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DOCUMENTS INCORPORATED BY REFERENCE
TD Holdings, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2022
TABLE OF CONTENTS
All references to “we,” “us,” “our,” “GLG,” “Company,” “Registrant” or similar terms used in this report refer to TD Holdings, Inc., a Delaware corporation (“GLG”), including its consolidated subsidiaries, unless the context otherwise indicates. We conduct our business through our operating entities, Shanghai Jianchi Supply Chain Co., Ltd., Shenzhen Baiyu Jucheng Data Technology Co., Ltd (Formerly Named: Shenzhen HuamuCheng Trade Co. Ltd.), Tongdow (Hainan) Data Technology Co. Ltd., Shenzhen Qianhai Baiyu Supply Chain Co., Ltd., Hainan Jianchi Import and Export Co., Ltd., Hainan Baiyu Cross-border E-commerce Co., Ltd., Yangzhou Baiyu Venture Capital Co., Ltd., Yangzhou Baiyu Cross-border E-commerce Co., Ltd., Yangzhou Baiyu Lightweight New Material Co., Ltd. and Shenzhen Tongdow Internet Technology Co., Ltd.
“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this report, Taiwan, Hong Kong and Macau. “RMB” or “Renminbi” refers to the legal currency of China and “$,” “US$” or “U.S. Dollars” refers to the legal currency of the United States.
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Note Regarding Forward-Looking Statements
The information contained in this Annual Report on Form 10-K includes statements that are not historical facts and are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our Company and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may be identified as forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained herein are based on current expectations and beliefs concerning future developments and the potential effects on us. Future developments that actually affect us may not be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Examples are statements regarding future developments with respect to the following:
| ● | expand our customer base; |
| ● | broaden our service and product offerings; |
| ● | enhance our risk management capabilities; |
| ● | improve our operational efficiency; |
| ● | our ability to raise sufficient funds to expand our operations; |
| ● | attract, retain and motivate talented employees; |
| ● | the impact of COVID-19 on our business operations; |
| ● | a decrease in demand for commodities trading and weakness in the commodities trading industry generally; |
| ● | navigate an evolving regulatory environment; |
| ● | defend ourselves against litigation, regulatory, privacy or other claims; |
| ● | development of a liquid trading market for our securities; |
| ● | our plan to maintain compliance with Nasdaq’s continued listing requirements; |
| ● | financial market volatility and declines in financial market prices of equity securities; |
| ● | liquidity and/or capital resources changes and the impact of any changes or limitations, including, without limitation, ability to borrow funds and/or renew or roll over existing indebtedness; and |
| ● | ongoing or new supply chain and product distribution/logistics issues. |
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
We qualify all of our forward-looking statements by these cautionary statements. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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PART I
Item 1. Description of Business.
Overview and Corporate History
TD Holdings, Inc. (formerly known as Bat Group, Inc.), has become a business engaging in commodities trading business (the “Commodities Trading Business”) and supply chain service business (the “Supply Chain Service Business”) in China since the disposition of its direct loans, loan guarantees and financial leasing services to small-to-medium sized businesses, farmers and individuals in July 2018 and its used luxurious car leasing business in August 2020.
The Commodities Trading Business primarily involves purchasing non-ferrous metal products from upstream metal and mineral suppliers and then selling to downstream customers. The Supply Chain Service Business primarily has served as a one-stop commodity supply chain service and digital intelligence supply chain platform integrating upstream and downstream enterprises, warehouses, logistics, information, and futures trading.
Our Current Business
Commodities Trading Business
The Commodities Trading Business primarily involves purchasing non-ferrous metal products, such as aluminum ingots, copper, silver, and gold, from upstream metal and mineral suppliers and then selling to downstream customers. In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help upstream metal and mineral suppliers to sell their metal products, the Company launched its Supply Chain Service Business in December 2019. The Company primarily generates revenues from bulk non-ferrous commodity products, and from providing related supply chain management services in the PRC.
In order to diversify the Company’s business, the Company has operated the Commodities Trading Business through Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”) since November 2019, which was renamed Shenzhen Baiyu Jucheng Data Technology Co., Ltd. (“Shenzhen Baiyu Jucheng”) in 2021. On November 22, 2019, Hao Limo Technology (Beijing) Co., Ltd. (“Hao Limo”), our indirectly wholly-owned subsidiary, entered into a series of agreements with Shenzhen Baiyu Jucheng and the shareholders of Shenzhen Baiyu Jucheng pursuant to which we obtained control of Shenzhen Baiyu Jucheng (the “VIE Agreements”). On June 25, 2020, Hao Limo and Shenzhen Baiyu Jucheng entered into certain VIE termination agreements to terminate the Shenzhen Baiyu Jucheng VIE Agreements. As such, Hao Limo no longer has the control rights and rights to the assets, property and revenue of Shenzhen Baiyu Jucheng. At the same time, Shanghai Jianchi Supply Chain Co., Ltd. (“Shanghai Jianchi”), our wholly-owned subsidiary incorporated in China, acquired 100% equity interest of Shenzhen Baiyu Jucheng from the shareholders of Shenzhen Baiyu Jucheng (the “Shenzhen Baiyu Jucheng Shareholders”) for nominal consideration.
Through Shenzhen Baiyu Jucheng’s business, we source bulk commodity products from non-ferrous metals and mines or its designated distributors and then sell to manufacturers who need these metals in large quantities. We also work with upstream suppliers in the sourcing of commodities.
Through Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Qianhai Baiyu”), our wholly-owned subsidiary incorporated in China, we provide supply chain management services to our customers. On October 26, 2020, Shenzhen Baiyu Jucheng entered into certain share purchase agreements to acquire 100% shares of Qianhai Baiyu. Qianhai Baiyu is engaged in the supply chain service business and covers a full range of commodities, including non-ferrous metals, ferrous metals, coal, metallurgical raw materials, soybean oils, oils, rubber, wood and various other types of commodities. It also has a supply chain infrastructure, which includes processing, logistics, warehousing and terminals. Utilizing its customer base, industry experience, and expertise in the commodity trading industry, Qianhai Baiyu serves as a one-stop commodity supply chain service and digital intelligence supply chain platform integrating upstream and downstream enterprises, warehouses, logistics, information, and futures trading.
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The acquisition of Qianhai Baiyu has laid a solid foundation for the Company to further expand its operations in the commodity supply chain field. The Company plans to strengthen and upgrade its supply chain services platform by introducing a systematic quantitative risk control system, which will be based on the Qianhai Baiyu’s massive historical market data and complex data analysis models. The platform is expected to establish a quantitative risk management system utilizing ETL data integration (Extract, Transform, Load) as its core, and then optimize trading portfolios by incorporating various factors and strategies in order to effectively control risks and sustain business development.
For the fiscal year ended December 31, 2022, the Company generated revenue of $155,443,398 from its commodities trading business and $1,391,903 from its supply chain management services.
Convertible Promissory Notes Issuance and Settlement
On March 4, 2021, the Company entered into a securities purchase agreement with Streeterville Capital, LLC, a Utah limited liability company, pursuant to which the Company issued an unsecured promissory note in the original principal amount of $3,320,000, convertible into shares of common stock, for proceeds of $3,000,000. The Company recorded a debt discount of $320,000, which is being amortized over 12 months. The Company settled convertible promissory note of $200,000 on January 5, 2022, $175,000 on January 26, 2022, $175,000 on February 8, 2022, $200,000 on February 25, 2022, $375,000 on March 17, 2022, $500,000 on March 17, 2022, $179,819 on March 18, 2022 and $262,331.48 on June 8, 2022, respectively, and issued 128,932, 176,482, 188,740, 275,330, 516,244, 500,000, 179,819 and 386,691 shares of the Company’s common stock on January 10, 2022, January 27, 2022, February 9, 2022, March 2, 2022, March 17, 2022, March 21, 2022, March 22, 2022 and June 14, 2022, respectively. As of June 30, 2022, the convertible promissory note issued on March 4, 2021 has been fully settled.
On October 4, 2021, the Company entered into a securities purchase agreement with Atlas Sciences, LLC, a Utah limited liability company, pursuant to which the Company issued the investor an unsecured promissory note in the original principal amount of $2,220,000, convertible into shares of the Company’s common stock, for $2,000,000 in gross proceeds. The convertible promissory note includes an original issue discount of $200,000 along with $20,000 for the investor’s fees, costs and other transaction expenses incurred in connection with the purchase and sale of the note. The Company settled convertible promissory note of $250,000 on June 23, 2022, $125,000 on July 7, 2022, $125,000 on July 18, 2022, $125,000 on July 26, 2022, $125,000 on August 4, 2022, $125,000 on September 6, 2022, $125,000 on September 29, 2022, $125,000 on November 4, 2022, $125,000 on November 11, 2022, and $125,000 on December 16, 2022, respectively, and issued 328,947, 135,693, 125,603, 125,100, 125,100, 150,777, 151,684, 144,676, 148,583, and 148,399 shares of the Company’s common stock on June 27, 2022, July 7, 2022, July 19, 2022, July 26, 2022, August 5, 2022, September 12, 2022, October 3, 2022, November 7, 2022, November 15, 2022, and December 19, 2022 , respectively, for the year ended December 31, 2022.
On May 6, 2022, the Company entered into a securities purchase agreement with Streeterville Capital, LLC, a Utah limited liability company, pursuant to which the Company issued the investor a convertible promissory note in the original principal amount of $3,320,000, convertible into shares of the Company’s common stock, for $3,000,000 in gross proceeds. By written consent dated May 10, 2022, as permitted by Section 228 of the Delaware General Corporation Law and Section 8 of Article II of our bylaws, the stockholders who have the authority to vote a majority of the outstanding shares of Common Stock approved the following corporate actions: (i) the entry into a purchase agreement dated of May 6, 2022 by and between the Company and the investor, pursuant to which the Company issued the note dated of May 6, 2022 to the investor; and (ii) the issuance of shares of common stock in excess of 19.99% of the currently issued and outstanding shares of common stock of the Company upon the conversion of the note. The Company settled a convertible promissory note of $375,000 on November 16, 2022, and issued 445,749 shares of the Company’s Common Stock on November 17, 2022.
The above two unsettled convertible promissory notes, issued on October 4, 2021 and May 6, 2022, have a maturity date of 12 months with an interest rate of 10% per annum. The Company retains the right to prepay the note at any time prior to conversion with an amount in cash equal to 125% of the principal that the Company elects to prepay at any time six months after the issue date, subject to maximum monthly redemption amount of $250,000 and $375,000, respectively. On or before the close of business on the third trading day of redemption, the Company should deliver conversion shares via “DWAC” (DTC’s Deposit/Withdrawal at Custodian system). The Company will be required to pay the redemption amount in cash, or chooses to satisfy a redemption in registered stock or unregistered stock, such stock shall be issued at 80% of the average of the lowest “VWAP” (the volume-weighted average price of the Common Stock on the principal market for a particular trading day or set of trading days) during the fifteen trading days immediately preceding the redemption notice is delivered.
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May 2022 Private Placement
On May 27, 2022, the Company entered into that certain securities purchase agreement with Mr. Xiangjun Wang and Mr. Heung Ming (Henry) Wong, affiliates of the Company, and certain other non-affiliate purchasers who are “non-U.S. Persons”, pursuant to which the Company agreed to sell an aggregate of 11,420,000 shares of Common Stock, par value $0.001 per share. The transaction was consummated on June 24, 2022 by the issuance of 11,420,000 shares of common stock. The Company received proceeds of $11,420,000 in June 2022.
Reverse Stock Split of Common Stock and Amendment to Certificate of Incorporation
On September 1, 2021, the Company received a letter from NASDAQ Stock Market LLC (“Nasdaq”) stating that the Company was not in compliance with the Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) because the closing bid price for the Company’s common stock had remained below $1.00 per share for the previous 30 consecutive business days. An initial grace period to regain compliance was provided, which ended on February 28, 2022.
On March 1, 2022, Nasdaq notified the Company that it was still non-compliant with the Minimum Bid Price Requirement. However, Nasdaq determined that the Company was eligible for an additional 180-day period, or until August 29, 2022, to regain compliance.
To achieve compliance with the Minimum Bid Price Requirements, the Company proposed a stock reverse split.
On August 11, 2022, at the 2022 annual meeting of stockholders, TD Holdings, Inc.’s stockholders approved and adopted an amendment to our Certificate of Incorporation to effect a reverse stock split of our common stock at a reverse stock split ratio of no less than five-for-one to no more than ten-for-one, with the final decision of whether to proceed with the reverse stock split and the exact ratio and timing of the reverse split to be determined by our board of directors (“Board of Directors”), in its discretion, prior to August 12, 2022. Promptly following the annual meeting, a reverse stock split ratio of five-for-one (the “Reverse Stock Split”) was adopted and approved by our Board of Directors. Subsequently, on August 11, 2022, we filed a Certificate of Amendment of Certificate of Incorporation with the Delaware Secretary of State to effect the Reverse Stock Split. The common stock was began trading when the markets opened on a Reverse Stock Split-adjusted basis on August 17, 2022. As a result of the Reverse Stock Split, every five shares of the Company’s common stock issued and outstanding were automatically reclassified into one new share of common stock, without modifying any rights or preferences of the shares of the Company’s common stock.
On September 1, 2022, the Company received a notification letter from Nasdaq informing it that compliance with the Minimum Bid Price Requirement had been regained, and the matter was closed.
Acquisition of Shenzhen Tongdow Internet Technology Co., Ltd.
On October 17, 2022, Shenzhen Baiyu Jucheng, entered into a set of variable interest entity agreements with Shenzhen Tongdow Internet Technology Co., Ltd. (“Tongdow Internet Technology”) and Shanghai Zhuotaitong Industry Co., Ltd., the sole shareholder of Tongdow Internet Technology. On October 25, 2022, the parties completed the transaction. Upon the closing of the transaction, Shenzhen Baiyu Jucheng acquired 65% equity interest of Tongdow Internet Technology at a consideration of RMB650 million and has effective control over Tongdow Internet Technology’s management and operations.
November 2022 Private Placement
On November 6, 2022, the Company entered into that certain securities purchase agreement with Ms. Renmei Ouyang, Chairwomen and Chief Executive Officer of the Company, and certain other purchasers who are “non-U.S. Persons”, pursuant to which the Company agreed to sell an aggregate of 50,000,000 shares of its common stock, at a purchase price of $1.15 per share (“November 2022 PIPE”). The gross proceeds to the Company from the November 2022 PIPE was $57.5 million. Since Ms. Renmei Ouyang is an affiliate of the Company, the November 2022 PIPE has been approved by the Audit Committee as well as the Board of Directors of the Company.
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Settlement and Restated Common Stock Purchase Agreement
On January 19, 2021, the Company entered into a common stock purchase agreement, with White Lion Capital, LLC, a Nevada limited liability company, and on September 13, 2021, the Company entered into a settlement and mutual release agreement (the “Settlement Agreement”) with the investor. Pursuant to the Settlement Agreement, the Company and the investor agreed that on any trading day selected by the Company, provided that the closing price of the Company’s common stock, par value $0.001 per share, on the date of purchase notice is greater than or equal to $1.00 and there is an effective registration statement for the resale by the investor of the purchase notice shares, the Company has the right, but not the obligation, to present the investor with a purchase notice, directing the investor to purchase up to certain amount shares of the Company’s common stock.
On December 12, 2022, the Company entered into a settlement and restated common stock purchase agreement (the “Restated Agreement”) with the investor. Pursuant to the Restated Agreement, in consideration for the investor’s execution and delivery of, and performance under the Restated Agreement, the Company agreed to issue to the investor 300,000 unregistered shares of common stock of the Company within five business days of execution of the Restated Agreement. In addition, within thirty days of the execution of the Restated Agreement, the Company shall deliver to the investor a purchase notice for 489,306 shares of common stock (the “First Purchase Notice”) at a purchase price of 80% of the lowest daily volume-weighted average price (“VWAP”) of the Company’s common stock during the valuation period as defined in the Restated Agreement (the “Purchase Price”). Within thirty days of the closing of the First Purchase Notice, the Company shall deliver to the investor a purchase notice for 200,000 purchase notice shares (the “Second Purchase Notice”) at the Purchase Price. Between the closing date of the Second Purchase Notice and the period ending on the earlier of (i) March 31, 2023 or (ii) the date on which the investor shall have purchased an aggregate of 2,889,306 purchase notice shares, the Company shall have the right, but not the obligation, to direct the investor to purchase up to 1,900,000 purchase notice shares at which (i) the first 600,000 purchase notice shares shall be at the Purchase Price and (ii) any remaining purchase notice shares shall be at a purchase price of 85% of the lowest daily VWAP of the Company’s common stock during the valuation period as defined in the Restated Agreement.
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 on May 22, 2018, is wholly owned by the Company. On April 2, 2020, HC High BVI established TD Internet Of Things Technology Company Limited (“TD Internet Of Things Technology”, formerly known as Tongdow Block Chain Information Technology Company Limited), a holding company incorporated in accordance with the laws and regulations of Hong Kong. TD Internet Of Things Technology is wholly owned by HC High BVI. On April 2, 2020 and July 16, 2020, Tongdow Block Chain established Shanghai Jianchi and Tongdow (Hainan) Data Technology Co., Ltd. (“Tondow Hainan”), respectively, as its wholly-owned subsidiaries. Both Shanghai Jianchi and Tongdow Hainan are holding companies incorporated in accordance with the laws and regulations of the People’s Republic of China (“PRC”).
On March 5, 2020, the Company filed a Certificate of Amendment of the Certificate of Incorporation with the Delaware Secretary of State to effect a name change from Bat Group, Inc. to TD Holdings, Inc. (the “March Charter Amendment”). The March Charter Amendment became effective on March 6, 2020.
