncertainty surrounding
its de-registration, management assessed that the likelihood of salvaging the investment in Shanghai Yaoku is remote, as a result,
a full impairment loss of $287,026 has been applied against this investment, as reflected in the consolidated statements of operations
and comprehensive income (loss) for the year ended December 31, 2019.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.
|
INVESTMENTS IN EQUITY INVESTEES (continued)
|
For the Company’s investment in
Chengdu Jianlo and Shanghai Huxin, no material impairment indicator noted as of December 31, 2019.
For
the year ended December 31, 2019, equity investment loss of $11,342 has been reported in connection with the Company’s
equity investment in Chengdu Jianluo and Shanghai Huxin.
8.
|
INVESTMENTS IN FINANCIAL PRODUCTS
|
On May 28, 2019, the Company entered into
a financial product investment agreement with Harrison Fund, a private equity fund (“PE Fund”) with a total investment
amount of $1,000,000 for three years. The purpose of this investment is to earn interest income. The PE Fund will invest the Company’s
cash in certain portfolio of financial instruments, including money market funds, private fund, bonds or mutual funds, with variable
rates of return on the investment. The interest earned will be recognized in the consolidated statements of income and comprehensive
income over the contractual term of this investment on an annual basis, and to be paid to the Company upon maturity of this investment.
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).
9.
|
OPERATING LEASE ASSETS, NET
|
As of December 31, 2019, the Company had
investments in eleven used luxurious cars. During the year ended December 31, 2019, the Company disposed of three used luxurious
cars with original costs aggregating $811,998, and accumulated depreciation expenses aggregating $18,678. The Company earned a
gain of $6,165 from the disposal.
The Company, by reference to the market
price, determined the fair value of four used luxurious cars as of December 31, 2019, and one used luxurious car as of December
31, 2018, was below the original carrying amount of the leased asset and had accumulated impairment of $322,210 and $177,630, respectively.
For the years ended December 31, 2019 and 2018, the Company accrued impairment of $148,143 and $184,645, respectively, for these
operating lease assets.
As of the December 31, 2019, the balance
of the used luxurious cars is comprised of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Used luxurious cars
|
|
$
|
2,795,136
|
|
|
$
|
1,728,538
|
|
Less: accumulated depreciation
|
|
|
(369,027
|
)
|
|
|
(94,520
|
)
|
|
|
$
|
2,426,109
|
|
|
$
|
1,634,018
|
|
For the years ended December 31, 2019 and
2018, the Company charged depreciation expenses of $296,933 and $101,654 on used luxurious cars, respectively.
In July 2019, the Company transferred two used luxurious cars
to Chendu Jianluo, a 40% equity investee, in exchange for consideration of $473,374. The original cost of these cars aggregated
$481,917, and the accumulated depreciation expenses aggregated $12,565. The Company did not record any gain or loss from the transfer
(see Note 13)
As of December 31, 2019, eight used luxurious
cars with an aggregated carrying amount of $1,980,899 were pledged for borrowings from third parties (see Note 10).
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.
|
THIRD PARTIES LOANS PAYABLE
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Third parties loans payable
|
|
$
|
2,367,967
|
|
|
$
|
218,100
|
|
As of December 31, 2019 and 2018, the Company had borrowings
of $2,367,967 and $218,100 from seven and two third parties, respectively. The borrowings were due through December 2020. The purpose
of such borrowings was to use the fund to purchase used luxurious cars. The interest rate charged on the borrowings ranged between
7% and 11.5%. For the years ended December 31, 2019 and 2018, the Company accrued interest expenses of $158,824 and $22,843 on the borrowings, respectively.
As of December 31, 2019, eight used luxurious
cars with an aggregated carrying amount of $1,980,899 were pledged for borrowings from third parties (see Note 9).
