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BAIYU Holdings, Inc. - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

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

 

For the transition period from ____________ to ____________

 

Commission file number: 001-36055

 

TD Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   45-4077653

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Room 104, No. 33 Section D,

No. 6 Middle Xierqi Road,

Haidian District, Beijing, China

  100085
(Address of principal executive offices)   (Zip Code)

 

+86 (010) 59441080

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of June 26, 2020, 68,585,806 shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.

 

 

 

 

 

 

EXPLANATORY NOTE

 

On March 4, 2020 the Securities and Exchange Commission issued an Order (Release No. 34-88318) under Section 36 of the Exchange Act granting exemptions from specified provisions of the Exchange Act and certain rules thereunder (the “Order”). The Order provides that a registrant subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant, is exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, where certain conditions are satisfied.

 

As a result of the global outbreak of the COVID-19 virus, the Company had to spend additional time in preparing for the filing of its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and was unable to timely prepare this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020. Based on the foregoing, on May 15, 2020, the Company filed a Current Report on Form 8-K to avail itself of a 45-day extension to file this Form 10-Q relying on the exemptions provided by the Order. This Form 10-Q is being filed in reliance on the Order.  

 

 

 

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2020 and December 31, 2019

 

   March 31,
2020
   December 31,
2019
 
ASSETS        
Current Assets        
Cash  $27,101   $2,446,683 
Loans receivable from third parties   3,735,799    1,955,697 
Due from related parties   4,823,038    3,310,883 
Other current assets   291,063    166,617 
Total current assets   8,877,001    7,879,880 
           
Investments in equity investees   963,154    972,807 
Deposit in investment in equity investee   14,105    14,351 
Loan receivable from a third party, noncurrent   49,368    50,230 
Property and equipment, net   3,386    3,835 
Right-of-use lease assets, net   401,034    41,188 
Leasing business assets, net   2,306,133    2,426,109 
Total noncurrent assets   3,737,180    3,508,520 
           
Total Assets  $12,614,181   $11,388,400 
           
LIABILITIES AND EQUITY          
Current Liabilities          
Advances from customers  $14,987   $15,249 
Third party loans payable   2,369,669    2,367,967 
Due to related parties   2,005,891    1,017,362 
Stock subscription advance   -    1,600,000 
Income tax payable   62,124    14,735 
Lease liabilities, current   302,028    - 
Other current liabilities   402,301    420,101 
Total Current Liabilities   5,157,000    5,435,414 
           
Non-current Liabilities          
Related party loan, noncurrent   149,515    152,124 
Lease liabilities, noncurrent   52,352    - 
Total Non-current Liabilities   201,867    152,124 
           
Total Liabilities   5,358,867    5,587,538 
           
Commitments and Contingencies (Note 13)          
           
Equity          
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 28,585,111 and 11,585,111 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively)   28,585    11,585 
Stock subscription receivable   (13,500,000)   - 
Additional paid-in capital   53,606,170    38,523,170 
Accumulated deficit   (32,526,743)   (32,391,040)
Accumulated other comprehensive loss   (339,857)   (334,281)
Total Shareholders’ Equity   7,268,155    5,809,434 
           
Non-controlling interests   (12,841)   (8,572)
Total Equity   7,255,314    5,800,862 
           
Total Liabilities and Equity  $12,614,181   $11,388,400 

 

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

 

1

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For the Three Months Ended March 31, 2020 and 2019

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

 

   For the Three Months Ended
March 31,
 
   2020   2019 
Revenues        
-    Revenue from sales of commodity products  $1,053,632   $- 
-    Revenue from supply chain management services   415,377    - 
-    Income from operating leases   14,051    399,999 
Total revenue   1,483,060    399,999 
           
Cost of revenue          
-    Cost of revenue - commodity product sales - related party   (1,055,143)   - 
-    Cost of revenue - supply chain management services   (717)   - 
-    Cost of operating lease   (99,314)   (237,651)
Total cost of revenue   (1,155,174)   (237,651)
           
Gross profit   327,886    162,348 
           
Operating expenses          
Selling, general, and administrative expenses   (425,115)   (1,906,319)
Impairment of leasing business assets   -    (96,318)
Total operating expenses   (425,115)   (2,002,637)
           
Net Operating Loss   (97,229)   (1,840,289)
           
Other income, net          
Interest income   140,012    10,463 
Interest expenses   (134,375)   - 
Total other income, net   5,637    10,463 
           