On June 25, 2020, Hao Limo, the Company’s wholly-owned subsidiary incorporated in the PRC, and Huamucheng, which was renamed Shenzhen Baiyu Jucheng in 2021, a former VIE of the Company, entered into certain VIE termination agreements to terminate the Shenzhen Baiyu Jucheng VIE agreements. On the same date, Shanghai Jianchi, Shenzhen Baiyu Jucheng and Shenzhen Baiyu Jucheng Shareholders entered into certain share acquisition agreements pursuant to which Shanghai Jianchi acquired 100% equity interest of Shenzhen Baiyu Jucheng. As a result, Shenzhen Baiyu Jucheng transitioned from a variable interest entity controlled by the Company into a wholly owned subsidiary of the Company.
On September 11, 2020, the Company acquired Zhong Hui Dao Ming Investment Management Limited (“ZHDM HK”) and its wholly owned subsidiary, Tongdow E-Trading Limited (“Tongdow HK”). Both entities were holding companies incorporated in accordance with the laws and regulations of Hong Kong.
On October 26, 2020, Shenzhen Baiyu Jucheng entered into a certain share purchase agreement to acquire 100% shares of Qianhai Baiyu. The acquisition of Qianhai Baiyu has laid a solid foundation for the Company to further expand its operations in the commodity supply chain field.
On April 20, 2021, the Company effected a Certificate of Amendment of the Certificate of Incorporation (the “April Charter Amendment”) with the Delaware Secretary of State to increase the number of authorized shares of its common stock, par value $0.001 per share, from 100,000,000 shares to 600,000,000 shares and the number of authorized shares of its preferred stock, par value $0.001 per share, from 10,000,000 shares to 50,000,000 shares. The April Charter Amendment was approved by the Company’s Board of Directors on March 9, 2021, and by shareholders holding a majority of the Company’s issued and outstanding capital stock on March 10, 2021. The April Charter Amendment does not affect the rights of the Company’s shareholders.
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As discussed above, on August 11, 2022, the Company has filed a Certificate of Amendment of the Certificate of Incorporation with the Delaware Secretary of State to effect the Reverse Stock Split.
On October 17, 2022, Shenzhen Baiyu Jucheng, entered into a set of variable interest entity agreements with Shenzhen Tongdow Internet Technology and Shanghai Zhuotaitong Industry Co., Ltd., the sole shareholder of Tongdow Internet Technology. On October 25, 2022, the parties completed the transaction. Upon the closing of the transaction, Shenzhen Baiyu Jucheng acquired 65% equity interest of Tongdow Internet Technology at a consideration of RMB650 million and has effective control over Tongdow Internet Technology’s management and operations.
The following diagram illustrates our corporate structure as of the date of this annual report:
Recent Developments
Settlement of Convertible Promissory Notes
The Company settled the convertible promissory notes of $125,000 on December 30, 2022, $125,000 on January 10, 2023, $125,000 on January 18, 2023, $200,000 on January 18, 2023, $250,000 on February 2, 2023, $200,000 on February 3, 2023, $175,000 on February 8, 2023, $250,000 on February 15, 2023 and $250,000 on March 2, 2023, respectively, and issued 148,399, 147,824, 147,475, 235,960, 292,987, 234,389, 205,090, 292,987 and 279,567 shares of the Company’s common stock on January 6, 2023, January 12, 2023, January 18, 2023, January 19, 2023, February 3, 2023, February 6, 2023, February 8, 2023, February 15, 2023, and March 2, 2023, respectively.
January Private Placement
On January 9, 2023, the Company entered into a certain securities purchase agreement with Ms. Huiwen Hu, an affiliate of the Company, and certain other purchasers who are non-U.S. Persons, pursuant to which the Company agreed to sell an aggregate of 35,000,000 shares of its common stock, at a purchase price of $1.21 per share (“January 2023 PIPE”). The gross proceeds to the Company from the January 2023 PIPE was $42.35 million. Since Ms. Huiwen Hu is an affiliate of the Company, the January 2023 PIPE has been approved by the Audit Committee as well as the Board of Directors of the Company.
Settlement of Restated Agreement
The Company issued to White Lion Capital, LLC 489,306 shares of the Company’s common stock on January 20, 2023 at a purchase price of 80% of the lowest daily volume-weighted average price of the Company’s common stock during the valuation period as defined in the Restated Agreement (the “Purchase Price”) and issued 200,000 shares of the Company’s common stock on February 1, 2023 at the Purchase Price, pursuant to the Restated Agreement dated December 12, 2022. The Company received relevant proceeds of $400,182.47 and $158,890.50, respectively, in 2023.
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Our Business
As of December 31, 2022, the Company has two business lines, the commodities trading business and supply chain management services set forth below.
Commodities Trading Business
Industry Overview
Bulk commodities trading refers to the trading of materials used in industrial and agricultural production that are continuously purchased in bulk, and are unable to be purchased from the retail sector. Commodities belong at the upstream stage of production processes of various industrial chains, and the supply and demand conditions of commodities can cause price fluctuations and affect the development of these industrial chains.
Commodities can be divided into four categories, metals, energy, livestock and meat, and agricultural. Metal commodities include gold, silver, platinum, and copper. Energy commodities include crude oil, heating oil, natural gas, and gasoline. Livestock and meat include lean hogs, pork bellies, live cattle, and feeder cattle. Agricultural commodities include corn, soybeans, wheat rice, cocoa, coffee, cotton, and sugar.
In recent years, although the growth rate of China’s total commodity sales has slowed down, the aggregate sales are still impressive and approach RMB200 billion. According to Colliers International, China’s major cities including Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu and Xi’an completed a total of approximately RMB197.1 billion in commodity sales. In 2019 and 2020, these figures are RMB2.5 billion and RMB2.5 billion, respectively. Due to the outbreak of COVID-19 in 2019, this figure decreases sharply to RMB1,369 billion. Therefore, the data of 2021 indicates a strong recovery from COVID-19.
Operation of Commodities Trading Business
The Company’s commodities trading operations via Shenzhen Baiyu Jucheng are focused on non-ferrous metal commodities such as aluminum, 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.
Business Model
We source bulk commodities from non-ferrous metal mines or its designated distributors and sell them to manufacturers who need these metals in large quantities. We work with many suppliers in the sourcing of commodities, including 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.
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The Company has entered into a warehousing lease agreement with Shanghai Quansheng Logistics Co., Ltd (“Shanghai Quansheng”) to designate it as the Company’s warehouse in Shanghai. The Company’s criteria for choosing its warehouses are based primarily on the convenience of its location for transportation, which is highly conducive to the transportation of non-ferrous metal commodities, and secondarily based on its storage price.
Our inventory management procedure involves (1) an Application for Storage, (2) Storage of the Commodities, (3) an Application for Shipment, and (4) Shipment of Commodities, which are further described below.
| 1) | Application for Storage |
| ● | The upstream suppliers apply for storage with the Company’s leased warehouse center upon the sale of commodities to the Company. The application requires information including the commodities’ production company, brand, specifications, weight, quantity, and storage time. |
| 2) | Storage of the Commodities |
| ● | Upon the arrival of the commodities at the warehouse, the warehouse checks and accepts the commodities according to the delivery instructions provided by the transportation company, ensuring that the delivery instructions, storage application, and the delivered commodities are all consistent. |
| ● | Upon acceptance, the warehouse scans and places the commodities into sorted storage. The warehouse then issues a certificate of inspection, which includes information such as the brand name, specifications, weight, quantity, packaging information, arrival time, storage location and other information of the received commodities. The certificate of inspection is then signed and stamped by the delivery driver, the warehouse manager, and the warehouse. Four copies of the certificate of inspection are made, two of which are provided to the transportation company and the supplier. |
| 3) | Application for Shipment |
| ● | The downstream customers apply for shipment with the warehouse upon the purchase of Commodities from the Company. The application requires information including the production company, brand, specifications, weight, quantity, delivery time, and storage location number. |
| ● | The downstream customers also fill in a delivery entrustment letter, including the name of the delivery company, the name of the delivery person, his or her ID number, the delivery vehicle’s license plate number, the time, quantity, and information regarding the warehouse for delivery. |
| 4) | Shipment of Commodities |
| ● | The warehouse prepares the commodities in advance according to the pick-up time and the Application for Shipment. |
| ● | Upon arrival of the pick-up driver at the warehouse, the Company reviews the identity of the pick-up driver according to the delivery entrustment letter. | |
| ● | Upon completing the loading of the commodities for shipment, the warehouse issues a certificate of sale, which includes information such as the brand name, specifications, weight, quantity, delivery time, and storage location number. The pick-up driver, warehouse manager, and the warehouse signs and stamps the certificate of sale. Four copies of the certificate of sale are made, two of which are provided to the transportation company and the customer. |
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We use a prepaid unified purchase and distribution model (“Prepaid Model”) in our business, which is further detailed below.
Under the Prepaid Model, we make advance prepayments between one to three 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
Shenzhen Baiyu Jucheng has entered into a certain warehousing agreement with Shanghai Quansheng pursuant to which Shenzhen Baiyu Jucheng designated Shanghai Quansheng as its warehouse for the storage of its commodities.
Pursuant to the warehousing agreement with Shanghai Quansheng, Shenzhen Baiyu Jucheng and Shanghai Quansheng agreed to various customary representations, warranties and covenants, including, among other things, (1) details regarding the procedures for the storage and retrieval of the commodities, (2) storage and penalty fees, and (3) negotiation and litigation in the event of any breach of contract.
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Suppliers
We source the non-ferrous metal from various sources including but not limited to smelters, non-ferrous metal wholesalers and metal traders. For the year ended December 31, 2022, the Company purchased non-ferrous metal products from twenty-two third party suppliers.
Customers
We sell to various businesses in need of large quantity of non-ferrous metal including home appliance manufacturing enterprises, cable manufacturing enterprises and wire manufacturing enterprises. For the years ended December 31, 2022 and 2021, the Company sold non-ferrous metals to twenty-nine and twenty-seven customers, respectively.
Supply Chain Management Services
Commodity Distribution Services
We offer a distribution service to bulk suppliers of precious metals by acting as a sales intermediary, procuring small to medium-sized buyers through our own professional sales team and channels and distributing to them the bulk precious metals of the suppliers. Upon the execution of a purchase order from our sourced buyers, we charge the suppliers with a commission fee ranging from 1% to 2% of the distribution order, depending on the size of the order. For the year ended December 31, 2022, the Company earned commodity distribution commission fees of $1,391,903 from facilitating such sales transactions with twenty third party customers. For the year ended December 31, 2021, the Company earned commodity distribution commission fees of $3,180,227 from facilitating such sales transactions with thirty-four third party customers.
Marketing
Currently we market our commodities trading services through our sales personnel and online promotion. We have registered public accounts on 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 with followers, viewers and potential customers on social media platforms such as Baidu Tieba, Tik Tok, Weibo, WeChat, and Zhihu. We plan to launch wider and deeper social media marketing in the near future as well as participate in more industry-related forums to increase the market exposure of our businesses and thereby increasing our popularity and establishing brand loyalty.
Seasonality
We do not experience substantial seasonal fluctuations in our revenues and the results of operations.
Business Strategy
Commodities Trading Business
Our current business strategy is to expand the varieties of commodities that we trade in, including ore, crude oil and coal in addition to our current focus on non-ferrous metals. In 2023, 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 for our bulk trading customers.
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Competition
Commodities Trading Business
The Company competes against other large domestic commodity trade service providers such as Xiamen International Trade and Yijian Shares. Currently, the principal competitive factors in the non-ferrous metal commodities trading business are price, product availability, quantity, service, and financing terms for purchases and sales of commodities. In addition, we also believe that our customers will choose among service providers on the basis of leadership in the commodity trading industry and service quality.
Competitive Strengths
Commodities Trading Business
| ● | Our 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 commodity consulting service, supply chain service and a comprehensive customer satisfaction evaluation mechanism. |
Intellectual Property
Our intellectual property includes domain names ir.tdglg.com and tdglg.com.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent the 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 2021 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.
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Human Capital
As of the date of this report, we have 58 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 the 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 that 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:
| ● | Foreign Trade Law; | |
| ● | Company Law of the PRC and its implementation rules; | |
| ● | Labor Contract Law and its implementing rules; | |
| ● | Provisional Regulation of China on Business Tax and its Implementing Rules; | |
| ● | Enterprise Income Tax Law and the related Circulars and Notices; | |
| ● | Foreign Exchange Administration Regulations; |
| ● | Foreign Investment Law of the PRC and its implementation Regulations; |
| ● | Special Management Measures (Negative List) for the Access of Foreign Investment; |
| ● | Road Traffic Safety Law; |
| ● | Road Transportation Regulation; | |
| ● | Circular on Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment; | |
| ● | Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment; | |
| ● | Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises; | |
| ● | Issues relating to Cross-border Direct Investment in RMB. |
We are supervised by many provincial and local government authorities, including the Beijing Administration of Industry and Commerce.
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Summaries of Certain Applicable Key PRC Laws
Foreign Trade Law of the PRC
The “Foreign Trade Law of the PRC” was revised and adopted at the 24th meeting of the Standing Committee of the Twelfth National People’s Congress of the PRC on November 7, 2016. The revised “Foreign Trade Law of the PRC” became effective on November 7, 2016.
The term “foreign trade” in the Foreign Trade Law of the People’s Republic of China refers to the import and export of goods, technology import and export, and international service trade. The law specifies the principles of foreign trade and the reasons why the country can restrict or prohibit the import and export of related goods and technologies, intellectual property protection, service trade, monopoly in foreign business activities and other relevant provisions.
On December 30, 2022, the Standing Committee further revised the Foreign Trade Law and deleted article 9. Article 9 established record and registration system for foreign trade operators and the deltoid of this article means foreign trade operators are no longer required to record or register themselves.
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 Regulation on the Administration of the Registration of Market Entities adopted at the 131st executive meeting of the State Council on April 14, 2021 and took effect on March 1, 2022, 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 a competent government agency and obtain a business license. The Administrative Regulation of the PRC on the Registration of Market Entities 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 license 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 terminates a 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 been provided for.
In addition, according to the Labor Contract Law and its implementing rules, in order to enforce the non-compete provision with the employees after the termination or ending of employment relationship, the employer shall compensate the employees on a monthly basis during the non-competition period after such termination or ending of employment.
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On January 24, 2014, the Ministry of Human Resources and Social Security promulgated Interim Provisions on Labor Dispatching, or Circular 22, effective from March 1, 2014, which provides that an employer shall strictly control the number of employees under labor dispatching arrangements and dispatched employees can only be used in temporary, ancillary and replaceable positions. The number of dispatched workers used by an employer shall be reduced to no more than 10% of the total number of its employees within two years after March 1, 2014. If the employer fails to reduce the number of dispatched employees as required by Circular 22 and could not correct its practice after receiving warnings from government authority, the employer may be subject to a fine ranging from RMB1,000 to RMB5,000 per dispatched employee.
Regulation on PRC Business Tax and VAT
Prior to January 1, 2012, pursuant to the Provisional Regulation of China on Business Tax and its Implementing Rules, an entity or individual rendering services in China were 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 and 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 was 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 PRC and Amending the Provisional Regulations on Value-Added Tax of the PRC. 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. According to the Notice of the Ministry of Finance and the SAT on Adjusting Value added Tax Rates, issued on April 4, 2018, and became effective on May 1, 2018, the value-add tax rates of 17%, 11% or 6% applicable to the taxpayers who render services are adjusted to 16%, 10% or 6% respectively. According to the Notice of the Ministry of Finance, the SAT and the General Administration of Customs on Relevant Policies for Deepening Value Added Tax Reform, issued on March 20, 2019, and became effective on April 1, 2019, such value added tax rate was reduced to 13%, 9% or 6%, respectively.
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 Enterprise Income Tax Law of the PRC, which became effective on January 1, 2008 and amended the Enterprise Income Tax Law of the PRC on December 29, 2018. On December 6, 2007, the State Council promulgated the Implementation Rules to the Enterprise Income Tax Law of the PRC, or the Implementation Rules, which also became effective on January 1, 2008 and amended the Implementation Rules to the Enterprise Income Tax Law of the PRC on April 23, 2019. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the Enterprise Income Tax Law of the PRC, or the Transition Preferential Policy Circular, which became effective simultaneously with the Enterprise Income Tax Law of the PRC. 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 and amended Withholding at Source of Income Tax of Non-resident Enterprises on June 15, 2018. The Enterprise Income Tax Law of the PRC 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 Enterprise Income Tax Law of the PRC, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementation Rules define the term “de facto management body” as the management body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In addition, the Circular Related to Relevant Issues on the Identification of a Chinese holding Company Incorporated Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies Recognizing issued by the State Administration of Taxation on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function mainly in China; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies in China; (iii) its major assets, accounting books, company seals and minutes and files of its board and shareholders’ meetings are located or kept in China; and (iv) more than half of the enterprise’s directors or senior management with voting rights reside in China. Although the circular only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, the determining criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
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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. In 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 was latest amended on December 30, 2019. Circular on Improving and Adjusting Foreign Exchange Policies 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 and was amended on December 30, 2019. 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 and was amended on December 30, 2019. Pursuant to SAFE Circular 19, foreign-invested enterprises may either continue to follow the current payment-based foreign currency settlement system or elect to follow the “conversion-at-will” regime of foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will regime of foreign currency settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time. The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by a foreign-invested enterprise of its RMB registered capital converted from foreign currencies. According to SAFE Circular 19, such Renminbi capital may be used at the discretion of the foreign-invested enterprise and SAFE will eliminate the prior approval requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises are still not allowed to extend intercompany loans to PRC consolidated entities. In addition, as Circular 19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this circular by relevant authorities.
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On June 9, 2016, SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”), which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities.
On January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance to further Promote Foreign Exchange Control, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks must check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities must hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.
Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned companies include:
| ● | Foreign Investment Law of the PRC, effective as of January 1, 2020; |
| ● | Regulations for Implementation the Foreign Investment Law of the PRC, effective as of January 1, 2020; |
| ● | Company Law of the PRC, as amended on October 26, 2018; |
| ● | Enterprise Income Tax Law of the PRC, effective as of March 16, 2007, as amended on December 29, 2018; |
| ● | Regulations on the Implementation of the Enterprise Income Tax Law of the PRC, effective as of December 6, 2007, as amended on April 23, 2019. |
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 Circular of the SAFE on Relevant Issues Concerning Foreign Exchange Administration over Involvement of Domestic Individuals in Equity Incentive Plans of Overseas Listed Companies, 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.