11.
|
STOCK SUBSCRIPTION ADVANCE FROM SHAREHOLDERS
|
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, par value $0.001 per share, 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 these investors 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 (see Note 20 Subsequent event)
12.
|
OTHER
CURRENT LIABILITIES
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Other payable
|
|
$
|
128,301
|
|
|
$
|
76,749
|
|
Accrued interest expenses
|
|
|
117,554
|
|
|
|
-
|
|
Deposit payable
|
|
|
64,342
|
|
|
|
-
|
|
Accrued litigation fees
|
|
|
-
|
|
|
|
82,500
|
|
Accrued payroll and benefit
|
|
|
49,690
|
|
|
|
17,983
|
|
Other tax payable
|
|
|
39,692
|
|
|
|
7,817
|
|
Others
|
|
|
20,522
|
|
|
|
-
|
|
Other current liabilities
|
|
$
|
420,101
|
|
|
$
|
185,049
|
|
Common Stock
The Company is authorized to issue up to
100,000,000 shares of Common Stock, par value $0.001 per share.
As of December 31, 2018, there were 25,119,532
shares of common stock issued and outstanding. On January 11, 2019, the Company filed a Certificate of Amendment of the Certificate
of Incorporation with the Secretary of State of Delaware and effected a 1 for 5 reverse stock split (the “Reverse Split”)
of the shares of the Company’s issued and outstanding common stock, par value $0.001. As a result of the Reverse Split, all
references to numbers of common shares and per-share data in the accompanying consolidated financial statements have been adjusted
to reflect such reverse split on a retrospective basis. As such, the 25,119,532 shares issued and outstanding as of December 31,
2018 decreased to 5,023,906 shares.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.
|
CAPITAL TRANSACTIONS (continued)
|
Common stocks issued to service providers
On March 8, 2019, the Company granted 502,391
restricted share units (“RSU”), at $1.76 per share based on the market price of the Company’s common stock on
the same date, to certain individual service providers as compensation for various services provided for the three months ended
March 31, 2019. These services include asset management consulting services, tax consulting services, customer relationship
services, valuation services and IT services. The restricted shares are fully vested while the transferability is restricted until
September 5, 2019.
Registered direct offering
On April 11, 2019, the Company and certain
institutional investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors
an aggregate of 1,680,000 shares of common stock in a registered direct offering and warrants to purchase up to approximately 1,680,000
shares of the Company’s Common Stock in a concurrent private placement, for gross proceeds of approximately $3.7 million.
The warrants will be exercisable immediately following the date of issuance and have an exercise price of $2.20. The warrants will
expire 5 years from the earlier of the date on which the shares of Common Stock issuable upon exercise of the warrants may be sold
pursuant to an effective registration statement or may be exercised on a cashless basis and be immediately sold pursuant to Rule
144. The purchase price for each share of Common Stock and the corresponding warrant is $2.20. Each warrant is 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 contain a mandatory exercise right for the Company to force exercise of the warrants if the Company’s
common stock trades at or above $6.60 for 20 consecutive trading days provided, among other things, that the shares issuable upon
exercise of the warrants are registered or could be sold pursuant to Rule 144 and the daily trading volume exceeds 200,000 shares
per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date.
On May 20, 2019, the Company and certain
institutional investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors
an aggregate of 1,440,000 shares of common stock in a registered direct offering and warrants to purchase up to approximately 1,080,000
shares of the Company’s Common Stock in a concurrent private placement, for gross proceeds of approximately $1.5 million.
The warrants will be exercisable after 6 months of the date of issuance and have an exercise price of $1.32. The warrants will
expire 5.5 years from the date of issuance. Each warrant is 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 contain
a mandatory exercise right for the Company to force exercise of the warrants if the Company’s common stock trades at or above
$3.96 for 20 consecutive trading days provided, among other things, that the shares issuable upon exercise of the warrants are
registered or could be sold pursuant to Rule 144 and the daily trading volume exceeds 200,000 shares per trading day on each trading
day in a period of 20 consecutive trading days prior to the applicable date.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.
|
CAPITAL TRANSACTIONS (continued)
|
In addition, with the registered direct
offering and warrants to purchase up to approximately 1,080,000 shares on May 20, 2019, the Company agreed to reduce the exercise
of the warrants issued on April 15, 2019 from $2.20 to $1.32 (“Replacement Warrants”).
However, the Company’s issuance of the Replacement Warrants had resulted in noncompliance
of Nasdaq Listing Rules 5635(d)(1) and 5635(d)(2), subjecting the Company to a potential delisting from the Nasdaq Capital Market
in the event the deficiency is not cured.