Loss Before Income Taxes   (91,592)   (1,829,826)
           
Income tax expenses   (48,380)   - 
           
Net Loss   (139,972)   (1,829,826)
           
Less: Net loss attributable to non-controlling interests   4,269    - 
           
Net loss attributable to TD Holdings, Inc.’s Stockholders   (135,703)   (1,829,826)
           
Comprehensive Loss          
Net Loss   (139,972)   (1,829,826)
Foreign currency translation adjustment   (5,576)   57,743 
Comprehensive loss   (145,548)   (1,772,083)
Less: Total comprehensive loss attributable to non-controlling interests   4,269    - 
Comprehensive loss attributable to TD Holdings, Inc.  $(141,279)  $(1,772,083)
           
Loss per share - basic and diluted          
Net loss per share – basic and diluted  $(0.01)  $(0.35)
           
Weighted Average Shares Outstanding-Basic and Diluted   13,673,023    5,169,041 

 

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

 

2

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2020 and 2019

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

 

   Common Stock   Additional paid-in   Accumulated   Subscription
advanced from a
   Accumulated other comprehensive   Non-controlling   Total (Deficit) 
   Shares   Amount   capital   Deficit   shareholder   income (loss)   interests   Equity 
                                 
Balance as at December 31, 2018   5,023,906   $5,024   $28,765,346   $(25,457,090)  $-   $(511,057)  $      -   $2,802,223 
Issuance of common stock to service providers   502,391    502    883,706    -    -    -    -    884,208 
Net loss   -    -    -    (1,829,826)   -    -    -    (1,829,826)
Foreign currency translation adjustments   -    -    -    -    -    57,743    -    57,743 
Balance as at March 31, 2019   5,526,297   $5,526   $29,649,052   $(27,286,916)  $-   $(453,314)  $-   $1,914,348 
                                         
Balance as at December 31, 2019   11,585,111   $11,585   $38,523,170   $(32,391,040)  $-   $(334,281)  $(8,572)  $5,800,862 
Issuance of common stocks in connection with private placements   17,000,000    17,000    15,083,000    -    (13,500,000)   -    -    1,600,000 
Net loss   -    -    -    (135,703)   -    -    (4,269)   (139,972)
Foreign currency translation adjustments   -    -    -    -    -    (5,576)   -    (5,576)
Balance as at March 31, 2020   28,585,111   $28,585   $53,606,170   $(32,526,743)  $-   $(339,857)  $(12,841)  $7,255,314 

 

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

 

3

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2020 and 2019

(Expressed in U.S. dollar)

 

   For the Three Months Ended
March 31,
 
   2020   2019 
Cash Flows from Operating Activities:        
Net loss  $(139,972)   (1,829,826)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation of leasing business assets   79,578    46,858 
Depreciation of property and equipment   388    551 
Amortization of right of use assets   88,620    - 
Impairment on leasing business assets   -    96,318 
Stock-based compensation to service providers   -    884,208 
Changes in operating assets and liabilities:          
Other current assets   (132,271)   29,320 
Advances from customers   -    23,180 
Income tax payable   48,380    - 
Other current liabilities   (6,394)   (9,242)
Lease liabilities   (94,888)   - 
Net Cash Used in Operating Activities   (156,559)   (758,633)
           
Cash Flows from Investing Activities:          
Purchases of leasing business assets   -    (406,757)
Loans made to related parties   (1,593,260)   - 
Loans made to third parties   (1,831,708)   (592,724)
Net Cash Used in Investing Activities   (3,424,968)   (999,481)
           
Cash Flows from Financing Activities:          
Proceeds from third party borrowings   -    592,724 
Proceeds from borrowings from related parties   1,063,773    - 
Net Cash Provided by Financing Activities   1,063,773    592,724 
           
Effect of exchange rate changes on cash and cash equivalents   98,172    21,969 
           
Net decrease in cash and cash equivalents   (2,419,582)   (1,143,421)
Cash at beginning of period   2,446,683    1,484,116 
Cash at end of period  $27,101   $340,695 
           
Supplemental Cash Flow Information          
Cash paid for interest expense  $-   $- 
Cash paid for income tax  $-   $- 
           