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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 offshore 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 those 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. The Management Rules on the Settlement of Foreign Direct Invested Renminbi was amended on June 5, 2015.
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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 and related rules and regulations, which become effective in 2010 and was last amended on November 11, 2020. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Patent. The Patent Law, which became effective in 2009 and was amended on October 17, 2020, 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 was amended on April 23, 2019, 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.
Available Information
We file or furnish periodic reports and amendments thereto, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Our website is located at www.tdglg.com, and our reports, amendments thereto, proxy statements and other information are also made available, free of charge, on our website at www.tdglg.com as soon as reasonably practicable after we electronically file or furnish such information with the SEC. The information posted on our website is not incorporated by reference into this Annual Report on Form 10-K.
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 Our Business and Industry
There is no assurance that we will be able to manage the commodities trading business effectively.
Operating the commodities trading business is a significant challenge and there is no assurance that we will be able to manage the integration successfully. If we are unable to efficiently integrate these businesses, the attention of our management could be diverted from our existing operations and the ability of the management teams at these business units to meet operational and financial expectations could be adversely impacted, which could impair our ability to execute our business plans. Failure to successfully integrate the new commodities trading business or to realize the expected benefits of entry into the business may have an adverse impact on our results of operations and financial condition.
Investment in our new line of business could disrupt the Company’s ongoing business and present risks not originally contemplated.
We have deployed a significant amount of proceeds from our financings in our new commodities business line, Shenzhen Baiyu Jucheng. 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.
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We may not be able to ensure the successful implementation of our strategy to diversify our businesses.
We have entered into the commodities trading business. Such initiatives involve various risks including but not limited to the investment costs in establishing a distribution network within the PRC, leasing warehouses, offices and other working capital requirements. There is no assurance that such future plans can be successfully implemented as the successful execution of such future plans will depend on several factors, some of which are not within our control, such as retaining and recruiting qualified and skilled staff, and the continued demand for our products by our customers. Failure to implement any part of our future plans or execute 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.
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, Mr. Tianshi (Stanley) Yang, our Chief Financial 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.
A decline in our key business sectors or a reduction in consumer demand generally could have a material adverse effect on our business.
A large portion of our supply chain management services revenue comes from clients in the energy, material and industrial sectors, which is intensely competitive, very volatile, and subject to rapid changes and fluctuations in the overall economic conditions. Declines in the overall performance of the energy, material and industrial sectors have in the past and could in the future, adversely affect the demand for our supply chain management services and reduce our revenue and profitability from these clients. In addition, industry changes, such as the transition of more collateral materials from physical form to digital form and changes in marketing channels, could lessen the demand for certain of our services we currently handle. To the extent recent uncertainty in the economy or other factors result in decreased demand for our clients’ products, we may experience a reduction in volumes of client products that we handle which could have a material adverse effect on our supply chain management services business, financial position and operating results.
We operate in a business that is cyclical and where demand can be volatile, which could have a material adverse effect on our business, financial condition or results of operations.
We operate in a business that is cyclical and where demand can be volatile, which could have a material adverse effect on our results of operations and financial condition. The timing and magnitude of the cycles in the business in which we operate are difficult to predict. Purchase prices for the raw materials we purchase, and selling prices for our products are volatile and beyond our control. While we attempt to respond to changing raw material costs through adjustments to the sales price of our products, our ability to do so is limited by competitive and other market factors. A significant reduction in selling prices for our products may have a material adverse effect on our business, financial condition and results of operations, and adversely impact our ability to recover purchase costs from end customers. A decline in market prices for our products between the date of the sales order and shipment of the product may impact the customer’s ability to obtain letters of credit to cover the full sales amount. A decline in selling prices for our products coupled with customers failing to meet their contractual obligations may also result in a net realizable value adjustment to the average cost of inventory to reflect the lower of cost or fair market value. Additionally, changing prices could potentially impact the volume of raw materials available to us, the volume of ore and processed metal sold by us and inventory levels. The cyclical nature of our businesses tends to reflect and be amplified by changes in general economic conditions, both domestically and internationally.
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Risk Factors Related to Our General Operations
The current geographic concentration where we provide services creates an exposure to local economies, regional downturns or severe weather or catastrophic occurrences that may materially adversely affect our financial condition and results of operations.
We currently conduct our commodities trading business in Shanghai and Shenzhen. We currently hold all our commodities inventory at the warehouses we rent in Shanghai and Shenzhen. 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 results of operations. Furthermore, there can be no assurance that we will be able to successfully replicate our business model and achieve levels of success as we enter new geographic markets.
Our failure to maintain a reputation of integrity and to otherwise maintain and enhance our brand could adversely affect our business and results of operations.
Our business model is based on our ability to provide customers with commodities trading that we believe will save them time and money. If we fail to build and maintain a positive reputation, or if an event occurs that damages this reputation, it could adversely affect consumer demand and have a material adverse effect on our business and results of operations. Even the perception of a decrease in the quality of our brand could negatively impact results.
Complaints or negative publicity about our business practices, marketing and advertising campaigns, compliance with applicable laws and regulations, the integrity of the data that we provide to users, and other aspects of our business, especially on industry-specific blogs and social media websites, and irrespective of their validity, could diminish consumer confidence in our services and adversely affect our brand. The growing use of social media increases the speed with which information and opinions can be shared and, thus, the speed with which reputation can be affected. If we fail to correct or mitigate misinformation or negative information, including information spread through social media or traditional media channels, about us, the vehicles we offer, our customer experience, or any aspect of our brand, it could have a material adverse effect on our business and results of operations.
Failure to adequately protect our intellectual property, technology and confidential information could harm our business and operating results.
Our business depends on our intellectual property, technology and confidential information, the protection of which is crucial to the success of our business. We attempt to protect our intellectual property, technology and confidential information by requiring certain of our employees and consultants to enter into confidentiality agreements and certain third parties to enter into nondisclosure agreements. In addition, these agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property, or technology. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our website features, software and functionality or obtain and use information that we consider proprietary. Changes in the law or adverse court rulings may also negatively affect our ability to prevent others from using our technology.
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.
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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 operations 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.
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We have identified material weaknesses in our internal control over financial reporting, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and which may lead to a decline in our stock price.
As discussed in “Part II, Item 9A. Controls and Procedures,” our management has identified material weaknesses in our internal control over financial reporting, which were not remediated as of December 31, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.
As of the date of this annual report, we are re-assessing the design of our controls and modifying processes. However, there can be no assurance that we will be able to fully remediate our existing material weaknesses or that our internal control over financial reporting will not suffer in the future from other material weaknesses, thus making us unable to prevent or detect on a timely basis material misstatement in our periodic reports with the SEC. If we fail to remediate these material weaknesses or otherwise maintain effective internal control over financial reporting in the future, the existence of one or more internal control deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify internal control deficiencies. If we cannot produce reliable financial reports, we may have difficulty in filing timely periodic reports with the SEC, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be materially harmed. In addition, any failure to remediate the existing material weaknesses or a failure to maintain effective internal control over financial reporting could negatively impact our results of operations, cash flows and financial condition, subject us to potential litigation and regulatory inquiry and cause us to incur additional costs in future periods relating to the implementation of remedial measures.
Matters relating to or arising from the restatements, Audit Committee investigation and the associated material weaknesses identified in our internal control over financial reporting, including adverse publicity, have caused us to incur significant legal, accounting and other professional fees and other costs, have exposed us to greater risks associated with other civil litigation, regulatory proceedings and government enforcement actions, have diverted resources and attention that would otherwise be directed toward our operations and implementation of our business strategy and may impact our ability to attract and retain customers, employees and vendors, any of which could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Our Corporate Structure
The failure to comply with PRC regulations relating to mergers and acquisitions of domestic enterprises by offshore SPV 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 (“SAIC”), and SAFE, jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“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 SPV 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.
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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 SPV, or Circular 37, which replaced Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore SPV, 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 “SPV” 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 SPV, 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.
In addition, different local SAFE branches may have different views and procedures as to the interpretation and implementation of the SAFE regulations, and it may be difficult for our ultimate shareholders or beneficial owners who are PRC residents to provide sufficient supporting documents required by the SAFE or to complete the required registration with the SAFE in a timely manner, or at all. Any failure by any of our shareholders who is a PRC resident, or is controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us to fines or sanctions imposed by the PRC government.
Risks Related to Ownership of our Common Stock
If We have not been in compliance with Nasdaq’s requirements for continued listing and our common stock may be delisted from trading on Nasdaq, which would have a material effect on us and our stockholders.
If We were delinquent in the filing of our periodic reports with the SEC, we will not be in compliance with listing requirements of The Nasdaq Stock Market LLC (“Nasdaq”) Listing Rule 5250(c)(1), which requires timely filing of periodic financial reports with the SEC. Under Nasdaq’s listing rules, we would be permitted to submit to Nasdaq a plan to regain compliance with the Nasdaq listing rules. However, there can be no guarantee that Nasdaq will accept our compliance plan, grant us the extension or that we will be able to file by the extended compliance period, in which case our common stock may be subject to delisting by Nasdaq. If our common stock is delisted, there can no assurance whether or when it would be listed for trading on Nasdaq or any other exchange. If our common stock is delisted, the market price of our shares will likely decline and become more volatile, and our stockholders may find that their ability to trade in our stock will be adversely affected. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our stock.
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We do not expect to declare or pay dividends in the foreseeable future.
We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business. Therefore, holders of our Common Stock will not receive any return on their investment unless they sell their securities, and holders may be unable to sell their securities on favorable terms or at all.
Future issuances of our Common Stock or securities convertible into, or exercisable or exchangeable for, our common stock (“Securities”), or the expiration of lock-up agreements that restrict the issuance of new Common Stock or the trading of outstanding Common Stock, could cause the market price of our Common Stock to decline and would result in the dilution of your holdings.
Future issuances of our Securities, or the expiration of lock-up agreements that restrict the issuance of new Common Stock or the trading of outstanding Common Stock, could cause the market price of our Common Stock to decline. We cannot predict the effect, if any, of future issuances of our Securities, or the future expirations of lock-up agreements, on the price of our Common Stock. In all events, future issuances of our Common Stock would result in the dilution of your holdings. In addition, the perception that new issuances of our Securities could occur, or the perception that locked-up parties will sell their securities when the lock-ups expire, could adversely affect the market price of our Common Stock. In addition to any adverse effects that may arise upon the expiration of these lock-up agreements, the lock-up provisions in these agreements may be waived, at any time and without notice. If the restrictions under the lock-up agreements are waived, our Common Stock may become available for resale, subject to applicable law, including without notice, which could reduce the market price for our Common Stock.
The Company has outstanding warrants having a “cashless exercise” feature and may cause dilution to existing stockholders.
As part of its Registered Direct Offerings in 2019, the Company issued warrants to purchase an aggregate of 2,760,000 shares of common stock. The warrants have a cashless exercise feature giving the holders the option of exercising the warrants on a cashless basis if there is no effective registration statement covering the common stock issuable upon exercise of these warrants. If the warrant shares are issued in such a cashless exercise, the warrant shares will take on the characteristics of the warrants being exercised, and the holding period of the warrant shares being issued may be tacked on to the holding period of the warrants in accordance with Section 3(a)(9).
The Company would not receive any proceeds from the exercise of warrants issued to the holder in such a cashless exercise, causing dilution to existing stockholders with no corresponding influx of capital. This may affect our ability to raise additional equity capital.
Our common stock may be thinly traded and our stockholders may be unable to sell at or near ask prices or at all if they need to sell their shares to raise money or otherwise desire to liquidate their shares.
Our Common Stock may be “thinly-traded”, meaning that the number of persons interested in purchasing our Common Stock at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our Common Stock may not develop or be sustained.
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The market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:
| ● | the perception of U.S. investors and regulators of U.S. listed Chinese companies; |
| ● | actual or anticipated fluctuations in our operating results; |
| ● | changes in financial estimates by securities research analysts; |
| ● | negative publicity, studies or reports; |
| ● | changes in the economic performance or market valuations of other microcredit companies; |
| ● | announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | addition or departure of key personnel; |
| ● | fluctuations of exchange rates between RMB and the U.S. dollar; and |
| ● | general economic or political conditions in China. |
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Volatility in our common stock price may subject us to securities litigation.
The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
Provisions in our by-laws and Delaware laws might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions of our by-laws and Delaware laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
| ● | the inability of stockholders to act by written consent or to call special meetings; | |
| ● | the ability of our board of directors to make, alter or repeal our by-laws; and | |
| ● | the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval. |
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
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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.
Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our assets and operations are located in the PRC. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the PRC could have a material adverse effect on the overall economic growth of the PRC. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in the PRC, which may adversely affect our business and operating results.
Uncertainties with respect to the PRC legal system could adversely affect us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters generally. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, the PRC has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, these regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
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Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in the PRC may be protracted, resulting in substantial costs and diversion of resources and management attention.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict how long such appreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again. All of our revenues and substantially all of our costs are denominated in Renminbi. We rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the common stock in U.S. dollars. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount.
U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic interests and technologies. There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements, especially as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our facilities by any of these regulators may be limited or prohibited.
General Risk Factors
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.
Our business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing COVID-19 pandemic, the evolution of which continues to be uncertain. We have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, our customers, which could negatively impact our business. As a result of COVID-19, we incurred increased costs for our operations, performed our operations remotely and experienced difficulty in recruiting personnel.
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 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 interruptions in the supply of commodities, personnel absences, and delivery and storage of commodities, any of which could have adverse ripple effects on 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.
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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.
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.
Increasing scrutiny and changing expectations from investors, lenders, customers, and other market participants with respect to our Environmental, Social and Governance (“ESG”) policies and activities may impose additional costs on us or expose us to additional risks.
Companies across all industries and around the globe are facing increasing scrutiny relating to their ESG policies, initiatives and activities by investors, lenders, customers, and other market participants. In the U.S., amongst other regulatory efforts, in March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement and in March 2022, the SEC proposed rules that would require public companies to disclose certain climate-related information in periodic filings with the SEC. Our disclosures on these matters or a failure to satisfy evolving stakeholder expectations for ESG practices and reporting may potentially harm our reputation and impact employee retention and access to capital. In addition, our failure, or perceived failure, to pursue or fulfill our goals, targets, and objectives or to satisfy various reporting standards within the timelines we announce, or at all, could expose us to government enforcement actions and private litigation.
We expect regulatory requirements related to ESG matters to continue to expand globally and increase our costs of compliance. Our ability to achieve any goal or objective, including with respect to environmental and diversity initiatives and compliance with ESG reporting standards, is subject to numerous risks, many of which are outside of our control. Examples of such risks include the availability and cost of technologies and products that meet sustainability, evolving regulatory requirements affecting ESG standards or disclosures, our ability to recruit, develop, and retain diverse talent in our labor markets, and our ability to develop reporting processes and controls that comply with evolving standards for identifying, measuring and reporting ESG metrics. As ESG best-practices, reporting standards, and disclosure requirements continue to develop, we may incur increasing costs related to maintaining or achieving our ESG goals in addition to ESG monitoring and reporting. We risk damage to our brand and reputation, impacts to our ability to secure government contracts, or limited access to capital markets and loans if we fail to adapt to, or comply with, investor, lender, customer or other stakeholder expectations and standards and potential government regulation with respect to ESG matters, including in areas such as diversity and inclusion, environmental stewardship, support for local communities and corporate governance and transparency.
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Our business could be negatively impacted by the inflationary pressures which may decrease our operating margins and increase working capital investments required to operate our business.
The U.S. economy has experienced rising inflation in 2022. A sustained increase in inflation may continue to increase our costs for labor, services, and materials. Further our customers face inflationary pressures and resulting impacts, such as the tight labor market and supply chain disruptions. The rate and scope of these various inflationary factors may increase our operating costs and capital expenditures materially, which may not be readily recoverable in the prices of our services and may have an adverse effect on our costs, operating margins, results of operations and financial condition. Additionally, Federal Reserve policies to combat inflationary pressures, including the significant increases in prevailing interest rates that occurred during 2022 as a result of the 425 aggregate basis point increase in the federal funds rate, and the associated macroeconomic impact on slowdown in economic growth, could negatively impact our business.
Our information systems or data, or those of our service providers or customers or users could be subject to cyber-attacks or other security incidents, which could result in data breaches, intellectual property theft, claims, litigation, regulatory investigations, significant liability, reputational damage and other adverse consequences.
We have continued to expand our information technology systems as our operations grow. While we maintain information technology measures designed to protect us against intellectual property theft, data breaches, sabotage and other external or internal cyber-attacks or misappropriation, our systems and those of our service providers are potentially vulnerable to malware, ransomware, viruses, denial-of-service attacks, phishing attacks, social engineering, computer hacking, unauthorized access, exploitation of bugs, defects and vulnerabilities, breakdowns, damage, interruptions, system malfunctions, power outages, terrorism, acts of vandalism, security breaches, security incidents, inadvertent or intentional actions by employees or other third parties, and other cyber-attacks. To the extent any security incident results in unauthorized access or damage to or acquisition, use, corruption, loss, destruction, alteration or dissemination of our data, it could disrupt our business, harm our reputation, compel us to comply with applicable data breach notification laws, subject us to time consuming, distracting and expensive litigation, regulatory investigation and oversight, mandatory corrective action, require us to verify the correctness of database contents, or otherwise subject us to liability under laws, regulations and contractual obligations, including those that protect the privacy and security of personal information. This could result in increased costs to us and result in significant legal and financial exposure and/or reputational harm.