On
August 30, 2019, the Company and the Purchasers entered into an amendment and exchange agreement (the “Exchange Agreement”),
pursuant to which the Company shall issue to the Purchasers exchange warrants (the “Exchange Warrants”) to purchase
up to 1,680,000 shares of Common Stock with an exercise price of $2.20 in exchange for the cancellation and termination of the
Replacement Warrants.
Common stock issued to acquire equity
interest in Yihe
As
disclosed in Note 7, on December 17, 2019, the Company acquired 20% equity interest in Hangzhou Yihe by issuance of 1,253,814
shares of common stock at per share price of $1.77. Hangzhou Yihe was engaged in car leasing business, and the acquisition was
for the purpose of producing synergy between the Company and the equity investee so as to promote car leasing business in Zhejiang
province.
Common stock issued in private placement
On
October 8, 2019, the Company entered into certain securities purchase agreements with certain investors, pursuant to which the
Company agreed to sell an aggregate of 1,685,000 shares of its common stock, par value $0.001 per share, at a per share purchase
price of $0.35 (the “Offering”). The net proceeds to the Company from
such Offering was approximately $589,750.
As of December 31, 2019 and 2018, the Company
had 11,585,111 shares and 5,023,906 shares issued and outstanding, respectively.
Warrants
A summary of warrants activity for the
year ended December 31, 2019 was as follows:
|
|
Number of
shares
|
|
|
Weighted
average life
|
|
Expiration
dates
|
|
|
|
|
|
|
|
|
Balance of warrants outstanding as of December 31, 2018
|
|
|
273,370
|
|
|
3.94 years
|
|
|
Grants of Warrants on April 11, 2019
|
|
|
1,680,000
|
|
|
5 years
|
|
April 15, 2024
|
Grants of Warrants on May 20 2019
|
|
|
1,080,000
|
|
|
5.5 years
|
|
November 23, 2024
|
Balance of warrants outstanding as of December 31, 2019
|
|
|
3,033,370
|
|
|
4.38 years
|
|
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.
|
CAPITAL TRANSACTIONS (continued)
|
Warrants (continued)
In connection with the direct offering
closed on April 11, 2019, 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 the direct offering
closed on May 20, 2019, 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.
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 an
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”.
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.
The key assumption 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
|
%
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14.
|
EARNINGS (LOSS) PER SHARE
|
The following table sets forth the computation
of basic and diluted loss per common share for the years ended December 31, 2019 and 2018, respectively:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to TD Holdings,
Inc.’s Stockholders
|
|
$
|
(6,933,950
|
)
|
|
$
|
7,647,157
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding-Basic and Diluted
|
|
|
7,776,306
|
|
|
|
4,596,116
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - basic and diluted
|
|
$
|
(0.89
|
)
|
|
$
|
1.67
|
|
Net loss per share from continuing operations – basic and diluted
|
|
$
|
(0.89
|
)
|
|
$
|
(0.50
|
)
|
Net income per share from discontinued operations – basic and diluted
|
|
$
|
-
|
|
|
$
|
2.17
|
|
On January 11, 2019, the Company amended
the certificate of incorporation to effect a one-for-five reverse stock split of our issued and outstanding shares of common stock.
All references to numbers of common shares and per-share data in the accompanying consolidated financial statements have been adjusted
to reflect such reverse split on a retrospective basis. As such, the weighted average shares outstanding – basic and diluted
of 24,595,612 shares issued and outstanding as for the year ended December 31, 2018
decreased to 4,596,116 shares issued and outstanding.
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, 2019 and 2018. The number
of warrants is excluded from the computation as the anti-dilutive effect.
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 and concluded there was no effect on the Company’s
income tax expenses as the Company has no deferred tax assets generated since inception.