Supplemental disclosure of Non-cash investing and financing activities          
Right-of-use assets obtained in exchange for operating lease obligations  $455,635   $- 
Issuance of common stocks in connection with private placements, net of issuance costs with proceeds subsequently collected   in April 2020  $13,500,000   $- 
Issuance of common stocks in connection with private placements, net of issuance costs with proceeds collected in advance in November 2019  $1,600,000   $  

 

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

 

4

 

 

1.ORGANIZATION AND BUSINESS DESCRIPTION

 

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

 

Currently, the Company conducts business through two variable interest entities (“VIEs”), Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”) and Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”). Beijing Tianxing is primarily engaged in operating leasing business of used luxurious cars and Huamucheng is engaged in commodity trading business and providing supply chain management services to customers in the People’s Republic of China (“PRC”). Supply chain management services consisted of loan recommendation service and commodity product distribution services.

 

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

 

Name   Background   Ownership

HC High Summit Holding Limited

(“HC High BVI”)

 

●      A BVI company

●      Incorporated on March 22, 2018

●      A holding company

  100% owned by the Company

HC High Summit Limited

(“HC High HK”)

 

●      A Hong Kong company

●      Incorporated on April 16, 2018

●      A holding company

  100% owned by HC High BVI
Hao Limo Technology (Beijing) Co. Ltd.
(“Hao Limo”)
 

●      A PRC company and deemed a wholly foreign owned enterprise (“WOFE”)

●      Incorporated on May 10, 2018

●      Registered capital of $15 million

●      A holding company

  WOFE, 100% owned by HC High HK

Beijing Tianxing Kunlun Technology Co. Ltd.

(“Beijing Tianxing”)*

 

●      A PRC limited liability company

●      Incorporated on April 17, 2018

●      Registered capital of $31,839 (RMB 200,000)

●      Engaged in operating leasing business of used luxurious cars

  VIE of Hao Limo
Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”)  

●      A PRC limited liability company

●      Incorporated on December 30, 2013

●      Registered capital of $1,417,736 (RMB 10 million) with registered capital fully paid-up

●     Engaged in commodity trading business and providing supply chain management services to customers

  VIE of Hao Limo

 

* As of March 31, 2020, Beijing Tianxing has six wholly owned subsidiaries, including:

 

  Beijing Tianrenshijia Apparel Co., Ltd.
  Beijing Blue Light Marching Technology Co., Ltd.
  Beijing Eighty Weili Technology Co., Ltd.
  Beijing Bat Riding Technology Co., Ltd
  Beijing Blue Light Riding Technology Co., Ltd., and
  Car Master (Beijing) Information Consulting Co., Ltd.

 

In addition, the Company has one subsidiary over which the Company has 60% ownership, Beijing Blue Light Super Car Technology Co., Ltd. The remaining 40% of ownership interest is owned by an employee of the Company.

 

Each of these subsidiaries owns a license to hold cars in Beijing or Zhejiang, and was either inactive or generated minimal revenues for the periods ended March 31, 2020 and 2019.

 

5

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)Basis of Presentation

 

The interim unaudited condensed consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

 

The unaudited condensed consolidated financial information as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 has been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on May 29, 2020.

 

In the opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are necessary for a fair presentation of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2019. The results of operations for the three months ended March 31, 2020 and 2019 are not necessarily indicative of the results for the full years.

 

(b)Consolidation of variable interest entities

 

As of March 31, 2020 and December 31, 2019, the Company’s business was primarily conducted through its two VIEs, Beijing Tianxing and Huamucheng. Beijing Tianxing is engaged in used luxurious car leasing business and Huamucheng is engaged in commodity trading and supply chain management business.

 

The following financial statement balances reflect the financial positions of Beijing Tianxing and Huamucheng, which were included in the consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively:

 

   As of March 31, 2020   As of December 31, 2019 
   Beijing
Tianxing
   Huamucheng   Total  

Beijing

Tianxing

   Huamucheng   Total 
   (unaudited)   (unaudited)   (unaudited)             
Cash  $5,780   $2,184   $7,964   $94,380   $1,730,793   $1,825,173 
Loans receivable from third parties   1,374,581    738,829    2,113,410    1,364,125    -    1,364,125 
Due from TD and Hao Limo*   990,195    -    990,195    966,882    -    966,882 
Due from related parties   292,828    4,360,949    4,653,777    470,154    2,840,729    3,310,883 
Other current assets   148,404    28,330    176,734    164,922    2,848    167,770 
Investment in equity investees   553,154    -    553,154    562,807    -    562,807 
Leasing business assets, net   2,306,133    -    2,306,133    2,426,109    -    2,426,109 
Other noncurrent assets   43,162    375,363    418,525    18,186    -    18,186 
Total Assets  $5,714,237   $5,505,654   $11,219,891   $6,067,565   $4,574,370   $10,641,935 
                               