We also rely on service providers, and similar incidents relating to their information technology systems could also have a material adverse effect on our business. Our service providers, including our workforce management software provider, may be subject to ransomware and other security incidents, and we cannot guarantee that our or our service providers’ systems have not been breached or that they do not contain exploitable defects, bugs, or vulnerabilities that could result in a security incident, or other disruption to, our or our service providers’ systems. Our ability to monitor our service providers’ security measures is limited, and, in any event, malicious third parties may be able to circumvent those security measures.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Description of Property.
Our principal executive offices are located at 139, Xinzhou 11th Street, Futian District, Shenzhen, Guangdong, PRC 518000, where we leased approximately 476.04 square feet of office space pursuant to a lease agreement, which lasts from December 1, 2022 to November 30, 2024 with an annual rent in the amount of RMB1.37 million (approximately US0.2 million).
We do not own any real property or have any land use rights.
Item 3. Legal Proceedings.
The Company is involved in a legal action as follows:
2020 Court Matter with Harrison Fund
On April 6, 2020, the Company filed a lawsuit against Harrison Fund in the United States District Court for the Northern District of California (Case No. 3:20-cv-2307). The Company 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 in Harrison Fund’s brochure appeared to be problematic. The Company demanded a return of its investment from Harrison Fund. When the Company failed to obtain a response from Harrison Fund, it filed the complaint against Harrison Fund seeking to recover the $1,000,000 investment.
Due to the uncertainty arising from this pending legal proceeding, a full impairment has been applied against the Company’s investment in financial products.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is currently listed on the NASDAQ Capital Market under the symbol “GLG.”
Recent Sales of Unregistered Securities
During the period covered by this annual report, there were no sales by us of unregistered securities that were not previously reported by us in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.
Holders
We had 275 holders of record of our common stock as of the date of this annual report.
Dividends
We did not declare or pay any dividend in 2022 and do not plan to do so in the foreseeable future. Although we intend to retain our earnings, if any, to finance the growth of our business, our board of directors will have the discretion to declare and pay dividends in the future, subject to applicable PRC regulations and restrictions as described below. Future payment of dividends will depend upon our earnings, capital requirements, and other factors, which our board of directors may deem relevant.
In addition, due to various restrictions under PRC laws on the distribution of dividends by WFOE, we may not be able to pay dividends to our stockholders. The Foreign Investment Law of the PRC, as amended, its Implementing Rules and the Company Law of the PRC, as amended, contain the principal regulations governing dividend distributions of wholly foreign-owned enterprises. Under these regulations, wholly foreign-owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, for certain reserve funds. Our accumulated reserve funds now reach and remain above 50% of the registered capital amount. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.
Item 6. [Reserved].
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
As of December 31, 2022, the Company had two business lines, which are the commodities trading business and supply chain management services.
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Commodities Trading Business
The commodity trading business primarily involves purchasing non-ferrous metal products, such as aluminum ingots, copper, silver, and gold, from metal and mineral suppliers and then selling to customers. In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help metal and mineral suppliers to sell their metal products, the Company launched its supply chain management service in December 2019. The Company primarily generates revenues from bulk non-ferrous commodity products, and from providing related supply chain management services in the PRC.
The Company sources bulk commodity products from non-ferrous metal and mines or its designated distributors and then sells to manufacturers who need these metals in large quantities. The Company works with suppliers in the sourcing of commodities. Major suppliers include various metal and mineral suppliers such as Kunsteel Group, Baosteel Group, Aluminum Corporate of China Limited, Yunnan Benyuan, Yunnan Tin, and Shanghai Copper. The Company’s target customers include large infrastructure companies such as China National Electricity, Datang Power, China Aluminum Foshan International Trade, Tooke Investment (China), CSSC International Trade Co., Ltd., Shenye Group, and Keliyuan.
Supply Chain Management 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 2% of the distribution order, depending on the size of the order. For the year ended December 31, 2022, the Company earned commodity distribution commission fees of $1,391,903 from facilitating such sales transactions with twenty third party customers. For the year ended December 31, 2021, the Company earned commodity distribution commission fees of $3,180,227 from facilitating such sales transactions with thirty-four third party customers.
Competition
The Company mainly competes against other large domestic commodity metal product trading service providers such as Xiamen International Trade and Yijian Shares. Currently, the principal competitive factors in the non-ferrous metal commodities trading business are price, product availability, quantity, service, and financing terms for purchases and sales of commodities.
Applicable Government Regulations
Shenzhen Baiyu Jucheng has obtained all material approvals, permits, licenses and certificates required for our metal product trading operations, including registrations from the local business and administrative department authorizing the purchase of raw materials.
Recent developments
| (1) | Settlement of Convertible Promissory Notes |
The Company settled convertible promissory notes of $125,000 on December 30, 2022, $125,000 on January 10, 2023, $125,000 on January 18, 2023, $200,000 on January 18, 2023, $250,000 on February 2, 2023, $200,000 on February 3, 2023, $175,000 on February 8, 2023, $250,000 on February 15, 2023 and $250,000 on March 2, 2023, respectively and issued 148,399, 147,824, 147,475, 235,960, 292,987, 234,389, 205,090, 292,987 and 279,567 shares of the Company’s common stock on January 6, 2023, January 12, 2023, January 18, 2023, January 19, 2023, February 3, 2023, February 6, 2023, February 8, 2023, February 15, 2023, and March 2, 2023, respectively.
| (2) | January Private Placement |
On January 9, 2023, the Company entered into a certain securities purchase agreement with Ms. Huiwen Hu, an affiliate of the Company, and certain other purchasers who are non-U.S. Persons, pursuant to which the Company agreed to sell an aggregate of 35,000,000 shares of its common stock, at a purchase price of $1.21 per share (“January 2023 PIPE”). The gross proceeds to the Company from the January 2023 PIPE was $42.35 million. Since Ms. Huiwen Hu is an affiliate of the Company, the January 2023 PIPE has been approved by the Audit Committee as well as the Board of Directors of the Company.
| (3) | Settlement of Restated Agreement |
The Company issued to White Lion Capital, LLC 489,306 shares of the Company’s common stock on January 20, 2023 at a purchase price of 80% of the lowest daily volume-weighted average price of the Company’s common stock during the valuation period as defined in the Restated Agreement (the “Purchase Price”) and issued 200,000 shares of the Company’s common stock on February 1, 2023 at the Purchase Price, pursuant to the Restated Agreement dated December 12, 2022. The Company received relevant proceeds of $400,182.47 and $158,890.50, respectively, in 2023.
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Key Factors Affecting Our Results of Operation
The commodities trading industry is also experiencing decreasing demand as a result of China’s overall economic slowdown. We expect competition in commodities trading business to persist and intensify.
We have a limited operating history having just started our commodities trading business in late December 2019. We believe our future success depends on our ability to significantly increase sales as well as maintain profitability from our operations. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving industry. These risks and challenges include, among other things,
| ● | our ability to continue our growth as well as maintain profitability; |
| ● | preservation of our competitive position in commodities trading industry in China; |
| ● | our ability to implement our strategies and make timely and effective responses to competition and changes in customer preferences; and |
| ● | recruitment, training and retaining of qualified managerial and other personnel. |
Our business requires a significant amount of capital in large part due to needing to purchase a bulk volume of commodities, and expand our business in existing markets and to additional markets where we currently do not have operations.
Results of Operations
Year Ended December 31, 2022 as Compared to Year Ended December 31, 2021
| For the Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | Amount | % | |||||||||||||
| Revenues | ||||||||||||||||
| Sales of commodity products – third parties | $ | 155,443,398 | $ | 173,904,016 | $ | (18,460,618 | ) | (11 | )% | |||||||
| Sales of commodity products – related parties | - | 24,049,999 | (24,049,999 | ) | (100 | )% | ||||||||||
| Supply chain management services – third parties | 1,391,903 | 3,180,227 | (1,788,324 | ) | (56 | )% | ||||||||||
| Total revenue | 156,835,301 | 201,134,242 | (44,298,941 | ) | (22 | )% | ||||||||||
| Cost of revenue | ||||||||||||||||
| Commodity product sales – third parties | (155,789,519 | ) | (173,996,000 | ) | 18,206,481 | (10 | )% | |||||||||
| Commodity product sales – related parties | - | (24,045,511 | ) | 24,045,511 | (100 | )% | ||||||||||
| Supply chain management services – third parties | (7,525 | ) | (84,118 | ) | 76,593 | (91 | )% | |||||||||
| Total cost of revenue | (155,797,044 | ) | (198,125,629 | ) | 42,328,585 | (21 | )% | |||||||||
| Gross profit | 1,038,257 | 3,008,613 | (1,970,356 | ) | (65 | )% | ||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general, and administrative expenses | (8,844,739 | ) | (8,137,481 | ) | (707,258 | ) | 9 | % | ||||||||
| Share-based payment for service | (44,000 | ) | (1,836,442 | ) | 1,792,442 | (98 | )% | |||||||||
| Total operating cost and expenses | (8,888,739 | ) | (9,973,923 | ) | 1,085,184 | (11 | )% | |||||||||
| Other income (expenses), net | ||||||||||||||||
| Interest income | 17,035,200 | 10,079,776 | 6,955,424 | 69 | % | |||||||||||
| Interest expenses | (523,980 | ) | (313,965 | ) | (210,015 | ) | 67 | % | ||||||||
| Amortization of beneficial conversion feature relating to issuance of convertible promissory notes | (1,212,617 | ) | (1,463,883 | ) | 251,266 | (17 | )% | |||||||||
| Other income (expense), net | 59,088 | (285,774 | ) | 344,862 | (121 | )% | ||||||||||
| Total other income, net | 15,357,691 | 8,016,154 | 7,341,537 | 92 | % | |||||||||||
| Loss from continuing operations before income taxes | 7,507,209 | 1,050,844 | 6,456,365 | 614 | % | |||||||||||
| Income tax expenses | (3,253,672 | ) | (1,991,201 | ) | (1,262,471 | ) | 63 | % | ||||||||
| Net income (loss) | $ | 4,253,537 | $ | (940,357 | ) | $ | 5,193,894 | 552 | % | |||||||
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Revenue
For the years ended December 31, 2022 and 2021, we generated revenue from the following two sources, including (1) revenue from sales of commodity products and (2) revenue from supply chain management services. Total revenue decreased by $44,298,941 or 22%, from $201,134,242 for the year ended December 31, 2021 to $156,835,301 for the year ended December 31, 2022, among which revenue from commodity trading, supply chain management services for 99.1% and 0.9%, respectively, of our total revenue for the year ended December 31, 2022. The decrease of revenue from sales of commodity products is mainly due to COVID-19, as well as the depreciation of RMB against USD in 2022. For the year ended December 31, 2022, our operations in Shanghai were temporarily affected due to the sporadic outbreak of COVID-19, which resulted in a decrease in revenue. But the extent to which COVID-19 affects our future 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.
| (1) | Revenue from sales of commodity products |
For the year ended December 31, 2022, the Company sold non-ferrous metals to twenty-nine third party customers at fixed prices, and earned revenues of $155,443,398 when the product ownership was transferred to its customers.
For the year ended December 31, 2021, the Company sold non-ferrous metals to twenty-four third party customers and three related party customers at fixed prices, and earned revenues when the product ownership was transferred to its customers. The Company earned revenues of $173,904,016 and $24,049,999, respectively, from sales of commodity products to twenty-four third party customers and three related party customers.
| (2) | Revenue from supply chain management services |
In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help metal and mineral suppliers sell their metal products, the Company launched its supply chain management service business in December 2019, which primarily consisted of commodity distribution services.
Commodity distribution service fees
The Company utilizes its strong sales and marketing expertise and customer network to introduce customers to large metal and mineral suppliers, and facilitate the metal product sales between the suppliers and the customers. The Company merely acts as an agent in this type of transaction and earns a commission fee based on the percentage of volume of metal products that customers purchase. Commodity distribution service fees are recognized as revenue when the Company successfully facilitates the sales transactions between the suppliers and the customers. For the year ended December 31, 2022, the Company earned commodity distribution commission fees of $1,391,903 from third party vendors compared with $3,180,227 for the year ended December 31, 2021.
Cost of revenue
Our cost of revenue primarily includes cost of revenue associated with commodity product sales and cost of revenue associated with management services of supply chain. Total cost of revenue decreased by $42,328,585 or 21% from $198,125,629 for the year ended December 31, 2021 to $155,797,044 for the year ended December 31, 2022, primarily due to an decrease of $42,251,992 in cost of revenue associated with commodity product sales. The cost of revenue increased is in accordance to the increase in sales.
Cost of revenue associated with commodity trading
Cost of revenue primarily consists of purchase costs of non-ferrous metal products.
For the year ended December 31, 2022, the Company purchased non-ferrous metal products of $155,789,519 from twenty-nine third party vendors.
For the year ended December 31, 2021, the Company purchased non-ferrous metal products of $173,996,000 from twenty-six third party vendors and $24,045,511 from eight related party vendors.
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Selling, general, and administrative expenses
Selling, general and administrative expenses increased from $8,137,481 for the year ended December 31, 2021 to $8,844,739 for the year ended December 31, 2022, representing an increase of $707,258, or 9%. Selling, general and administrative expenses primarily consisted of salary and employee benefits, office rental expense, amortizations of intangible assets and convertible promissory notes, professional service fees and finance offering related fees. The increase was mainly attributable to (1) amortization of intangible assets of $4,630,169 for the year ended December 31, 2022 as compared to $3,927,961 for the year ended December 31, 2021 and (2) amortization of convertible promissory notes of $1,212,617 for the year ended December 31, 2022 as compared to $489,000 for the year ended December 31, 2021.
Share-based payment for service
On December 16, 2022, the Company issued 300,000 shares of the Company’s common stock as compensation to a settlement and mutual release agreement with White Lion Capital, LLC, a Nevada limited liability company, and recognized $324,000 share-based payment for service to profit. and charged back $280,000 share-based payment for service to profit to a PR service provider.
On March 4, 2021, the Company issued 750,000 fully-vested warrants with an exercise price of $0.01, with a five-year life, to an agent who was engaged to complete the warrant waiver and exercise agreements. The Company applied Black-Scholes model and determined the fair value of the warrants to be $1,695,042. Significant estimates and assumptions used included stock price on March 4, 2021 of $2.27 per share, risk-free interest rate of one year of 0.08%, life of 5 years, and volatility of 71.57% for the year ended December 31, 2021.
On July 16, 2021, the Company issued 140,000 shares of the Company’s common stock as compensation to a PR service provider for increasing the Company’s visibility in the financial news community, and recognized $141,400 share-based payment for service to profit.
Interest income
Interest income was primarily generated from loans made to third parties and related parties. For the year ended December 31, 2022, interest income was $17,035,200 representing an increase of $6,955,424, or 69% from $10,079,776 for the year ended December 31, 2021. The increase was due to the growth of loans made to third party vendors for the year ended December 31, 2022.
Amortization of beneficial conversion feature and relative fair value of warrants relating to the issuance of convertible promissory notes
For the year ended December 31, 2022, the item represented the amortization of beneficial conversion feature of $1,212,617 of the three convertible promissory notes issued on March 4, 2021, October 4, 2021 and May 6, 2022.
For the year ended December 31, 2021, the item represented the amortization of beneficial conversion feature of $1,463,883 of the three convertible promissory notes issued on January 6, 2021, March 4, 2021 and October 4, 2021.
Cash Flows and Capital Resources
We have financed our operations primarily through shareholder contributions, cash flow from operations, borrowings from third parties and related parties, and equity financing through private placement and public offerings of our securities.
As reflected in the accompanying audited consolidated financial statements, for the year ended December 31, 2022, the Company reported cash inflows of $4,335,359 from operating activities. As of December 31, 2022, the Company positive working capital of about $87 million.
During the year ended December 31, 2022, the Company entered into additional private placement agreements with certain private investors and issued 13,000,000 shares of common stock for $45,500,000, 11,420,000 shares of common stock for $11,420,000, and 50,000,000 shares of common stock for $57,500,000, respectively, and sold unsecured senior convertible promissory notes in the aggregate principal amount of $3,000,000.
The total gross proceeds from these transactions were $117.42 million. The Company expects to use the proceeds from the equity financing as working capital to expand its commodity trading business.
Based on the foregoing capital market activities, the management believes that the Company will continue as a going concern in the following 12 months.
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Statement of Cash Flows
The following table sets forth a summary of our cash flows. For the years ended December 31, 2022 and 2021, respectively:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Cash Provided by Operating Activities | $ | 4,335,359 | $ | 8,034,010 | ||||
| Net Cash Used in Investing Activities | (125,537,746 | ) | (71,520,955 | ) | ||||
| Net Cash Provided by Financing Activities | 117,390,265 | 64,118,618 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 394,111 | 979,382 | ||||||
| Net increase in cash and cash equivalents | (3,418,011 | ) | 1,611,055 | |||||
| Cash at beginning of period | 4,311,068 | 2,700,013 | ||||||
| Cash from continuing operations | $ | 893,057 | $ | 4,311,068 | ||||
Net Cash Provided by Operating Activities
During the year ended December 31, 2022, we had a cash inflow from operating activities of $4,335,359, a decrease of $3,698,651 from a cash inflow of $8,034,010 for the year ended December 31, 2021. We incurred a net income for the year ended December 31, 2022 of $4,253,537, an increase of $5,193,894 from the year ended December 31, 2021, during which we recorded a net loss of $940,357.
In addition to the change in profitability, the decrease in net cash provided by operating activities was the result of several factors, including: (1) non cash effects adjustments, including amortization of intangible assets of $4,630,169, amortization of beneficial conversion feature of convertible promissory notes of $1,212,617, amortization of discount on convertible promissory notes of $434,333, and interest expenses for convertible promissory notes of $465,201; (2) a decrease of $4,497,189 of advances from customers due to a purchase payment in advance to store goods recent competitive market; (3) a decrease of $3,162,561 of due to accounts payable; and (4) a decrease of $3,507,517 of other current liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was $125,537,746 as compared to net cash used in investing activities of $71,520,955 for the year ended December 31, 2021.