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.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
|
INCOME TAXES (continued)
|
Income tax (expenses) benefits consist of the following:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Current income tax (expenses) benefits
|
|
$
|
(14,861
|
)
|
|
$
|
104,024
|
|
Deferred income tax expenses
|
|
|
-
|
|
|
|
-
|
|
Income tax (expenses) benefits
|
|
$
|
(14,861
|
)
|
|
$
|
104,024
|
|
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, 2019 and 2018, 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, 2019.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards in the PRC
|
|
$
|
485,507
|
|
|
$
|
179,518
|
|
Federal Net operating loss carryforwards in the U.S.
|
|
|
1,421,677
|
|
|
|
947,981
|
|
State Net operating loss carryforwards in the U.S.
|
|
|
880,086
|
|
|
|
586,845
|
|
Impairment of operating lease assets
|
|
|
80,553
|
|
|
|
-
|
|
Impairment of investments
|
|
|
703,699
|
|
|
|
-
|
|
Equity investment loss
|
|
|
2,811
|
|
|
|
-
|
|
Less: valuation allowance
|
|
|
(3,574,333
|
)
|
|
|
(1,714,344
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Below is a reconciliation of the statutory
tax rate to the effective tax rate of continuing operations:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Impact of different income tax rates in other jurisdictions
|
|
|
(3.05
|
)%
|
|
|
(2.82
|
)%
|
Effect of valuation allowance for deferred tax assets
|
|
|
(22.16
|
)%
|
|
|
(22.22
|
)%
|
Tax benefits from intra-period tax allocation from discontinued operations
|
|
|
-
|
|
|
|
4.33
|
%
|
Effective tax rate
|
|
|
(0.21
|
)%
|
|
|
(4.29
|
)%
|
The Company does not anticipate any significant
increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties
related to income tax matters, if any, in income tax expense.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
|
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, 2019 and 2018 and the Company does not believe that its unrecognized
tax benefits will change over the next twelve months.
16.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
1) Nature of relationships with related parties
Name
|
|
Relationship with the Company
|
Chengdu Jianluo Technology Co., Ltd.
(“Chengdu Jianluo”)
|
|
An associate of the Company, over which the Company has 40% equity interest and exercises significant influence
|
Shanghai Huxin Technology Co., Ltd.
(“Shanghai Huxin”)
|
|
An associate of the Company, over which the Company has 40% equity interest and exercises significant influence
|
Shenzhen Qianhai Baiyu Supply Chain Co., Ltd.
(“Qianhai Baiyu”)
|
|
Controlled by Mr. Zhiping Chen, the legal representative of Huamucheng
|
Jiaxi Gao
|
|
Chief Executive Office of the Company prior to January 9, 2020
|
Guotao Deng
|
|
Legal representative of an entity over which the Company exercised significant influence
|
Guangzhou Chengji Investment Development Co., Ltd. (“Guangzhou Chengji”)
|
|
Controlled by Mr. Weicheng Pan, who is an independent director of the Company.
|
Tao Sun
|
|
Senior Management of the Company
|
Shun Li
|
|
Legal representative of Beijing Tianxing
|
Lu Zhao
|
|
Senior Management of the Company
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16.
|
RELATED PARTY TRANSACTIONS AND BALANCES (continued)
|
2) Balances with related parties
Due from related parties
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Related party relationship
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Chengdu Jianluo (i)
|
|
An associate of the Company, over which the Company has 40% equity interest and exercises significant influence
|
|
$
|
452,346
|
|
|
$
|
-
|
|
Shanghai Huxin (ii)
|
|
An associate of the Company, over which the Company has 40% equity interest and exercises significant influence
|
|
|
17,809
|
|
|
|
-
|
|
Qianhai Baiyu (iii)
|
|
Controlled by Mr. Zhiping Chen, the legal representative of Huamucheng
|
|
|
2,840,728
|
|
|
|
-
|
)
|
Total Due from related parties
|
|
|
|
$
|
3,310,883
|
|
|
$
|
-
|
|
|
(i)
|
The balance due from Chengdu Jianluo consisted of receivables for transfers of two used luxurious cars at consideration aggregating $469,352, netting off against car-related fees due to the related party of $17,006. The balance was fully collected as of the date of this report.
|
|
(ii)
|
The balance due from Shanghai Huxin represented a loan due from the related party. The balance is collected on demand, and no interest income is charged to the associate. The balance was fully collected as of the date of this report.
|
|
(iii)
|
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. Principal and interest are repaid on maturity of the loan. Interest income amounted to $25,537 for the year ended December 31, 2019. The balance of due from Qianhai Baiyu is fully collected as of the date of this report.
|
The Company does not plan to provide loans with related parties
going forward.