LIABILITIES                              
Advances from customers  $14,987   $-   $14,987   $15,249   $-   $15,249 
Other current liabilities   317,481    496,252    813,733    218,688    207,834    426,522 
Third parties loans   2,045,250    141,052    2,186,302    2,080,941    315,729    2,396,670 
Due to related parties   234,329    1,062,965    1,297,294    197,733    166,332    364,065 
Due to TD and Hao Limo **   5,120,488    2,036,116    7,156,604    5,197,531    2,577,356    7,774,887 
Total Liabilities  $7,732,535   $3,736,385   $11,468,920   $7,710,142   $3,267,251   $10,977,393 

 

*Receivable due from TD and Hao Limo is eliminated upon consolidation.

 

**Payable due to TD and Hao Limo is eliminated upon consolidation.

 

6

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(b)Consolidation of variable interest entities (continued)

 

The following financial statement amounts reflect the financial performances and cash flows of Beijing Tianxing and Huamucheng, which were included in the consolidated financial statements for the three months ended March 31, 2020 and 2019, respectively:

 

  

For the Three Months Ended

March 31, 2020

  

For the Three Months Ended

March 31, 2019

 
   Beijing Tianxing   Huamucheng   Total  

Beijing

Tianxing

   Huamucheng   Total 
   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
Revenue  $14,051   $1,469,009   $1,483,060   $399,999   $       -   $399,999 
Cost of revenue  $(99,314)  $(1,055,860)  $(1,155,174)  $(237,651)  $-   $(237,651)
Operating expenses  $(70,613)  $(264,900)  $(335,513)  $(702,041)  $-   $(702,041)
Net (loss) income  $(213,444)  $143,930   $(69,514)  $(529,230)  $-   $(529,230)
                               
  

For the Three Months Ended

March 31, 2020

  

For the Three Months Ended

March 31, 2019

 
   Beijing Tianxing   Huamucheng   Total  

Beijing

Tianxing

   Huamucheng   Total 
   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
Net Cash Used in Operating Activities  $(94,559)  $(295,142)  $(389,701)  $(342,335)  $          -   $(342,335)
Net Cash Used in by Investing Activities   (34,377)   (2,343,539)   (2,377,916)   (999,481)   -    (999,481)
Net Cash Provided by Financing Activities   40,607    913,427    954,034    592,724    -    592,724 
Effect of Exchange Rate Changes on Cash   (271)   (3,355)   (3,627)   20,390    -    20,390 
Net Decrease in Cash   (88,600)   (1,728,609)   (1,817,209)   (728,702)   -    (728,702)
Cash at Beginning of Period   94,380    1,730,793    1,825,173    991,385    -    991,385 
Cash at End of Period  $5,780   $2,184   $7,964   $262,683   $-   $262,683 

 

7

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(c)Foreign currency translation

 

The reporting currency of the Company is United States Dollars (“US$”), which is also the Company’s functional currency. HC High BVI and HC High HK maintain their book and records in US$, which is also their functional currency. The Company’s PRC subsidiaries and VIEs maintain their books and records in its local currency, the Renminbi Yuan (“RMB”), which is their functional currencies as being the primary currency of the economic environment in which these entities operate.

 

For financial reporting purposes, the financial statements of the PRC subsidiaries and VIEs prepared using RMB, are translated into the Company’s reporting currency, US$, at the exchange rates quoted by www.oanda.com. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates, except for the change in accumulated deficit during the year which is the result of the income statement translation process. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive loss in stockholders’ equity. Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:

 

   March 31,
2020
   December 31,
2019
 
         
Balance sheet items, except for equity accounts   7.0896    6.9680 

 

   For the Three Months Ended
March 31,
 
   2020   2019 
         
Items in the statements of operations, comprehensive loss and statements of cash flows   6.9814    6.7485 

 

Transactions denominated in currencies other than the functional currency are translated into prevailing functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the consolidated statements of comprehensive loss.