The cash used in investing activities for the year ended December 31, 2022 was for the loans disbursed to third parties of $109,106,926, collected loans from third partis of $70,150,111 and collected loans from related partis of $10,448,662. As of December 31, 2022, the Company payed for Tongdow Internet Technology acquisition of $96,638,468.
Net Cash Provided by Financing Activities
During the year ended December 31, 2022, the cash provided by financing activities was mainly attributable to cash raised from certain private placement, specifically, the Company entered into certain private placement agreements with certain private investors and issued 13,000,000 shares of common stock for $45,500,000, 11,420,000 shares of common stock for $11,420,000, and 50,000,000 shares of common stock for $57,500,000, respectively, and sold unsecured senior convertible promissory notes in the aggregate principal amount of $3,000,000.
Contractual Obligations
As of December 31, 2022, the Company had one lease arrangement with an unrelated third party with a monthly rental fee of approximately $8,202. The lease term was within 23 months, which will be due in November 2024. As of the date of this report, the Company cannot reasonably assess whether it will renew the lease term. The lease commitment was as following table:
| Total | Less than 1 year | 1-2 years | Thereafter | |||||||||||||
| Contractual obligations: | ||||||||||||||||
| Operating lease (1) | $ | 188,650 | $ | 98,426 | $ | 90,224 | $ | - | ||||||||
| Total | $ | 188,650 | $ | 98,426 | $ | 90,224 | $ | - | ||||||||
We do not have any off-balance sheet arrangements as of December 31, 2022.
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Critical Accounting Policies
Please refer to Note 2 of the Consolidated Financial Statements included in this Form 10-K for details of our critical accounting policies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements and notes thereto and the report of Audit Alliance LLP, our independent registered public accounting firm for the fiscal years ended December 31, 2022 and 2021, respectively, are set forth on pages F-1 through F-36 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2022 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Inherent Limitations over Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
| i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; | |
| ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and | |
| iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management, including the Company’s principal executive officer and principal financial officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and our Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as of December 31, 2022. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013) in Internal Control-Integrated Framework. Our Management believes that, as of December 31, 2022, our internal control over financial reporting was not effective based on those criteria.
A “material weakness” is defined under the SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.
As a result of its review, management concluded that we had material weaknesses in our internal control over financial reporting process consisting of the following:
Certain personnel primarily responsible for the preparation of our financial statements require additional requisite levels of knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements. The management thought that in light of the inexperience of our accounting staff with respect to the requirements of U.S. GAAP-based reporting and SEC rules and regulations, we did not maintain effective controls and did not implement adequate and proper supervisory review to ensure that significant internal control deficiencies can be detected or prevented.
Management’s assessment of the control deficiency over accounting and finance personnel as of December 31, 2022 including:
| ● | There is a lack of formal procedures with handling different types of revenue recognition. | |
| ● | Company management conducted extensive transactions with related parties without adequate control by the Audit Committee and the Board of Directors. | |
| ● | There is a lack of procedures and documentation for dealing with related parties. | |
| ● | There was no accountant with adequate U.S. GAAP knowledge working in the Company’s Accounting Department. Part of the Company’s U.S. GAAP reporting function was outsourced to external consultant; | |
| ● | The Company has insufficient written policies and procedures for accounting and financial reporting, which led to inadequate financial statement closing process. |
Based on the above factors, management concluded that the control deficiency over accounting and finance personnel was the material weaknesses as of December 31, 2022, as our accounting staff continues to lack sufficient U.S. GAAP experience and requires further substantial training.
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Management Plan to Remediate Material Weaknesses
We expect to implement the following measures in 2023 to continue to remediate the material weaknesses identified:
| ● | To establish additional written policies and procedures for accounting and financial reporting to improve the Company’s financial statement closing process. | |
| ● | To appoint a monitor to oversee corporate governance and legal compliance matters. The monitor should be appointed for a period of at least 18 months, and should report directly to the Audit Committee. | |
| ● | To retain one or two additional independent, bilingual Chinese and English-speaking directors. They should assist and augment the efforts of the Company’s current independent directors. | |
| ● | To establish an internal audit function to assist the Audit Committee with compliance requirements and improvement of overall internal control. | |
| ● | To establish and maintain (i) a control process for the accounting implication assessment of all significant payments, particularly those that are non-routine; (ii) a control process for maintaining all supporting documentation regarding all non-routine transactions. | |
| ● | To continue providing applicable training for our financial and accounting staff in the Company’s Accounting Department to enhance their understanding of U.S. GAAP and internal control over financial reporting. | |
| ● | To continue providing applicable training for the Company’s accounting manager to improve the Company’s internal review process. |
Changes in Internal Control over Financial Reporting
The Company tried to make some changes (excluding corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting during the fourth quarter of 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
| ● | The Company has appointed a new accounting manager to improve the Company’s internal review process. | |
| ● | The Company has established additional written policies and procedures for accounting and financial reporting to improve the Company’s financial statement closing process. | |
| ● | The Company has established and maintained (i) a control process for the accounting implication assessment of all significant payments, particularly those that are non-routine; (ii) a control process for maintaining all supporting documentation regarding all non-routine transactions. | |
| ● | The Company provides applicable training for our financial and accounting staff in the Company’s Accounting Department to enhance their understanding of U.S. GAAP and internal control over financial reporting. |
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not Applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers, Key Employees and Directors
The following table sets forth certain information concerning our executive officers, key employees, and directors:
| Name | Age | Position | ||
| Renmei Ouyang | 55 | Chief Executive Officer, President and Chairwoman of the Board | ||
| Tianshi (Stanley) Yang | 33 | Chief Financial Officer, Director | ||
| Xiangjun Wang | 50 | Director | ||
| Heung Ming (Henry) Wong | 53 | Director | ||
| Donghong Xiong | 55 | Director |
The biographies of our current directors and officers are set forth below.
Ms. Renmei Ouyang, has served as the Chief Executive Officer (“CEO”) of the Company since January 9, 2020. From October 17, 2019 to January 9, 2020, Ms. Ouyang has served as the chief operating officer of the Company. Ms. Ouyang has served as the chairwoman of Tongdaw Group from 2011 to September 2019. She was the founder of Tongdaw E-Commerce in 2011. Ms. Ouyang was the founder of Zhonghui Daoming Group in 2006. She has served as the foreign exchange trading manager of CITIC Group, the deputy general manager in investment banking department of Beijing Securities, and the managing director of the international department of First Venture Securities. She holds a bachelor’s degree in statistics from Renmin University of China and a master’s degree in international finance from Peking University.
Mr. Tianshi (Stanley) Yang, has served as the chief financial officer and director since June 11, 2021. Mr. Yang served as the head of investor relations of Aesthetic Medical International Holdings Group Ltd. (NASDAQ: AIH) from March 2020 to May 2021 and as the financial department director of Meten EdtechX Education Group (NASDAQ: METX) from January 2019 to February 2020. From May 2016 to October 2018, Mr. Yang served as the investment director of China First Capital Group, a company listed on the Hong Kong Stock Exchange (SEHK: 01269). Mr. Yang has also served as a senior auditor at Ernst & Young from September 2011 to December 2013. Mr. Yang graduated from Tianjin University of Finance and Economics in Tianjin, China with a bachelor’s degree in financial engineering, and obtained a master’s degree in finance from Brandeis University.
Mr. Xiangjun Wang, has served as a member of the Board since December 14, 2020 and as a partner and practicing lawyer of Beijing Junzejun (Shenzhen) Law Firm since 2010. From 2008 to 2010, he practiced as a lawyer of Guangdong Shenpeng Law Firm. Mr. Wang served as the managing director of Shenzhen investment banking department of Pacific Securities Co., Ltd. from 2006 to 2008. He served as the deputy general manager of Ruigu Technology (Shenzhen) Co., Ltd. from 2003 to 2006. From 1999 to 2003, Mr. Wang worked in the supply chain management department and legal department of Huawei Technologies Co., Ltd. He is a licensed attorney and also a certified public accountant in China. Mr. Wang obtained his bachelor’s degree in theory of mechanical system and applied mechanics from Lanzhou University and his master’s degree in solid mechanics from Lanzhou University in 1999.
Mr. Heung Ming (Henry) Wong, was the independent non-executive director of Shifang Holding Limited (SEHK: 1831) and Raffles Interiors Limited (SEHK: 1376) since November 8, 2010 and March 30, 2020 respectively. Both companies are listed on the Main Board of the Hong Kong Stock Exchange. Mr. Wong has more than 27 years of experience in finance, accounting, internal controls and corporate governance in the United States, Singapore, China and Hong Kong. Prior to that, Mr. Wong was the chief financial officer of a Nasdaq listed Company, Meten EdtechX Education Group Ltd (NASDAQ: METX) from June 2020 to March 2021. Mr. Wong was also the chief financial officer and senior finance executive of various companies including being the chief financial officer of the Frontier Services Group Limited, a company listed on the Main Board of the Stock Exchange (stock code: 0500) and the chief financial officer of Beijing Oriental Yuhong Waterproof Technology Co., Ltd., the leading waterproof materials manufacturer in China and a company listed on the Shenzhen Stock Exchange (SZSE: 2271). Mr. Wong began his career in an international accounting firm and moved along in audit fields by taking some senior positions both in internal and external audits including being a senior manager and a manager in PricewaterhouseCoopers, Beijing office and Deloitte Touche Tohmatsu, Hong Kong, respectively. Mr. Wong graduated from City University of Hong Kong in 1993 with a bachelor’s degree in accountancy and also obtained a master’s degree in electronic commerce from The Open University of Hong Kong in 2003. He is a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants.
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Mr. Donghong Xiong, has served as the managing director of Synergetic Innovation Fund Management Co., LTD. since 2014. He served as the M&A general manager at Shanghai Search Media Group from 2007 to 2013. Mr. Xiong holds a bachelor’s degree in philosophy from Sun Yat-Sen University and also received his MBA and PhD in scientific philosophy from Sun Yat-Sen University.
Director Independence
Our Board reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, it is determined that Heung Ming (Henry) Wong, Xiangjun Wang and Donghong Xiong are “independent directors” as defined by NASDAQ.
Committees of the Board of Directors
We have established an audit committee, a compensation committee and a nominating and governance committee. Each of the committees of the Board has the composition and responsibilities described below.
Audit Committee
Xiangjun Wang, Donghong Xiong, and Heung Ming (Henry) Wong are members of our Audit Committee, where Heung Ming (Henry) Wong serves as the chairman. All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.
We have adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee shall perform several functions, including:
| ● | evaluates the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor; | |
| ● | approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to be provided by the independent auditor; |
| ● | monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law; | |
| ● | reviews the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements; | |
| ● | oversees all aspects of our systems of internal accounting control and corporate governance functions on behalf of the Board; | |
| ● | reviews and approves in advance any proposed related-party transactions and reports to the full Board on any approved transactions; and | |
| ● | provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley Act implementation, and makes recommendations to the Board regarding corporate governance issues and policy decisions. |
It is determined that Heung Ming (Henry) Wong possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations of the SEC.
Compensation Committee
Xiangjun Wang, Donghong Xiong and Heung Ming (Henry) Wong are members of our Compensation Committee where Donghong Xiong serves as the chairwoman. All members of our Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ. We have adopted a charter for the Compensation Committee. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and making recommendations to the Board regarding the salaries and other compensation of our executive officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices.
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Nominating and Governance Committee
Xiangjun Wang, Donghong Xiong and Heung Ming (Henry) Wong are the members of our Nominating and Governance Committee where Xiangjun Wang serves as the chairman. All members of our Nominating and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ. Our Board adopted and approved a charter for the Nominating and Governance Committee. According to the Nominating and Governance Committee’s Charter, the Nominating and Governance Committee is responsible for identifying and proposing new potential director nominees to the board of directors for consideration and review our corporate governance policies.
Code of Conduct and Ethics
We have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and NASDAQ rules. A copy of such code of conduct and ethics will be provided free of charge upon request made to our principal executive office.
Section 16 Compliance
Section 16(a) of the Exchange Act, requires our directors, officers and persons who own more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other of our equity securities. To our knowledge, based solely on review of the copies of such reports furnished to us, Section 16(a) filings applicable to officers, directors and greater than 10% shareholders were timely made during the fiscal year 2022.
Family Relationships
There are no family relationships between or among the members of the Board or other executive officers of the Company.
Legal Proceedings Involving Officers and Directors
To the knowledge of the Company after reasonable inquiry, no Director Nominee during the past ten years, or any promoter who was a promoter at any time during the past five fiscal years, has (1) been subject to a petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws; (4) been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3)(i) of this section, or to be associated with persons engaged in any such activity; (5) been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated; (6) been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; (7) been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any Federal or State securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (8) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act, as amended, any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29)), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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Item 11. Executive Compensation.
The following table provides disclosure concerning all compensation paid for services to GLG in all capacities for our fiscal years ended 2022 and 2021 provided by (i) each person serving as our principal executive officer (“PEO”), (ii) each person serving as our principal financial officer (“PFO”) and (iii) our two most highly compensated executive officers other than our PEO and PFO whose total compensation exceeded $100,000 (collectively with the PEO, referred to as the “named executive officers” in this Executive Compensation section).
Summary Compensation Table
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Other Compensation ($) | Total ($) | ||||||||||||||||||||
| Renmei Ouyang (1) | 2022 | 600,000 | - | - | - | - | 600,000 | ||||||||||||||||||||
| (CEO, Former COO) | 2021 | 600,000 | - | - | - | - | 600,000 | ||||||||||||||||||||
| Tianshi (Stanley) Yang (2) | 2022 | 78,800 | - | - | - | - | 78,800 | ||||||||||||||||||||
| (CFO) | 2021 | 51,174 | - | - | - | - | 51,174 | ||||||||||||||||||||
| (1) | Ms. Renmei Ouyang was appointed as the CEO of the Company on January 9, 2020. Ms. Renmei is entitled to an annual base salary of $600,000 pursuant to the employment agreement she has with the Company. |
| (2) | Mr. Tianshi (Stanley) Yang was appointed as the CFO of the Company on June 11, 2021. |
Grants of Plan Based Awards in the Fiscal Year Ended December 31, 2022
During the fiscal year ended December 31, 2022, no shares of common stock were granted to our officers and directors under the plan.
Outstanding Equity Awards at Fiscal Year-End
None.
Director Compensation
The following table represents compensation earned by our non-executive directors in 2022.
| Name | Fees earned in cash ($) | Stock awards ($) | Option awards ($) | All other compensation ($) | Total ($) | |||||||||||||||
| Xiangjun Wang (1) | $ | - | 23,400 | - | - | 23,400 | ||||||||||||||
| Heung Ming (Henry) Wong (2) | $ | - | 35,100 | - | - | 35,100 | ||||||||||||||
| Donghong Xiong (3) | $ | - | 11,700 | - | - | 11,700 | ||||||||||||||
| (1) | Mr. Xiangjun Wang was appointed as a director of the Company on December 14, 2020 and has received annual compensation of 20,000 shares of common stock of the Company during 2022, about $23,400 value. |
| (2) | Mr. Heung Ming (Henry) Wong was appointed as a director of the Company on April 27, 2021 and shall receive annual compensation of 30,000 shares of common stock of the Company per year, and during 2022 he received annual compensation of 30,000 shares of common stock of the Company, about $23,400 value. |
| (3) | Mr. Donghong Xiong was appointed as a director of the Company on February 8, 2021 and shall receive annual compensation of 10,000 shares of common stock of the Company per year. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the beneficial ownership of our common stock as of March 3, 2023 by our officers, directors and 5% or greater beneficial owners of common stock. There is no other person or group of affiliated persons, known by us to beneficially own more than 5% of our common stock.