Due to related parties
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Related party relationship
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Jiaxi Gao (i)
|
|
Chief Executive Office of the Company prior to January 9, 2020
|
|
$
|
8,134
|
|
|
$
|
-
|
|
Guotao Deng (i)
|
|
Legal representative of an entity over which the Company exercised significant influence
|
|
|
1,435
|
|
|
|
-
|
|
Tao Sun
|
|
Senior Management of the Company
|
|
|
4,206
|
|
|
|
-
|
|
Lu Zhao (ii)
|
|
Senior Management of the Company
|
|
|
33,269
|
|
|
|
|
|
Guangzhou Chengji (ii)
|
|
Controlled by Mr. Weicheng Pan, who is an independent director of the Company
|
|
|
970,318
|
|
|
|
-
|
|
|
|
|
|
$
|
1,017,362
|
|
|
$
|
-
|
|
|
(i)
|
The balances due to Jiaxin Gao, Guotao Deng and Tao Sun represents the operating expenses paid by the related parties on behalf of the Company. The balance is payable on demand and interest free.
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16.
|
RELATED PARTY TRANSACTIONS AND BALANCES (continued)
|
|
(ii)
|
The balance due to Lu Zhao consisted of the operating expenses of $2,870 paid by the related party on behalf the Company and is payable on demand and interest free, and loan principal and interest of $30,399 due to the related party. The loan has an interest rate of 10% per annum with a maturity date of December 30, 2020.
|
|
(iii)
|
The balance due to Guangzhou Chengji represents loan principal and interest due to the related parties. The loan has an interest rate of 8% per annum with a maturity date of September 4, 2020.
|
Related party loan, noncurrent
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Related party relationship
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Tao Sun
|
|
Senior Management of the Company
|
|
$
|
152,124
|
|
|
$
|
-
|
|
The balance of related party loan
was payable in September 2022, with an interest rate of 9.5% per annum.
For the above mentioned related party borrowings, interest expense
amounted to $4,242 for the year ended December 31, 2019.
3) Transactions with related parties
-
|
Purchase from a related party and cost of revenue associated
with commodity trading business
|
In December 2019, the Company purchased aluminum ingots of $100,180
from Qianhai Baiyu, which was controlled by Mr. Zhiping Chen, the legal representative of Huamucheng. For the year ended December
31, 2019, the Company sold all aluminum ingots to customers and recorded cost of revenues of $100,180 associated with commodity
product sales.
-
|
Services provided by a related party and cost of revenue associated
with supply chain management services
|
In connection with the Company’s
supply chain management services provided customers, a related party 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, 2019, the Company reported cost of revenue of $489,231 associated with the supply chain management services related to the
support from Qianhai Baiyu.
-
|
Issuance of restricted shares to a related party
|
On March 8, 2019, the Company issued 133,333 restricted shares
to Mr. Shun Li, the legal representative of Beijing Tianxing, for his management consulting services provided during January 15,
2019 and March 31, 2019. The restricted shares are fully vested while the transferability is restricted until September 5, 2019.
The fair value of the services provided was in in the total amount of $234,666, at a per share price of $1.76 at the market price
of the grant date (see Note 13).
-
|
Transfer of operating lease assets to a related party
|
In July 2019, the Company transferred two used luxurious cars
to Chendu Jianluo, a 40% equity investee, in exchange for consideration of $473,374. The original cost of the car aggregated $481,917,
and the accumulated depreciation expenses aggregated $12,565. The Company did not record any gain or loss from the transfer (see
Note 9).
-
|
Lending to a related party
|
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.
|
-
|
Borrowings from related parties
|
On September 2, 2019, the Company entered
into a loan agreement with Mr. Tao Sun, a senior management of the Company, to borrow $153,428 for a period from September 16,
2019 through September 15, 2022. The interest rate charged on the borrowing was 7.5%. For the year ended December 31, 2019,
the Company was charged interest expenses of $4,242.
On December 25, 2019, the Company entered
into a loan agreement with Mr. Lu Zhao, a senior management of the Company, to borrow $30,659 for a period from December 25, 2019
through December 24, 2020. The interest rate charged on the borrowing was 10%. As the loan was borrowed on December 31, 2019, the
Company incurred minimal interest expenses on the loan.