 

8

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(d)Leasing business asset, net

 

Leasing business asset, net, represents the automobiles that are underlying our automotive lease contracts and is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs. Depreciation of vehicles is recorded on a straight-line basis to an estimated residual value over the useful life of nine years. We periodically evaluate our depreciation rate for leased vehicles based on expected residual values and adjust depreciation expense over the remaining life of the lease if deemed necessary.

 

We have significant investments in the residual values of the assets in our operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts. At contract inception, we determine pricing based on the projected residual value of the lease vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts in used vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and make adjustments to the depreciation rates to the extent the expected value of the vehicle at lease termination changes. In addition to estimating the residual value at lease termination, we also evaluate the current value of the leasing business asset and test for impairment to the extent necessary when there is an indication of impairment based on market considerations and portfolio characteristics. Impairment is determined to exist if fair value of the leased asset is less than carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our leasing business assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. We recognize rental income on our operating leases when collection is reasonably assured.

 

(e)Income from operating lease

 

Income from operating lease represents lease origination fees and rental fee, netting off lease origination costs. In accordance with ASC 842, Leases, the Company recognized the income from operating lease on a straight-line basis over the scheduled lease term. 

 

9

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(f)Revenue recognition

 

The Company generates income or revenue from the following source (1) income from operating lease of luxury cars, which is accounted for in accordance with ASC 842, Leases, the Company recognized the income from operating lease on a straight-line basis over the scheduled lease term; (2) Revenue associated with commodity trading and revenue associated with supply chain management services are accounted for in accordance with ASC 606.

 

On January 1, 2019, the Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective approach. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. This new guidance provides a five-step analysis in determining when and how revenue is recognized. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company has assessed the impact of the new guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.

 

Revenue from sales of commodity products

 

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

 

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

 

For the three months ended March 31, 2020, the Company sold non-ferrous metal products to two customers and generated revenue of $1,053,632.

 

Revenue from supply chain management services

 

In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help upstream metal and mineral suppliers to sell their metal products, the Company launched its supply chain management service business in December 2019, which primarily consisted of loan recommendation service fees and distribution service fees. For the three months ended March 31, 2020, the Company provided loan recommendation services to customers.

 

10

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(f)Revenue recognition (continued)

 

-Loan recommendation service fees

 

The Company recommends customers who have financing need for commodity trading to various financial institutions and assist these customers to obtain loans from the financial institutions. The Company’s services include conducting customer screening and credit check, matching customer with right financial institution and assisting in customer’s applications and related paperwork etc. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by customer. For the three months ended March 31, 2020, the Company provided loan recommendation services to six customers and earned revenue of $415,377 from loan recommendation services.

 

(g)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.

 

11

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(g)Income taxes (continued)

 

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

 

(h)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 March 31, 2020, approximately $17,187 was deposited with a bank in the United States which was insured by the government up to $250,000. As of March 31, 2020 and December 31, 2019, approximately $9,914 and $2,399,300, respectively, were primarily deposited in financial institutions located in Mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

 

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

 

(b) 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.

 

(c) Foreign currency risk

 

Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, except for the cash deposit of approximately $17,187 which was in U.S. dollars as of March 31, 2020, 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.

 

(d) VIE risk

 

It is possible that the Company’s VIE agreements with Beijing Tianxing, and Huamucheng would not be enforceable in China if PRC government authorities or courts were to find that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event that the Company were unable to enforce these contractual arrangements, the Company would not be able to exert effective control over the VIEs. Consequently, the VIEs’ results of operations, assets and liabilities would not be included in the Company’s consolidated financial statements. If such were the case, the Company’s cash flows, financial position, and operating performance would be materially adversely affected.

 

12

 

 

3.LOANS RECEIVABLE FROM THIRD PARTIES

 

Accounts receivable, net consist of the following:

 

  

March 31,

2020

   December 31,
2019
 
         
Loans receivable from third parties  $3,785,167   $2,005,927 
Less: loan receivable from third parties, current   3,735,799    1,955,697 
Loan receivable from a third party, noncurrent  $49,368   $50,230 

 

During the three months ended March 31, 2020 and 2019, the Company entered into loan agreements with three and two third parties, respectively, and advanced an aggregate of $1,831,708 and $592,724, respectively, to these third parties as interest-bearing loans. The interest rate ranges between 9% and 16% per annum. As of March 31, 2020, the balances of loan principal and interest payment were due in September 2020 through August 2021. The Company classified loan receivables due before December 31, 2020 as current assets, and those after December 31, 2020 as noncurrent assets.