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We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Unless otherwise indicated, the person identified in this table has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to applicable community property laws.
| Name and address of Beneficial Owner (1) | Number of Shares of Common Stock Beneficially Owned | Percent of Class Beneficially Owned | ||||||||
| 5% stockholders: | ||||||||||
| Shuxiang Zhang (2) | 27,934,000 | 19.34 | % | |||||||
| Katie Ou | 11,442,996 | 7.92 | % | |||||||
| Chaoliang Yang | 10,750,000 | 7.44 | % | |||||||
| Qing Ouyang | 7,550,000 | 5.23 | % | |||||||
| Directors and Executive Officers: | ||||||||||
| Renmei Ouyang | - | * | ||||||||
| Donghong Xiong | - | * | ||||||||
| Tianshi (Stanley) Yang | - | * | ||||||||
| Heung Ming (Henry) Wong | 30,000 | * | ||||||||
| Xiangjun Wang | 30,000 | * | ||||||||
| All officers and directors as a group (9 persons) | 57,736,996 | 39.98 | % | |||||||
| * | Less than 1% |
| (1) | Unless otherwise indicated the address of the beneficial owners are c/o 139, Xinzhou 11th Street, Futian District, Shenzhen, Guangdong, PRC 518000. |
| (2) | Mr. Shuxiang Zhang’s address is Floor 7 Building D, No.28 Chengfu Road, Haidian District, Beijing, China. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
1) Nature of relationships with related parties
| Name | Relationship with the Company | |
| Guangzhou Chengji Investment Development Co., Ltd. (“Guangzhou Chengji”) | Controlled by Mr. Weicheng Pan, who is a former independent director of the Company. | |
| Yunfeihu International E-commerce Group Co., Ltd (“Yunfeihu”) | An affiliate of the Company, over which an immediate family member of chief executive officer owns equity interest and plays a role of director and senior management | |
| Shenzhen Tongdow International Trade Co., Ltd. (“TD International Trade”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Beijing Tongdow E-commerce Co., Ltd. (“Beijing TD”) | Wholly owned by Tongdow E-commerce Group Co., Ltd. which is controlled by an immediate family member of chief executive officer of the Company | |
| Shanghai Tongdow Supply Chain Management Co., Ltd. (“Shanghai TD”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Guangdong Tongdow Xinyi Cable New Material Co., Ltd. (“Guangdong TD”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Yangzhou Tongdow E-commerce Co., Ltd. (“Yangzhou TD”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Tongdow (Zhejiang) Supply Chain Management Co., Ltd. (“Zhejiang TD”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Shenzhen Meifu Capital Co., Ltd. (“Shenzhen Meifu”) | Controlled by chief executive officer of the Company | |
| Shenzhen Tiantian Haodian Technology Co., Ltd. (“TTHD”) | Wholly owned by Shenzhen Meifu | |
| Hainan Tongdow International Trade Co., Ltd. (“Hainan TD”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Yunfeihu modern logistics CO., Ltd (“Yunfeihu Logistics”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Shenzhen Tongdow Jingu Investment Holding Co., Ltd (“Shenzhen Jingu”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Tongdow E-commerce Group Co., Ltd (“TD E-commerce”) | Controlled by an immediate family member of chief executive officer of the Company | |
| Katie Ou | Shareholder of TD Holdings Inc |
42
2) Balances with related parties
As of December 31, 2022 and 2021, the balances with related parties were as follows:
Due from related parties
| December 31, 2022 | December 31, 2021 | |||||||
| Yunfeihu (i) | $ | - | $ | 11,358,373 | ||||
| Total due from related parties | $ | - | $ | 11,358,373 | ||||
| (i) | The balance due from Yunfeihu represented loans provided to the related party. Both the principal and interest have been due in May 2022, with an interest rate of 10.95% per annum. |
| - | Due to related parties |
| December 31, 2022 | December 31, 2021 | |||||||
| TD E-commerce | $ | 38,767,481 | $ | - | ||||
| Other related parties | - | 21,174 | ||||||
| Total due to related parties | $ | 38,767,481 | $ | 21,174 | ||||
3) Transactions with related parties
Revenues generated from related parties:
For the years ended December 31, 2022 and 2021, the Company generated revenues from below related party customers:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue from sales of commodity products | ||||||||
| Yunfeihu | $ | - | $ | 22,403,309 | ||||
| Yangzhou TD | - | 1,646,690 | ||||||
| Total revenues generated from related parties | $ | - | $ | 24,049,999 | ||||
Purchases from a related party:
For the years ended December 31, 2022 and 2021, the Company purchased commodity products from below related party vendors:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Purchase of commodity products | ||||||||
| Yangzhou TD | $ | - | $ | 7,998,963 | ||||
| Yunfeihu | - | 1,643,472 | ||||||
| TD International Trade | - | 1,124,753 | ||||||
| Hainan TD | - | 3,700,921 | ||||||
| Zhejiang TD | - | 7,974,703 | ||||||
| $ | - | $ | 22,442,812 | |||||
43
Item 14. Principal Accountant Fees and Services.
The following table shows the fees that were billed for audit and other services during the fiscal years ended December 31, 2022 and 2021:
| For the Fiscal Years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Audit Fees (1) | $ | 237,715 | $ | 339,000 | ||||
| Audit-related Fees (2) | 88,500 | 2,000 | ||||||
| Tax Fees (3) | - | - | ||||||
| All Other Fees (4) | - | - | ||||||
| Total | $ | 326,215 | $ | 341,000 | ||||
| (1) | Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements. |
| (2) | Audit-Related Fees - This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” |
| (3) | Tax Fees - This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. |
| (4) | All Other Fees - This category consists of fees for other miscellaneous items. |
The Audit Committee of our board of directors has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit, tax and non-audit services provided by Audit Alliance LLP in 2022 and 2021. Consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed services and fee estimates for these services. One or more independent directors serving on the Audit Committee may be delegated by the full Audit Committee to pre-approve any audit and non-audit services. Any such delegation shall be presented to the full Audit Committee at its next scheduled meeting. Pursuant to these procedures, the Audit Committee approved the foregoing audit services provided by Audit Alliance LLP.
44
PART IV
Item 15. Exhibits, Financial Statement Schedules.
| (1) | Financial Statements |
Financial Statements and Report of Independent Registered Public Accounting Firms are set forth on pages F-1 through F-36 of this report.
| (2) | Financial Statement Schedules |
Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is given in the consolidated financial statements or the notes thereto.
| (3) | Exhibits |
45
| * | Filed herewith. |
| ** | Furnished herewith. |
46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TD HOLDINGS, INC. | ||
| Date: March 10, 2023 | By: | /s/ Renmei Ouyang |
| Name: | Renmei Ouyang | |
| Title: | Chief Executive Officer and (Principal Executive Officer) | |
| By: | /s/ Tianshi (Stanley) Yang | |
| Name: | Tianshi (Stanley) Yang | |
| Title: | Chief Financial Officer and Director (Principal Financial and Accounting Officer) | |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Renmei Ouyang | Chief Executive Officer and | March 10, 2023 | ||
| Renmei Ouyang | Chairwoman of the Board (Principal Executive Officer) |
|||
| /s/ Tianshi (Stanley) Yang | Chief Financial Officer and Director | March 10, 2023 | ||
| Tianshi (Stanley) Yang | (Principal Financial Officer and Principal Accounting Officer) |
|||
| /s/ Xiangjun Wang | Director | March 10, 2023 | ||
| Xiangjun Wang | ||||
| /s/ Heung Ming (Henry) Wong | Director | March 10, 2023 | ||
| Heung Ming (Henry) Wong | ||||
| /s/ Donghong Xiong | Director | March 10, 2023 | ||
| Donghong Xiong |
47
TD HOLDINGS, INC.
(FORMERLY BAT GROUP, INC.)
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
TD Holdings, Inc and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of TD Holdings, Inc and its subsidiaries. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity and cash flows, for the year ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the year ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America(“U.S. GAAP”).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that were material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
F-2
Valuation of Loans Receivable
As described in Note 4 to the financial statements, the Company monitors all loans receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. As disclosed in the Note 4 to the financial statements, the balances of loans receivable from third parties were $143.17 million as of December 31, 2022.
The principal considerations for our determination that auditing management’s assessment of impairment of loans receivable is a critical audit matter included the significant judgment made by management when considering factors in assessing collectability of the loan receivables as described above, as well as the likelihood of the occurrence of these factors impacting the collectability. In turn, such management’s assessment led to challenging and subjective auditor judgment in performing our audit procedures.
Our audit of valuation of loans receivable included, but was not limited to, the following procedures:
|
● | understanding of controls relating to management assessment of the loans receivable allowance; |
|
● | reviewing management’s impairment assessment, including its supporting evidence such as subsequent repayments; |
|
● | examining original transaction related documents; |
|
● | confirming balance with the borrowers; |
|
● | searching public information for the operating and financial conditions of the borrowers; |
|
● | evaluating the sufficiency of the Company’s disclosures to loans receivable. |
Goodwill-Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Baiyu”) and Shenzhen Tongdow Internet Technology Co., Ltd. (“Tongdow Internet Technology”)
As described in Note 2 and Note 3 to the consolidated financial statements, the Company acquired the Baiyu and Tongdow Internet Technology in 2020 and 2022, respectively. The goodwill arising on this acquisition amounted to $65.02 million and $95.19 million, respectively, as of December 31,2022.
Management assessed goodwill for potential impairment as of December 31 2022 by comparing the carrying amount of the cash-generating unit to which goodwill has been allocated with the recoverable amount determined by assessing the value-in-use (“VIU”) by preparing a discounted cash flow forecast. Preparing a discounted cash flow forecast involves the exercise of significant management judgement, in particular in forecasting revenue growth and operating profit and in determining an appropriate discount rate
The Company’s balance of goodwill allocated to Baiyu and Tongdow Internet Technology as of December 31,2022 was $65.02 million and $95.19 million, respectively. Goodwill is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company has elected to perform quantitative assessment. In the quantitative assessment, the Company’s evaluation of goodwill for impairment involves the comparison of the fair value of Baiyu and Tongdow Internet Technology to their carrying value. The Company used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to discount rates and forecasts of future revenues and operating margins. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge. Based on the quantitative assessment performed, if it is more likely than not that the fair value is less than its carrying amount. During the year ended December 31, 2022, no impairment charge on goodwill was recognized based on the quantitative assessment performed.
F-3
We identified goodwill impairment for the Baiyu and Tongdow Internet Technology as a critical audit matter because it is the material to the consolidated financial statements of the Company and certain significant judgments in respect of the assumption made which are inherently uncertain and could be subject to management bias made by management to estimate the fair value of the Baiyu and Tongdow Internet Technology and the difference between its fair value and carrying value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue and operating margin.
Our audit procedures relating to the discount rate and forecasts of future revenue and operating margin used by management to estimate the fair value of the Baiyu and Tongdow Internet Technology included the following, among others:
| ● | We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual results to management’s historical forecasts. | |
| ● | We evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to historical revenues and operating margins. | |
| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: |
| a. | Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation; | |
| b. | Developing a range of independent estimates and comparing those to the discount rate selected by management. |
/s/
March 10, 2023
PCAOB ID Number is
We have served as the Company’s auditor since 2021.
F-4
TD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2022 and 2021
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Loans receivable from third parties | ||||||||
| Due from related parties | ||||||||
| Inventories, net | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-Current Assets | ||||||||
| Plant and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right-of-use assets, net | ||||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Bank borrowings | ||||||||
| Third party loans payable | ||||||||
| Advances from customers | ||||||||
| Due to related parties | ||||||||
| Income tax payable | ||||||||
| Lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Convertible promissory notes | ||||||||
| Total current liabilities | ||||||||
| Non-Current Liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Lease liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 17) | ||||||||
| Shareholders’ Equity | ||||||||
| Additional paid-in capital | ||||||||
| Statutory surplus reserve | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive (loss)income | ( | ) | ||||||
| Total TD Shareholders’ Equity | ||||||||
| Non-controlling interest | ( | ) | ||||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
| * |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
TD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2022 and 2021
(Expressed in U.S. dollars, except for the number of shares)
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Sales of commodity products - third parties | $ | $ | ||||||
| Sales of commodity products - related parties | ||||||||
| Supply chain management services - third parties | ||||||||
| Total Revenues | ||||||||
| Cost of revenues | ||||||||
| Commodity product sales - third parties | ( | ) | ( | ) | ||||
| Commodity product sales - related parties | ( | ) | ||||||
| Supply chain management services - third parties | ( | ) | ( | ) | ||||
| Total operating costs | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling, general, and administrative expenses | ( | ) | ( | ) | ||||
| Share-based payment for service | ( | ) | ( | ) | ||||
| Total operating expenses | ( | ) | ( | ) | ||||
| Other income (expenses), net | ||||||||
| Interest income | ||||||||
| Interest expenses | ( | ) | ( | ) | ||||
| Amortization of beneficial conversion feature relating to issuance of convertible promissory notes | ( | ) | ( | ) | ||||
| Other income (expense), net | ( | ) | ||||||
| Total other income, net | ||||||||
| Net income from continuing operations before income taxes | ||||||||
| Income tax expenses | ( | ) | ( | ) | ||||
| Net income (loss) | ( | ) | ||||||
| Less: Net loss attributable to non-controlling interests | ( | ) | ||||||
| Net income(loss) attributable to TD Holdings, Inc.’s Stockholders | $ | $ | ( | ) | ||||
| Other comprehensive income(loss) | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Comprehensive (loss) income | ( | ) | ||||||
| Less: Total comprehensive loss attributable to non-controlling interests | ( | ) | ||||||
| Comprehensive (loss) income attributable to TD Holdings, Inc. | ( | ) | ||||||
| Weighted Average Shares Outstanding-Basic | ||||||||
| Weighted Average Shares Outstanding- Diluted | ||||||||
| income (loss) per share- basic | $ | $ | ( | ) | ||||
| income (loss) per share- diluted | $ | $ | ( | ) | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
TD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in U.S. dollars, except for the number of shares)
| Additional | Statutory | Accumulated
other | Non- | |||||||||||||||||||||||||||||
| Common stock | paid-in | surplus | Accumulated | comprehensive | controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | capital | reserve | deficit | income (loss) | interest | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common stocks in connection with private placements | ||||||||||||||||||||||||||||||||
| Issuance of common stocks pursuant to exercise of warrants | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common stocks pursuant to registered direct offering | ||||||||||||||||||||||||||||||||
| Share-based payment for service | ||||||||||||||||||||||||||||||||
| Issuance of common stocks pursuant to exercise of convertible promissory notes | ||||||||||||||||||||||||||||||||
| Beneficial conversion feature relating to issuance of convertible promissory notes | - | |||||||||||||||||||||||||||||||
| Appropriation of statutory reserve | - | ( | ) | - | ||||||||||||||||||||||||||||
| Net income | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common stocks in connection with private placements | - | - | - | |||||||||||||||||||||||||||||
| Issuance of common stocks pursuant to exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Beneficial conversion feature relating to issuance of convertible promissory notes | - | |||||||||||||||||||||||||||||||
| Appropriation of statutory reserve | - | ( | ) | |||||||||||||||||||||||||||||
| Net income | - | ( | ) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Acquisition of Tongdao Internet | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| * | Retrospectively restated due to five for one Reverse Stock Split, see Note 13 - Reverse stock split of common stock. |
The accompanying notes are an integral part of the consolidated financial statements.
F-7
TD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022 and 2021
(Expressed in U.S. dollar)
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation of plant and equipment | ||||||||
| Amortization of right-of-use lease assets | ||||||||
| (Gain) loss on disposal of right-of-use lease assets | ( | ) | ||||||
| Amortization of intangible assets | ||||||||
| Amortization of beneficial conversion feature of convertible promissory notes | ||||||||
| Interest expense for convertible promissory notes | ||||||||
| Amortization of discount on convertible promissory notes | ||||||||
| Share-based payment for service | ||||||||
| Standstill fee relating to convertible promissory notes | ||||||||
| Monitoring fee relating to convertible promissory notes | ||||||||
| Amortization of beneficial conversion feature relating to issuance of convertible promissory notes | ||||||||
| Inventories impairment | ||||||||
| Deferred tax liabilities | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities, (net of assets and liabilities acquired and disposed): | ||||||||
| Other current assets | ||||||||
| Inventories | ( | ) | ||||||
| Prepayments | ( | ) | ||||||
| Due from related parties | ( | ) | ( | ) | ||||
| Advances from customers | ( | ) | ( | ) | ||||
| Due from third parties | ( | ) | ( | ) | ||||
| Income tax payable | ||||||||
| Due to related parties | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Lease liabilities | ( | ) | ||||||
| Due to third party loans payable | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of intangible assets | ( | ) | ||||||
| Purchases of plant and equipment | ( | ) | ( | ) | ||||
| Purchases of operating lease assets | ( | ) | ( | ) | ||||
| Investment in subsidiary, net of cash acquired | ( | ) | ( | ) | ||||
| Payment made on loans to third parties | ( | ) | ( | ) | ||||
| Collection of loans from third parties | ||||||||
| Collection of loans from related parties | ||||||||
| Investments in other investing activities | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayments made on loans to third parties | ( | ) | ( | ) | ||||
| Repayment made on loans to related parties | ( | ) | ||||||
| Proceeds from issuance of common stock under ATM transaction | ||||||||
| Proceeds from issuance of common stock under private placement transactions | ||||||||
| Proceeds from issuance of convertible promissory notes | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of Exchange Rate Changes on Cash | ||||||||
| Net (Decrease)/Increase in Cash | ( | ) | ||||||
| Cash, Beginning of Year | ||||||||
| Cash from continuing operations | $ | $ | ||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
| Issuance of common stocks in connection with conversion of convertible promissory notes | $ | $ | ||||||
| Issuance of common stocks in exchange of investments in one equity investee | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-8
TD HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND BUSINESS DESCRIPTION |
The Company conducts business through Shanghai Jianchi Supply chain Co.,Ltd, a subsidiary of the Company, which is engaged in the commodity trading business and providing supply chain management services to customers in the PRC. Supply chain management services consist of loan recommendation services and commodity product distribution services. The Company incorporated Hainan Jianchi Import and Export Co., Ltd, a subsidiary of Shanghai Jianchi, and Hainan Baiyu Cross-border e-commerce Limited, a subsidiary of Tongdow HK, Hainan Baiyu Cross-border e-commerce Limited, a subsidiary of Tongdow HK, and Yangzhou Baiyu Cross-border e-commerce Limited, a subsidiary of Yangzhou Baiyu VC in 2022.
| Name | Background | Ownership | ||
| |
F-9
| 1. | ORGANIZATION AND BUSINESS DESCRIPTION (CONTINUED) |
The following diagram illustrates our corporate structure as of the December 31, 2022.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation.
Business combination
The Company accounted for its business
combination using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”. The cost of an
acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the
Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred.
Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective
of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests
and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net
assets of the acquiree is recorded as goodwill.If the cost of acquisition is less than the acquisition date amounts of the net assets
of the subsidiary acquired, the difference is recognized directly in the consolidated income statements. During the measurement period,
which can be up to
In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements.
When there is a change in ownership interests or a change in contractual arrangements that results in a loss of control of a subsidiary, the Company deconsolidates the subsidiary from the date control is lost. Any retained non-controlling investment in the former subsidiary is measured at fair value and is included in the calculation of the gain or loss upon deconsolidation of the subsidiary.
F-10
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are all entities (including structured entities) over which the Company has control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date on that control ceases.
In preparing the consolidated financial statements, transactions, balances and unrealised gains on transactions between group entities are eliminated. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment indicator of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
Acquisitions
The acquisition method of accounting is used to account for business combinations entered into by the Company.
The consideration transferred for the acquisition of a subsidiary or business combination comprises the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred also includes any contingent consideration arrangement and any pre-existing equity interest in the subsidiary measured at their fair value at the acquisition date.
Disposals
When a change in the Company’s ownership interest in a subsidiary results in a loss of control over the subsidiary, the assets and liabilities of the subsidiary including any goodwill are derecognised. Amounts previously recognised in other comprehensive income in respect of that entity are also reclassified to profit or loss or transferred directly to retained earnings if required by a specific Standard.
Any retained equity interest in the entity is remeasured at fair value. The difference between the carrying amount of the retained interest at the date when control is lost and its fair value is recognised in profit or loss.