On October 1, 2019, Hao Limo and Guangzhou
Chengji, which is controlled by Mr. Weicheng Pan who is an independent director of the Company, entered into a loan agreement,
under which Guangzhou Chengji will lend to Hao Limo up to $1,300,000. The Loan has an annual interest rate of 8% and a maturity
date of September 4, 2020. For the year ended December 31, 2019, the Company borrowed a loan of $978,632. As the loan was borrowed
on December 25, 2019, the Company incurred minimal interest expenses on the loan.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with ASC 280, Segment
Reporting, operating segments are defined as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group,
in deciding how to allocate resources and in assessing performance. The Company uses the “management approach” in
determining reportable operating segments. The management approach considers the internal organization and reporting used by
the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for
determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews
operation results by the revenue of different services. For the year ended December 31, 2019, the Company has 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. Based on management’s assessment, the Company
has determined that the two operating business lines are two operating segments as defined by ASC 280. For the year ended
December 31, 2018, the Company has one operating business line and one reporting unit.
The following table presents summary information
by segment for the years ended December 31, 2019 and 2018:
|
|
For the Year Ended December 31, 2019
|
|
|
|
Used Car Leasing
Business Under
Tianxing VIE
|
|
|
Commodity
Trading and
Supply
Chain
Management
Services
Under
Huamucheng
VIE
|
|
|
Unallocated
|
|
|
Total
|
|
Revenue
|
|
$
|
1,830,148
|
|
|
$
|
663,013
|
|
|
$
|
-
|
|
|
$
|
2,493,161
|
|
Cost of revenue and related tax
|
|
|
(1,544,120
|
)
|
|
|
(589,411
|
)
|
|
|
-
|
|
|
|
(2,133,531
|
)
|
Gross profit
|
|
$
|
286,028
|
|
|
$
|
73,602
|
|
|
$
|
-
|
|
|
$
|
359,630
|
|
Interest (expense) income, net
|
|
$
|
(68,162
|
)
|
|
$
|
25,475
|
|
|
$
|
42,030
|
|
|
$
|
(657
|
)
|
Depreciation
|
|
$
|
(2,326
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,326
|
)
|
Capital expenditures
|
|
$
|
(2,066,148
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,066,148
|
)
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
(14,861
|
)
|
|
$
|
-
|
|
|
$
|
(14,861
|
)
|
Segment profit (loss)
|
|
$
|
(1,631,580
|
)
|
|
$
|
44,583
|
|
|
$
|
(5,355,525
|
)
|
|
$
|
(6,942,522
|
)
|
Segment assets as of December 31,
2019
|
|
$
|
6,067,565
|
|
|
$
|
4,574,370
|
|
|
$
|
746,465
|
|
|
$
|
11,388,400
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
Used Car
Leasing
Business
Under
Tianxing
VIE
|
|
|
Commodity
Trading and
Supply
Chain
Management
Services
Under
Huamucheng
VIE
|
|
|
Unallocated
|
|
|
Total
|
|
Revenue
|
|
$
|
488,062
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
488,062
|
|
Cost of revenue and related tax
|
|
|
(71,252
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(71,252
|
)
|
Gross profit
|
|
$
|
416,810
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
416,810
|
|
Interest (expense) income, net
|
|
$
|
(20,157
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(20,157
|
)
|
Depreciation
|
|
$
|
(1,001
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,001
|
)
|
Capital expenditures
|
|
$
|
(2,124,220
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,124,220
|
)
|
Income tax (expense) benefits
|
|
$
|
104,024
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
104,024
|
|
Segment profit (loss)
|
|
$
|
(2,320,472
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,320,472
|
)
|
Segment assets as of December 31, 2018
|
|
$
|
3,211,580
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,211,580
|
|
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
|
COMMITMENTS AND CONTINGENCIES
|
The Company adopted the Topic 842 on January
1, 2019 using a modified retrospective approach.
The Company’s VIEs lease their 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.