 

Management periodically assesses the collectability of these third-party loans receivable. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of March 31, 2020 and December 31, 2019, there was no allowance recorded as the Company considers all of the loans receivable fully collectible. In April 2020, the Company terminated certain third-party loan receivable contracts and collected approximately $1.0 million loans receivable from these third-parties.  

 

Interest income of $85,275 and $12,429 was accrued for the three months ended March 31, 2020 and 2019. As of March 31, 2020 and December 31, 2019, the Company recorded an interest receivable of $216,271 and $133,742 as reflected under “other current assets” in the consolidated balance sheets.

 

4.INVESTMENTS IN EQUITY INVESTEES

 

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

 

   Investment   % of ownership   Investment
dates
            
Chengdu Jianluo Technology Co., Ltd. (“Chengdu Jianluo”) (a)  $282,103    40%  June 28, 2019
Shanghai Huxin Technology Co., Ltd. (“Shanghai Huxin”) (a)   282,103    40%  July 4, 2019
Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou Yihe”) (b)   410,000    20%  December 17, 2019
    974,206         
Less: Share of results of equity investees   (11,052)        
   $963,154         

 

(a) On June 28, 2019 and July 4, 2019, the Company made investments of $282,103 (RMB 2,000,000) and $282,103 (RMB 2,000,000), for 40% of the ownership interest in each of these two investees, respectively. The purpose of such investment is to establish a cooperative business partnership with these investees and utilize their marketing strength and customer network to bring in more customers for the Company’s car leasing services in Chengdu and Shanghai markets.

 

(b) October 14, 2019, the Company entered into an agreement with Hangzhou Yihe and agreed to issue 1,253,814 shares of the Company’s common stock to acquire 20% equity interest in Hangzhou Yihe. Hangzhou Yihe was engaged in car leasing business, and the acquisition was for the purpose of producing synergy between the Company and Hangzhou Yihe so as to promote car leasing business in Zhejiang province.

 

For the three months ended March 31, 2020, the three equity investees were closed as affected by COVID-19. As a result, the Company had no share of results of equity investees for the period. As of March 31, 2020 and December 31, 2019, the balance of share of results of equity investees was $11,052 and $11,245, respectively. Because these equity investees gradually resumed work since April, the Company expected the closure was temporary, and the decline in fair value below the carrying value is not other-than-temporary. As of March 31, 2020, the Company did not provide impairment against the investments in equity investees.

 

13

 

 

5.LEASING BUSINESS ASSETS, NET

 

As of March 31, 2020 and December 31, 2019, the Company had investments in eleven and eleven used luxury cars, respectively. 

 

As of March 31, 2020 and December 31, 2019, the Company, by reference to the market price, determined the fair value of nil and four used luxurious car were below the original carrying amount of the leased asset and had accumulated impairment of $316,683 and $322,210, respectively. For the three months ended March 31, 2020 and 2019, the Company recorded impairment of $nil and $96,318, respectively, for these leasing business assets.

 

As of the March 31, 2020 and December 31, 2019, the balance of the used luxurious cars is comprised of the following:

 

   March 31,
2020
   December 31,
2019
 
         
Used luxury cars  $2,747,194   $2,795,136 
Less: accumulated depreciation   (441,061)   (369,027)
   $2,306,133   $2,426,109 

 

For the three months ended March 31, 2020 and 2019, the Company charged depreciation expenses of $79,578 and $46,858 on used luxurious cars, respectively.

 

As of March 31, 2020 and December 31, 2019, eight used luxurious cars with an aggregated carrying amount of $1,883,879 were pledged for borrowings from third parties (Note 6).

 

6.THIRD PARTIES LOANS PAYABLE

 

   March 31,
2020
   December 31,
2019
 
         
Third parties loans payable  $2,369,669   $2,367,967 

 

The borrowings are due through December 2020. The purpose of such borrowings was to use the funds to purchase used luxurious cars. The interest rate charged on the borrowings ranged between 7% and 11.5%. For the three months ended March 31, 2020 and 2019, the Company accrued interest expenses of $98,115 and $6,869 on the borrowings, respectively.

 

As of March 31, 2020 and December 31, 2019, eight used luxurious cars with an aggregated carrying amount of $1,883,879 were pledged for borrowings from third parties (see Note 5).