Please refer to the paragraph “Investments in subsidiaries” for the accounting policy on investments in subsidiaries in the separate financial statements of the Company.
Investments in subsidiaries
Investments in subsidiaries are carried at cost less accumulated impairment losses in the Company’s balance sheets. On disposal of investments in subsidiaries, the difference between disposal proceeds and the carrying amounts of the investments are recognised in profit or loss.
F-11
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews these estimates using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. Significant accounting estimates reflected in the financial statements include: (i) useful lives and residual value of long-lived assets; (ii) the impairment of long-lived assets and investments; (iii) the valuation allowance of deferred tax assets; (iv) estimates of allowance for doubtful accounts, including loans receivable from third parties and related parties, and (v) contingencies and litigation.
Fair value measurement
The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:
| Level 1 | – | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2 | – | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| Level 3 | – | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The carrying value of financial items of the Company, including cash and cash equivalents, loans receivable due from third parties, accounts receivable, due from related parties, bank borrowings, third parties loans payable, other current liabilities and acquisition payable, approximate their fair values due to their short-term nature.
The inputs used to measure the estimated fair value of warrants are classified as Level 3 fair value measurement due to the significance of unobservable inputs using company-specific information. The valuation methodology used to estimate the fair value of warrant liabilities is discussed in Note 9.
Cash and cash equivalents
Cash includes cash on hand and demand deposits in accounts maintained with commercial banks. The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains most of its bank accounts in the PRC. Cash balances in bank accounts in the PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
Loans receivable from third parties
The Company provided loans to certain third parties for the purpose of making use of its cash.
The Company monitors all loans receivable for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. Management periodically assesses the collectability of these loans receivable. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of December 31, 2021 and 2020, the Company did not accrue allowance against loans receivables due from third parties.
F-12
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Prepayments and other current assets, net
Prepayment and other current assets, net, primarily consists of advances to suppliers for purchasing goods and the interest receivables. These advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.
Inventories, net
Inventories of the Company are bulk commodities products, such as precious metals. Inventories are stated at the lower of cost or net realizable value. Costs of inventory are determined using the first-in first-out method. Adjustments to reduce the cost of inventories are made, if required, for decreases in sales prices, obsolescence or similar reductions in the estimated net realizable value.
We keep inventory for our direct sales model. Our inventory control policy requires us to monitor our inventory level and to manage obsolete inventory. Risk is passed to our customers (or to delivery service providers) upon the delivery of commodities to our customers. For a substantial majority of precious metal sold through our network, the whole transaction process takes from a few hours to a few days, thus our inventory risk is limited. For a small portion of our transactions under direct sales model, we hold inventories for repeating customers with relatively stable demands of large quantity based on our transaction data. We analyze historical sales data and days in inventory to establish inventory management plans. We monitor our real-time inventory volume and adjust our inventory management plans based on factors such as fluctuations in supply and prices, seasonality, and sales of a particular product.
Plant and equipment, net
Plant and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use.
Depreciation is computed on a straight-line
basis over the estimated useful lives of the related assets. The estimated useful lives for significant plant and equipment are
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized.
Intangible assets
The Company’s intangible assets consist
of customer relationships and software copyright, the customer relationships are generally recorded in connection with acquisitions at
their fair value and the software copyrights are purchased in March 2021 and recorded in connection with Shenzhen Tongdow Internet Technology
acquisition. Intangible assets with estimable lives are amortized, generally on a straight-line basis, over their respective estimated
useful lives of
Goodwill
Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.
The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the opinion to assess qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.
The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. The fair value of discounted cash flow was determined using management’s estimates and assumptions.
For the year ended December 31, 2022, the Company did not record an impairment loss against goodwill.
F-13
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Impairment of long-lived assets other than goodwill
Long-lived assets, including intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values.
For the year ended December 31, 2022, the Company did not record an impairment loss against intangible assets.
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.
Account and other payables
Account and other payables represent liabilities for goods
and services provided to the Company prior to the end of financial year which are unpaid. They are classified as current liabilities
if payment is due within
Account and other payables are initially recognised at fair value, and subsequently carried at amortised cost using the effective interest method.
Bank borrowings
Borrowings are presented as current liabilities unless the Company has an unconditional right to defer settlement for at least 12 months after the financial year end date, in which case they are presented as non-current liabilities.
Borrowings are initially recognised at fair value (net of transaction costs) and subsequently carried at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using effective interest method.
Borrowing costs are recognised in profit or loss using the effective interest method.
F-14
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Commitments and contingencies
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for the contingencies are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.
Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses these contingent liabilities, which inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in legal proceedings, the Company, in consultation with its legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of the reasonably possible loss, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Statutory reserves
In accordance with the relevant regulations
and their articles of association, subsidiaries of the Company incorporated in the PRC are required to allocate at least
Provisions
Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.
Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised in profit or loss as finance expense.
Changes in the estimated timing or amount of the expenditure or discount rate are recognised in profit or loss when the changes arise.
Related parties
The Company follows subtopic 850-10 of the FASB ASC for the identification of related parties and disclosure of related party transactions. Pursuant to Section 850-10-20, related parties include: (a) affiliates of the Company; (b) entities for which investments in their equity securities would be required, absent the election of the FV option under the FV Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
F-15
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Revenue recognition
The Company generates revenue associated with commodity trading and revenue associated with supply chain management services are accounted for in accordance with ASC 606.
ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. This new guidance provides a five-step analysis in determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Revenue from sales of commodity products
In December 2019, the Company started its commodity trading business through its subsidiary Shenzhen Huamucheng Trading Co., Ltd, which was renamed Shenzhen Baiyu Jucheng Data Technology Co., Ltd (“Shenzhen Baiyu Jucheng”) in 2021. The commodity trading business primarily involves purchasing non-ferrous metal product (such as aluminum ingots, copper, silver, and gold) from metal and mineral suppliers and then selling to customers. The Company makes advance payments to suppliers to purchase the metal products, requests suppliers to ship products to designated warehouse. Upon obtaining purchase orders and receipt of full advance payments from customers, the Company instructs warehouse agent to transfer ownership of products to customers. The transaction is normally completed within a short period of time, ranging from a few days to a month.
The Company’s contracts with customers for metal commodity trading are fixed-price contracts. The Company does not grant customers with incentives or return rights, and therefore, there is no variable considerations derived from the contracts. The Company acts as the principal because the Company is responsible for fulfilling the promise to provide the specified metal products to customers, is subject to inventory risk before the product ownership and risk are transferred and has the discretion in establishing prices. As a result, revenue is recognized on a gross basis. The Company recognizes revenue when the product ownership is transferred to its customers as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is required before payment is made.
Revenue from supply chain management services
In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help metal and mineral suppliers to sell their metal products, the Company launched its supply chain management service business as defined below:
Loan recommendation service fees
The Company recommends customers who have financing need for commodity trading to various financial institutions and assist these customers to obtain loans from the financial institutions. The Company’s services include conducting customer screening and credit check, matching customer with right financial institution and assisting in customer’s applications and related paperwork etc. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by customer.
F-16
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Commodity distribution service fees
The Company utilizes its sales and marketing expertise
and customer network to introduce customers to large metal and mineral suppliers, and facilitate metal product sales between the suppliers
and the customers. The Company merely acts as an agent in this type of transaction and earns a commission fee based on the percentage
of volume of metal products that customers purchase. Distribution service fees are recognized as revenue when the Company successfully
facilitates sales transactions between suppliers and customers. For the year ended December 31, 2022, the Company earned commodity distribution
commission fees of $
Contract liabilities
The supply chain management service fees are collected either in advance to provision of services or after the services. In cases where fees are collected in advance, the fees are recorded as “advances from customers” in the consolidated balance sheets. Advance from customers is recognized as revenue when the Company delivers the supply chain management services to its customers.
Cost of revenue
Cost of revenue consists primarily of cost of inventories, logistics costs, expenses associated with the operation of the Company’s staff costs and other related incidental expenses that are directly attributable to the Company’s principal operations.
Beneficial conversion feature
The Company evaluates the conversion feature to determine whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible notes payable and may not be settled in cash upon conversion, is treated as a discount to the convertible notes payable. This discount is amortized over the period from the date of issuance to the date the notes is due using the effective interest method. If the notes payable are retired prior to the end of their contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.
Debt issuance costs and debt discounts
The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed.
Convertible promissory notes
Convertible promissory notes are recognized initially at fair value, net of upfront fees, debt discounts or premiums, debt issuance costs and other incidental fees. Upfront fees, debt discounts or premiums, debt issuance costs and other incidental fees are recorded as a reduction of the proceeds received and the related accretion is recorded as interest expense in the consolidated income statements over the estimated term of the facilities using the effective interest method.
F-17
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Value added tax
The Company is generally subject
to the value added tax (“VAT”) for selling sales of commodity products. and. Before May 1, 2018, the applicable VAT rate
was
Income taxes
The Company accounts for income taxes in accordance with the U.S. GAAP for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.
The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis. Deferred tax assets are recognized to the extent that it is probable that taxable income to be utilized with prior net operating loss carried forward. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
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
Loss per share
Basic loss per share is computed by dividing the net loss income by the weighted average number of common shares outstanding during the period. Diluted loss income per share is the same as basic loss income per share due to the lack of dilutive items in the Company. The number of warrants is excluded from the computation because of its anti-dilutive effect.
Share-based compensation
Share-based compensation granted to the Company’s senior management and nonemployees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of the underlying shares.
At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based compensation changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.
F-18
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Discontinued operation
In accordance with ASC 205-20, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and non-current liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
Foreign currency translation
The Company’s financial information is presented in U.S. dollars (“USD”). The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”), the currency of PRC. Any transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of operations as foreign currency transaction gain or loss. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. The financial information is first prepared in RMB and then translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Segment reporting
The Company had two operating business lines, business with metal products trading and supply chain management services business conducted by Shenzhen Baiyu Jucheng (“Commodity Trading and Supply Chain Management Services”) . The accounting policies of our one reportable segment are the same as those described in this Note 2.
Reclassification
Certain items in the financial statements of comparative period have been reclassified to conform to the financial statements for the current period, primarily for the effects of discontinued operations.
Recent accounting pronouncement
In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) “Financial Instruments - Credit Losses” (“ASC 326”): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASC 2019-10,”) which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for public entities which meet the definition of a smaller reporting company. The Company will adopt ASU 2016-13 effective January 1, 2023. Management is currently evaluating the effect of the adoption of ASU 2016-13 on the consolidated financial statements. The effect will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.
In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. Step two of the goodwill impairment test measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. As amended by ASU 2019-10, annual or interim goodwill impairment tests are performed in fiscal years beginning after December 15, 2022. We do not expect that the adoption of this guidance will have a material impact on our financial position, results of operations and cash flows.
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company will adopt ASU 2020-06 effective January 1, 2024. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
F-19
| 3. |
Significant acquisitions |
1) Acquisition Of Shenzhen Tongdow Internet Technology Co., Ltd.
On October 17, 2022, Shenzhen
Baiyu Jucheng, entered into a set of variable interest entity agreements with Shenzhen Tongdow Internet Technology Co., Ltd. (“Tongdow
Internet Technology”) and Shanghai Zhuotaitong Industry Co., Ltd., the sole shareholder of Tongdow Internet Technology. On October
25, 2022, the parties completed the transaction. Upon the closing of the transaction, Shenzhen Baiyu Jucheng acquired
The transaction was accounted for as a business combination using the purchase method of accounting in accordance with ASC 805-10-20. The purchase price allocation of the transaction was determined by the Company with the assistance of an independent appraisal firm based on the fair value of the assets acquired and liabilities assumed as of the acquisition date.
The following table presents the purchase price allocation to assets acquired and liabilities assumed for Shenzhen Tongdow Internet Technology Co., Ltd. as of the acquisition date:
| As of October 25, 2022 | ||||
| Cash and cash equivalents | $ | |||
| Other current assets | ||||
| Intangible assets (software copyrights) | ||||
| Other current liabilities | ( | ) | ||
| Non-controlling interest | ||||
| Goodwill (Note 7) | ||||
| Total purchase consideration | $ | |||
Changes in the carrying amount of goodwill for the year ended December 31, 2022 consisted of the following:
| As of December 31, 2021 | ||||
| Beginning balance | $ | |||
| Addition by the changes of foreign currency exchange rate | ||||
| Goodwill (Note 7) | $ | |||
The intangible assets mainly include
are software copyrights purchased. Intangible assets with estimable service life are usually amortized by the straight-line method according
to their estimated residual value within the estimated service life of
| For the year ended December 31, 2022 | Amortization expenses | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| $ | ||||
The goodwill of $
F-20
| 3. | SIGNIFICANT ACQUISITIONS (CONTINUED) |
Deferred tax liabilities arose from the temporary difference of intangible assets acquired from the acquisition.
The amounts of revenue and net loss of Tongdow Internet Technology included in the Company’s consolidated statement of income and other comprehensive income (loss) from the acquisition date to December 31, 2022 are as follows:
From | ||||
| Net revenue | $ | |||
| Net income | $ | ( | ) | |
The following table presents the Company’s unaudited pro forma results for the years ended December 31, 2022 and 2021, respectively, as if the Tongdow Internet Technology was acquired on January 1, 2021. The unaudited pro forma financial information presented includes the effects of adjustments related to the amortization of acquired intangible assets, and excludes other non-recurring transaction costs directly associated with the acquisition such as legal and other professional service fees. Statutory rates were used to calculate income taxes.
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Pro forma revenue | $ | $ | ||||||
| Pro forma net income (loss) | $ | (1) | )(1) | |||||
| Pro forma net income (loss) attributable to TD Holdings, Inc. | $ | (1) | )(1) | |||||
| Pro forma income (loss) per share - basic | $ | $ | ( | ) | ||||
| Pro forma income (loss) per share - diluted | ( | ) | ||||||
| Weighted average shares - basic | ||||||||
| Weighted average shares - diluted | ||||||||
| (1) |
| 2) | ACQUISITION OF QIANHAI BAIYU |
As of December 31, 2019, Qianhai Baiyu was identified as a related party of the Company, as Qianhai Biayu was controlled by Mr. Zhiping Chen, the legal representative of Huamucheng before March 31, 2020. On March 31, 2020, Mr. Zhiping Cheng transferred its equity interest in Qianhai Baiyu to Shenzhen Xinsuniao, and Qianhai Baiyu became a third party to the Company.
On October 26, 2020, the Company, through Huamucheng,
entered into certain share purchase agreements (the “SPA”) with Shenzhen Xinsuniao, to acquire
On the same date, the Company closed acquisition
of Qianhai Baiyu for an aggregated cash consideration of RMB
The transaction was accounted for as a business combination using the purchase method of accounting in accordance with ASC 805-10-20. The purchase price allocation of the transaction was determined by the Company with the assistance of an independent appraisal firm based on the fair value of the assets acquired and liabilities assumed as of the acquisition date.
F-21
| 3. | SIGNIFICANT ACQUISITIONS (CONTINUED) |
The following table presents the purchase price allocation to assets acquired and liabilities assumed for Qianhai Baiyu as of the acquisition date:
| As of October 26, 2020 | ||||
| Cash and cash equivalents | $ | |||
| Inventories | ||||
| Prepayments | ||||
| Other current assets | ||||
| Intangible assets (customer relationship) | ||||
| Bank borrowings | ( | ) | ||
| Advances from customers | ( | ) | ||
| Taxes payable | ( | ) | ||
| Other current liabilities | ( | ) | ||
| Deferred tax liabilities | ( | ) | ||
| Goodwill (Note 7) | ||||
| Total purchase consideration | $ | |||
Changes in the carrying amount of goodwill for the year ended December 31, 2022 consisted of the following:
| As of December 31, 2022 | ||||
| Beginning balance as of October 26, 2020 | $ | |||
| Addition by the changes of foreign currency exchange rate | ( | ) | ||
| Goodwill (Note 7) | $ | |||
The intangible assets mainly include customer
relationship of $
| For the year ended December 31, 2022 | Amortization expenses | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total: | $ | |||
The goodwill of $
| 4. | LOANS RECEIVABLE FROM THIRD PARTIES |
December 31, 2022 | December 31, 2021 | |||||||
| Loan receivable from third parties | $ | $ | ||||||
As of December 31, 2022, the Company
has seventeen loan agreements compared with ten loan agreements on December 31, 2021. The Company provided loans aggregating $
Interest income of $
As of December 31, 2022 and December 31,2021 there was no allowance recorded as the Company considers all of the loan receivable fully collectible.
F-22
| 5. | INVENTORIES, NET |
The Company’s inventories consist of aluminum ingots, etc. that were purchased from third parties for resale to third party. Inventories consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Aluminum ingots | $ | $ | ||||||
| Less: impairment for inventories | ( | ) | ||||||
| Inventories, net | $ | $ | ||||||
For the years ended December 31, 2022 and 2021, the Company accrued
impairment of $
| 6. | PLANT AND EQUIPMENT, NET |
| December 31, 2022 | December 31, 2021 | |||||||
| Cost: | ||||||||
| Office equipment | $ | $ | ||||||
| Accumulated depreciation: | ||||||||
| Office equipment | $ | ( | ) | $ | ( | ) | ||
| Plant and equipment, net | $ | $ | ||||||
Depreciation expense was $
Depreciation expense was $
| 7. | GOODWILL |
Changes in the carrying amount of goodwill by segment for the years ended December 31, 2022 and 2021 were as follows:
| Acquisition of Qianhai Baiyu | Acquisition of Tongdow Internet Technology | Total | ||||||||||
| Balance as of December 31, 2020 (i) | $ | $ | $ | |||||||||
| Additions | ||||||||||||
| Foreign currency translation adjustments | ||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | |||||||||
| Additions (ii) | ||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||
| Balance as of December 31, 2022 | $ | $ | $ | |||||||||
(i)
(ii)
Based on an assessment of the qualitative factors, management determined that it is more-likely-than-not that the fair value of the reporting unit is in excess of its carrying amount. Therefore, management concluded that it was not necessary to proceed to the two-step goodwill impairment test. No impairment loss or other changes were recorded, except the influence of foreign currency translation for the years ended December 31, 2022 and 2021.