The Company leases offices space with terms
ranging from one to two years. The Company considers those renewal or termination options that are reasonably certain to be exercised
in the determination of the lease term and initial measurement of right of use assets and lease liabilities. Lease expense for
lease payment is recognized on a straight-line basis over the lease term. Leases with initial term of 12 months or less are not
recorded on the balance sheet.
The Company determines whether a contract
is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating
lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most
of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discount lease payments
based on an estimate of its incremental borrowing rate.
As of December 31, 2019, the Company had
one lease contract with lease expiration in September 2020. The lease contract does not contain any material residual value guarantees
or material restrictive covenants. The weighted average remaining lease term for the operating lease is 0.71 year and discount
rate is 4.75%.
As of December 31, 2019, the Company had
net right-of-use lease assets of $41,188, and lease liabilities of $nil. The weighted average remaining lease term for the operating
lease is 0.71 year and discount rate of 4.75%.
During the year ended December 31,
2019 and 2018, the Company incurred total operating lease expenses of $78,957 and $65,297, respectively.
In December 2019, the Company entered into
an office lease agreement and a warehouse lease agreement with two third party lessors. The office lease agreement took effective
on January 1, 2020 and will expire on June 30, 2021. The monthly rental fee is $24,089, payable on a monthly basis. The warehouse
lease agreement took effective on January 1, 2020 and will expire on December 31, 2020. The warehouse rental fee was calculated
on a monthly basis, determined by the volume of stored precious metal products, and storage dates.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
|
COMMITMENTS AND CONTINGENCIES (continued)
|
On February 3, 2015, a purported shareholder
Kiran Kodali filed a putative shareholder derivative complaint against the Company, allegeing 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 $1,436,521.50 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.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
|
COMMITMENTS AND CONTINGENCIES (continued)
|
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.
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.
19.
|
DISPOSITION OF GLG BVI
|
On June 19, 2018, the Company, HK Xu Ding
Co., Limited, a private limited company duly organized under the laws of Hong Kong (the “Purchaser” and CCCR International
Investment Ltd., a business company incorporated in the British Virgin Islands with limited liability (“GLG BVI” entered
into certain Share Purchase Agreement (the “Purchase Agreement”. Pursuant to the Purchase Agreement, the Purchaser
agreed to purchase GLG BVI in exchange of cash purchase price of $500,000. The consideration was paid in the year ended December
31, 2018.
In accordance with ASC 205-20-45, GLG BVI
met the criteria as a discontinued operation. The assets relevant to the sale of GLG BVI with a carrying value of $6.2 million
were classified as assets held for sale as of June 19, 2018. The liabilities relevant to the sale of GLG BVI with a carrying value
of $10.5 million were classified as liabilities held for sale as of June 19, 2018. A net gain of $9.7 million was recognized as
the net gain from disposal of discontinued operation in 2018.
The following is a reconciliation of the
amounts of major classes of income from operations classified as discontinued operations in the consolidated statements of operations
and comprehensive loss for the years ended December 31, 2019 and 2018:
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19.
|
DISPOSITION OF GLG BVI (continued)
|
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Discontinued Operations
|
|
|
|
|
|
|
Total interest and fees income
|
|
$
|
-
|
|
|
$
|
106,985
|
|
Reversal of provision for loan losses and financing lease losses
|
|
|
-
|
|
|
|
417,600
|
|
Reversal of provision of (Provision for financial guarantee services
|
|
|
-
|
|
|
|
(104,229
|
|
Non-interest expenses
|
|
|
-
|
|
|
|
(142,600
|
|
Net gain from discontinued operations
|
|
|
-
|
|
|
|
9,689,873
|
|
Net income from discontinued operations
|
|
$
|
-
|
|
|
$
|
9,967,629
|
|
Total operating cash flows provided by
discontinued operations for the year ended December 31, 2018 was $1,769,566. The operating cash flows provided by discontinued
operations was mainly caused by net loss incurred by discontinued operations of $277,756 and increased receivables due from the
Company of $1.2 million.
Total investing cash flows used in discontinued
operations for the years ended December 31, 2018 was $1,270,070. The cash provided by investing activities for the years ended
December 31, 2018 was net effects of disbursement of loans to third parties of $3,391,907 against collection of $1,943,958 from
third party customers of direct loan services.