F-23
| 8. | INTANGIBLE ASSETS |
| December 31, 2022 | December 31, 2021 | |||||||
| Gross carrying amount: | ||||||||
| Customer relationships | $ | $ | ||||||
| Software copyright | ||||||||
| Total | $ | $ | ||||||
| Accumulative amortization: | ||||||||
| Customer relationships | $ | ( | ) | $ | ( | ) | ||
| Software copyright | ( | ) | ( | ) | ||||
| Total | $ | ( | ) | $ | ( | ) | ||
| Intangible assets, net | $ | $ | ||||||
The Company’s intangible assets
consist of customer relationships and software copyright, the customer relationships are generally recorded in connection with acquisitions
at their fair value and the software copyrights are purchased in March 2021 and recorded in connection with Shenzhen Tongdow Internet
Technology acquisition. Intangible assets with estimable lives are amortized, generally on a straight-line basis, over their respective
estimated useful lives of
For the years ended December 31,
2022 and 2021, the Company amortized $
The estimated amortization expense for these intangible assets in the next five years and thereafter is as follows:
| Period ending December 31, 2022: | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total: | $ | |||
| 9. | BANKS BORROWINGS |
Bank borrowings represent the amounts due to various banks that are due within one year. As of December 31, 2021 and 2022, bank loans consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Short-term bank loans: | ||||||||
| Loan from Bank of Baosheng County Bank | $ | $ | ||||||
In August 2021, Qianhai Baiyu entered into two
loan agreements with Baosheng County Bank to borrow a total amount of RMB
In August 2022, Qianhai Baiyu entered
into another five loan agreements with Baosheng County Bank to borrow a total amount of RMB
F-24
| 10. | LEASES |
The Company leases offices space under non-cancelable operating leases, with terms with 38 months. 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. The amortization of right of use assets 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.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Supplemental balance sheet information related to operating lease was as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Right-of-use lease assets, net | $ | $ | ||||||
| Lease Liabilities-current | $ | $ | ||||||
| Lease liabilities-non current | ||||||||
| Total | $ | $ | ||||||
The weighted average remaining lease terms and discount rates for the operating lease were as follows as of December 31, 2022:
| Remaining lease term and discount rate: | ||||
| Weighted average remaining lease term (years) | ||||
| Weighted average discount rate | % | |||
For the years ended December 31,
2021 and 2022, the Company charged total amortization of right-of-use assets of $
The following is a schedule, by fiscal years, of maturities of lease liabilities as of December 31, 2022:
| Period ending December 31, 2022: | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| Total lease payments | ||||
| Less: imputed interest | ||||
| Present value of lease liabilities | ||||
| 11. | OTHER CURRENT LIABILITIES |
| December 31, 2022 | December 31, 2021 | |||||||
| Accrued payroll and benefit | $ | $ | ||||||
| Other tax payable | ||||||||
| Others | ||||||||
| $ | $ | |||||||
F-25
| 12. | CONVERTIBLE PROMISSORY NOTES |
| December 31, 2022 | December 31, 2021 | |||||||
| Convertible promissory notes – principal | $ | $ | ||||||
| Convertible promissory notes – discount | ( | ) | ( | ) | ||||
| Convertible promissory notes – interest | ||||||||
| Convertible promissory notes, net | $ | $ | ||||||
On October 4, 2021, the Company entered into a
securities purchase agreement with Atlas Sciences, LLC, a Utah limited liability company, pursuant to which the Company issued the investor
an unsecured promissory note on October 4, 2021 in the original principal amount of $
On May 6, 2022, the Company entered into
a securities purchase agreement with Streeterville Capital, LLC, a Utah limited liability company, pursuant to which the Company issued
the investor a convertible promissory note in the original principal amount of $
The above two unsettled convertible
promissory notes, issued on October 4, 2021 and May 6, 2022, have a maturity date of 12 months with an interest rate of
For the above two unsettled convertible
promissory notes, upon evaluation, the Company determined that the Agreements contained embedded beneficial conversion features which
met the definition of Debt with Conversion and Other Options covered under the Accounting Standards Codification topic 470 (“ASC
470”). According to ASC 470, an embedded beneficial conversion feature present in a convertible instrument shall be recognized
separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.
F-26
| 13. | EQUITY |
Common stock issued in private placements
On November 5, 2021, the Company
entered into a certain securities purchase agreement with Huiwen Hu, affiliates of the Company and Mr. Shuxiang Zhang, and certain other
non-affiliate purchasers whom are “non-U.S. Persons”, pursuant to which the Company agreed to sell an aggregate of
On May 27, 2022, the Company
entered into that certain securities purchase agreement with Mr. Xiangjun Wang and Mr. Heung Ming (Henry) Wong, affiliates of the Company,
and certain other non-affiliate purchasers who are “non-U.S. Persons” pursuant to which the Company agreed to sell an aggregate
of
On November 6, 2022, the Company
entered into that certain securities purchase agreement with Ms. Renmei Ouyang, Chairwomen and Chief Executive Officer of the Company,
and certain other purchasers who are non-U.S. Persons, (as defined in Regulation S under the Securities Act of 1933, as amended), pursuant
to which the Company agreed to sell an aggregate of
Settlement and Restated Common Stock Purchase Agreement
On January
19, 2021, the Company entered into a common stock purchase agreement, with White Lion Capital, LLC, a Nevada limited liability company,
and on September 13, 2021, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”)
with the investor. Pursuant to the Settlement Agreement, the Company and the investor agreed that on any trading day selected by the
Company, provided that the closing price of the Company’s common stock, par value $
On December 12, 2022, the Company entered into a Settlement and Restated Common Stock Purchase Agreement (the “Restated Agreement”) with the investor. Pursuant to the Restated Agreement, in consideration for the investor’s execution and delivery of, and performance under the Restated Agreement, the Company agreed to issue to the investor 300,000 unregistered shares of Common Stock within five business days of execution of the Restated Agreement. In addition, within thirty days of the execution of the Restated Agreement, the Company shall deliver to the investor a purchase notice for 489,306 shares of Common Stock (the “First Purchase Notice”) at a purchase price of 80% of the lowest daily volume-weighted average price (“VWAP”) of the Company’s Common Stock during the valuation period as defined in the Restated Agreement (the “Purchase Price”). Within thirty days of the closing of the First Purchase Notice, the Company shall deliver to the investor a purchase notice for 200,000 purchase notice shares (the “Second Purchase Notice”) at the Purchase Price. Between the closing date of the Second Purchase Notice and the period ending on the earlier of (i) March 31, 2023 or (ii) the date on which the investor shall have purchased an aggregate of 2,889,306 purchase notice shares, the Company shall have the right, but not the obligation, to direct the Investor to purchase up to 1,900,000 purchase notice shares at which (i) the first 600,000 purchase notice shares shall be at the Purchase Price and (ii) any remaining purchase notice shares shall be at a purchase price of 85% of the lowest daily VWAP of the Company’s Common Stock during the valuation period as defined in the Restated Agreement.
F-27
| 13. | EQUITY (CONTINUED) |
Common stock issued pursuant to the conversion of convertible promissory notes
The Company settled the convertible promissory notes issued on October 4, 2021 of $250,000 on June 23, 2022, $125,000 on July 7, 2022, $125,000 on July 18, 2022, $125,000 on July 26, 2022, $125,000 on August 4, 2022, $125,000 on September 6, 2022, $125,000 on September 29, 2022, $125,000 on November 14, 2022, $125,000 on November 11, 2022 and $125,000 on December 16, 2022, respectively, and issued 328,947, 135,693, 125,603, 125,100, 125,100, 150,777, 151,684, 144,676, 148,583 and 148,399 shares of the Company’s Common Stock on June 27, 2022, July 7, 2022, July 19, 2022, July 26, 2022, August 5, 2022, September 12, 2022, October 13, 2022, November 7, 2022, November 15, 2022 and December 19, 2022, respectively, for the year ended December 31, 2022.
The Company settled the convertible
promissory note issued on May 6, 2022 of $
Reverse stock split of common stock
On August 8, 2022, The Company completed a five (5) for one (1) Reverse Stock Split (the “Reverse Split”) of our issued and outstanding ordinary shares, par value $0.001 per share.
The Reverse Stock Split applied to the issued shares of the Company on the date of the Reverse Stock Split and does not have any retroactive effect on the Company’s shares prior to that date. However, for accounting purposes only, references to our ordinary shares in this quarterly report are stated as having been retroactively adjusted and restated to give effect to the Reverse Split, as if the Reverse Split had occurred by the relevant earlier date.
Common stocks issued for exercise of warrants by holders of warrants
Warrants
A summary of warrants activity for the year ended December 31, 2022 was as follows:
| Number of shares | Weighted average life | Weighted average exercise price | Intrinsic Value | |||||||||||
| Balance of warrants outstanding and exercisable as of December 31, 2021 | $ | |||||||||||||
| Granted | ||||||||||||||
| Exercised | ||||||||||||||
| Balance of warrants outstanding and exercisable as of December 31, 2022 | $ | |||||||||||||
As of December 31, 2022, the Company
had
In connection with
The Warrants ended on December 31, 2022 are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions, but not as a result of future securities offerings at lower prices. The warrants did not meet the definition of liabilities or derivatives, and as such they are classified as equity.
F-28
| 13. | EQUITY (CONTINUED) |
Statutory reserve
As of December 31, 2022 and 2021, the Company’s
PRC profit generating subsidiaries accrued statutory reserve funds of $
| 14. | INCOME (LOSS) PER SHARE |
The following table sets forth the computation of basic and diluted loss per common share for the years ended December 31, 2022 and 2021, respectively:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net income(loss) | $ | $ | ( | ) | ||||
| Weighted Average Shares Outstanding-Basic | ||||||||
| Weighted Average Shares Outstanding- Diluted | ||||||||
| Income (loss) per share- basic | $ | $ | ( | ) | ||||
| Income (loss) per share- diluted | $ | $ | ( | ) | ||||
Basic income(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, 2022 and 2021. The number of warrants is excluded from the computation as the anti-dilutive effect.
The following table includes the number of shares that may be dilutive potential common shares in the future. The holders of these shares do not have a contractual obligation to share in our losses and thus these shares were not included in the computation of diluted loss per share because the effect was anti-dilutive.
| December 31, 2022 | December 31, 2021 | |||||||
| Warrants | ||||||||
F-29
| 15. | INCOME TAXES |
The United States of America
On December 22, 2017, the Tax Cuts
and Jobs Act of 2017 (the “Tax Act”) was signed into law, which has made significant changes to the Internal Revenue
Code. Those changes include, but are not limited to, a U.S. corporate tax rate decrease from
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
Income tax expenses consist of the following:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Current income tax expenses | $ | ( | ) | $ | ( | ) | ||
| Deferred income tax benefits | ||||||||
| Income tax expenses | $ | ( | ) | $ | ( | ) | ||
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, 2022 and 2021, 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, 2022 and 2021.
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss carryforwards in the PRC | $ | $ | ||||||
| Federal Net operating loss carryforwards in the U.S. | ||||||||
| State Net operating loss carryforwards in the U.S. | ||||||||
| Amortization of beneficial conversion feature relating to issuance of convertible promissory notes | ||||||||
| Amortization of relative fair value of warrants relating to issuance of convertible promissory notes | ||||||||
| Impairment of equity investment | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| $ | $ | |||||||
| Deferred tax liabilities | ||||||||
| Amortization of intangible assets acquired in business combination | $ | $ | ||||||
| $ | $ | |||||||
F-30
| 15. | INCOME TAXES (CONTINUED) |
Below is a reconciliation of the statutory tax rate to the effective tax rate of continuing operations:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| PRC statutory tax rate | % | % | ||||||
| Impact of different income tax rates in other jurisdictions | % | % | ||||||
| Effect of non-deductible expenses | % | % | ||||||
| Effect of valuation allowance for deferred tax assets | % | % | ||||||
| Effective tax rate | % | % | ||||||
As of December 31, 2022 and 2021,
the Company had U.S. domestic cumulative tax loss carryforwards of $
Realization of the Company’s net deferred
tax assets is dependent upon the Company’s ability to generate future taxable income in the respective tax jurisdictions to obtain
benefit from the reversal of temporary differences and net operating loss carryforwards. Full valuation allowance of $
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.
F-31
| 16. | RELATED PARTY TRANSACTIONS AND BALANCES |
| 1) | Nature of relationships with related parties |
| Name | Relationship with the Company | |
F-32
| 16. | RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED) |
| 2) | Balances with related parties |
As of December 31, 2022 and 2021, the balances with related parties were as follows:
| - | Due from related parties |
| December 31, 2022 | December 31, 2021 | |||||||
| Yunfeihu (i) | $ | $ | ||||||
| Total due from related parties | $ | $ | ||||||
| (i) |
| - | Due to related parties |
| December 31, 2022 | December 31, 2021 | |||||||
| TD E-commerce | $ | $ | ||||||
| Other related parties | ||||||||
| Total due to related parties | $ | $ | ||||||
F-33
| 16. | RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED) |
| 3) | Transactions with related parties |
Revenues generated from related parties
For the years ended December 31, 2022 and 2021, the Company generated revenues from below related party customers:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue from sales of commodity products | ||||||||
| Yunfeihu | $ | $ | ||||||
| Yangzhou TD | ||||||||
| Total revenues generated from related parties | $ | $ | ||||||
Purchases from related parties
For the years ended December 31, 2022 and 2021, the Company purchased commodity products from below related party vendors:
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Purchase of commodity products | ||||||||
| Yangzhou TD | $ | $ | ||||||
| Yunfeihu | ||||||||
| TD International Trade | ||||||||
| Hainan TD | ||||||||
| Zhejiang TD | ||||||||
| $ | $ | |||||||
F-34
| 17. | COMMITMENTS AND CONTINGENCIES |
| 1) | Contingencies |
| a | 2015 Derivative Action |
On February 3, 2015, a purported shareholder Kiran Kodali filed a putative shareholder derivative complaint against the Company, alleging that the Company and its former officers and directors violated their fiduciary duties, grossly mismanaged the Company and were unjustly enriched based upon the transfer that was the subject of the Internal Review and other grounds substantially similar to those asserted in the class action complaints.
On July 16, 2019, the Company received a copy of the final order and judgment that the Court entered on July 11, 2019, approving the settlement set forth in the Stipulation. The Stipulation provides for dismissal of the Derivative Action as to the Company and the Individual Defendants, and the Company agrees to adopt or maintain certain corporate governance reforms for at least three years. The Stipulation also provides for attorneys’ fees and expenses to be paid by the Individual Defendants’ insurance carriers to plaintiffs’ counsel.
| b. | 2017 Arbitration with Sorghum |
On December 21, 2017, the Company delivered notice (“Notice”) to Sorghum notifying Sorghum that certain recent actions of Sorghum constituted breaches of Sorghum’s covenants under the Exchange Agreement. Specifically, we believe that Sorghum is in breach of Section 6.9 (a and Section 6.11 (b of the Exchange Agreement which required Sorghum to use commercially reasonable efforts and to cooperate fully with the other parties to consummate the transactions contemplated by the Exchange Agreement and to make its directors, officers and employees available in connection with responding in a timely manner to SEC comments. According to the terms of the Exchange Agreement, the Company is entitled to terminate the Exchange Agreement if the breach is not cured within twenty (20 days after the Notice is provided to Sorghum.
On January 25, 2018, the Company filed an arbitration demand (“Arbitration Demand” with the American Arbitration Association) “AAA” against Sorghum in connection with Sorghum’s breach of the Exchange Agreement.
On July 30, 2018,
| 1) | Commitments |
| a | Non-cancellable operating leases |
The following table sets forth our contractual obligations as of December 31, 2022:
| Payment due by December 31 | ||||||||||||||||
| Total | 2023 | 2024 | 2025 | |||||||||||||
| Operating lease commitments for property management expenses under lease agreement | ||||||||||||||||
F-35
| 17. | COMMITMENTS AND CONTINGENCIES (CONTINUED) |
| 2) | 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 $
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,
Due to the uncertainty arising from this pending legal proceeding, a full impairment has been applied against the Company’s investment in financial products.
| 18. | RISKS AND UNCERTAINTIES |
| 1) | Credit risk |
Assets that potentially subject the
Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of such assets
to credit risk is their carrying amount as at the balance sheet dates. As of December 31, 2021, approximately $
The Company’s operations are carried out in Mainland China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among other factors.
| 2) | Liquidity risk |
The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
| 3) | Foreign currency risk |
Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts.
The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Where there is a significant change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected.
F-36
| 18. | RISKS AND UNCERTAINTIES (CONTINUED) |
Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Balance sheet items, except for equity accounts | ||||||||
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Items in the statements of operations and comprehensive income (loss), and statements of cash flows | ||||||||
| 19. | SUBSEQUENT EVENTS |
| (1) | Settlement of Convertible Promissory Notes |
The Company settled convertible promissory notes of $125,000 on December 30, 2022, $125,000 on January 10, 2023, $125,000 on January 18, 2023, $200,000 on January 18, 2023, $250,000 on February 2, 2023, $200,000 on February 3, 2023, $175,000 on February 8, 2023, $250,000 on February 15, 2023 and $250,000 on March 2, 2023, respectively and issued 148,399, 147,824, 147,475, 235,960, 292,987, 234,389, 205,090, 292,987 and 279,567 shares of the Company’s common stock on January 6, 2023, January 12, 2023, January 18, 2023, January 19, 2023, February 3, 2023, February 6, 2023, February 8, 2023, February 15, 2023 and March 2, 2023, respectively.
| (2) | January Private Placement |
On January 9, 2023, the Company entered into a certain securities purchase
agreement with Ms. Huiwen Hu, an affiliate of the Company, and certain other purchasers who are non-U.S. Persons, pursuant to which the
Company agreed to sell an aggregate of
| (3) | Settlement of Restated Agreement |
The Company issued to White Lion Capital, LLC
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