20.
|
REGAIN COMPLIANCE WITH NASDAQ LISTING RULE
|
On July 3, 2019,
the Company received a notification letter from the Nasdaq notifying the Company
that the minimum bid price per share for its common shares has been below $1.00 for a period of 30 consecutive business days and
the Company therefore no longer meets the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2). The
notification received has no immediate effect on the listing of the Company’s common stock on Nasdaq. Under the Nasdaq Listing
Rules, the Company has until December 30, 2019 to regain compliance. If at any time during such 180-day period the closing bid
price of the Company’s common shares is at least $1 for a minimum of 10 consecutive business days, Nasdaq will provide the
Company written confirmation of compliance.
On December 11,
2019, the Company received a written notification from the Nasdaq Stock Market Listing Qualifications Staff, indicating that the
Company has regained compliance with the bid price requirement for continued listing on the Nasdaq Capital Market pursuant to
Nasdaq Listing Rule 5550(a)(2) based on the closing bid price of the Company’s common stock being at $1.00 per share or
greater for 10 consecutive business days from November 26 to December 10, 2019.
|
(1)
|
Entry into Share Purchase Agreement for Private Placements
|
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 on March 23, 2020 and the Company received proceeds of $13,500,000 from this equity financing transaction.
In addition, 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.
On March 23, 2020, the transaction was closed and the Company issued the Notes and Warrants
to the investors. In April 2020, the Company received the proceeds of $30,000,000 from the issuance of Notes and
Warrants.
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.
|
SUBSEQUENT EVENTS (continued)
|
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.
The
Warrants will be exercisable immediately upon the date of issuance at the exercise price of $1.80 for cash (the “Warrant
Shares”. The Warrants may also be exercised cashless if at any time after the six-month
anniversary of the issuance date, there is no effective registration statement registering, or no current prospectus available
for, the resale of the Warrant Shares, exercised, The Warrants will expire five years from its date of issuance. The Warrants are
subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions. The Warrants contain a
mandatory exercise right for the Company to force exercise of the Warrants if the Company’s common stock trades at or above
$3.00 for 20 consecutive trading days, provided, among other things, that the shares issuable upon exercise of the are registered
or may be sold pursuant to Rule 144 and the daily trading volume exceeds 300,000 shares of Common stock per trading day on each
trading day in a period of 20 consecutive trading days prior to the applicable date.
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.
(2) Closing of the Share Purchase Agreement
dated November 21, 2019 (See Note 11 – Advance of subscription from shareholders)
As
disclosed in Note 11, on November 21, 2019, the Company entered into a certain securities purchase agreement with certain investors
and 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 $0.80.
On
February 5, 2020, the Company issued 2,000,000 shares of Common Stock to the Purchasers.
|
(2)
|
Change of the Company’s Name (See Note 1 – Organization and principal activities)
|
On March 6, 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 to TD Holdings,
Inc. (see Note 1).
|
(3)
|
Pending legal proceeding against Harrison Fund
|
On April 6, 2020, the Company filed a legal
proceeding against Harrison Fund to seek for repayment of its $1 million investment in Harrison Fund. Due to the uncertainty arising
from this pending legal proceeding, a full impairment has been applied against the Company’s investment in financial products
(see Note 8 and Note 18).
(4)
|
The impact of Coronavirus (COVID-19)
|
In December 2019, a novel strain of coronavirus
was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The COVID-19 outbreak
is causing lockdowns, quarantines, travel restrictions, and closures of businesses and schools. The potential impact which may
be caused by the outbreak is uncertain; however it may result in a material adverse impact on the Company’s financial position,
operations and cash flows for fiscal year 2020.
Based on the Company’s operating
results from January 1, 2020 through the date of this report, due to closure of our luxury car rental facilities, interruptions
in the Company supply of commodities, limited support from our workforce, and restrictions on the Company luxury car rental services
or delivery and storage of commodities,, the Company expects a lower amount of revenue and net income during February to April
2020 period. However, the extent of the impact of COVID-19 on the Company’s results of operations and financial condition
for fiscal year 2020 will depend on certain developments, including the duration and spread of the outbreak, impact on its customers,
all of which are uncertain and cannot be predicted at this point.
F-42