 

7. STOCK SUBSCRIPTION ADVANCE FROM SHAREHOLDERS

 

On November 21, 2019, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell an aggregate of 2,000,000 shares of its common stock, par value $0.001 per share, at a per share purchase price of $0.80. As of December 31, 2019, the Company received the proceeds of $1,600,000 in advance from these investors and recorded the amount as “stock subscription advance from shareholder”. On February 5, 2020, the Company issued 2,000,000 shares of Common Stock to the Purchasers, and reversed the amount in the account of “stock subscription advance from shareholder”.

 

As of March 31, 2020 and December 31, 2019, the Company had stock subscription advance from shareholder of $nil and $1,600,000, respectively.

 

14

 

 

8.CAPITAL TRANSACTIONS

 

Common Stock

 

On January 22, 2020, the Company entered into certain securities purchase agreement with certain investors, pursuant to which the Company agreed to sell an aggregate of 15,000,000 shares of Common Stock, at a per share purchase price of $0.90. The transaction was consummated on March 23, 2020 by issuance of 15,000,000 shares of Common Stock. The Company received proceeds of $13,500,000 in April 2020.

 

Convertible Promissory Notes 

 

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

 

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

 

The Warrants are exercisable immediately upon the date of issuance at the exercise price of $1.80 for cash (the “Warrant Shares”). The Warrants may also be exercised cashless if at any time after the six-month anniversary of the issuance date. There is no effective registration statement registering, or no current prospectus available for the resale of the Warrant Shares, if exercised, The Warrants will expire five years from date of issuance. The Warrants are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions. The Warrants contain a mandatory exercise right for the Company to force exercise of the Warrants if the Company’s common stock trades at or above $3.00 for 20 consecutive trading days, provided, among other things, that the shares issuable upon exercise of the are registered or may be sold pursuant to Rule 144 and the daily trading volume exceeds 300,000 shares of Common stock per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date.

 

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

 

Because the Company did not receive the proceeds until April 2020, the Holders did not have the conversion rights of either convertible notes or warrants until payment were made. Accordingly the Company did not record accounting book on the transaction.

 

15

 

 

8.CAPITAL TRANSACIONS (CONTINUED)

 

Warrants

 

A summary of warrants activity for the three months ended March 31, 2020 was as follows:

 

   Number of
shares
   Weighted
average life
  Expiration
dates
           
Balance of warrants outstanding as of December 31, 2019   3,033,370   4.38 years 
Grant of warrants during the three months ended March 31, 2020   -    
Exercise of warrants during the three months ended March 31, 2020   -    
Forfeiture of warrants during the three months ended March 31, 2020   -    
Balance of warrants outstanding as of March 31, 2020   3,033,370   3.78 years 

 

As of March 31, 2020 and December 31, 2019, the Company had 3,033,370 shares of warrants, among which 273,370 shares of warrants were issued to two individuals in private placements, and 2,760,000 shares of awrrants were issued in two direct offerings closed on May 20, 2019 (“May Offering”) and April 11, 2019 (“April Offering”)

 

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

 

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

 

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

 

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

 

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

 

16

 

 

8.CAPITAL TRANSACIONS (CONTINUED)

 

Warrants (continued)

 

The key assumption used in estimates are as follows:

 

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

 

9.LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted loss per common share for the three months ended March 31, 2020, respectively:

 

   For the Three Months Ended
March 31,
 
   2020   2019 
         
Net loss attributable to TD Holdings, Inc.’s Stockholders  $(135,703)  $(1,829,826)
           
Weighted Average Shares Outstanding-Basic and Diluted   13,673,023    5,169,041 
Loss per share - basic and diluted          
Net loss per share – basic and diluted  $(0.01)  $(0.35)

 

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

 

10. INCOME TAXES

 

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

 

17

 

 

10. INCOME TAXES (CONTINUED)

 

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 three months ended March 31, 2020, 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 for certain subsidiaries and a VIE. As of March 31, 2020 and December 31, 2019, the Company had deferred tax assets of $3,635,446 and $3,574,333, respectively. The Company maintains a full valuation allowance on its net deferred tax assets as of March 31, 2020.

 

The Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties related to income tax matters, if any, in income tax expense.

 

For the three months ended March 31, 2020 and 2019, the Company had current income tax expenses of $48,380 generated by a profitable VIE and $nil, respectively, and deferred income tax expenses of $nil and $nil, respectively.

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Company is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. There were no uncertain tax positions as of March 31, 2020 and December 31, 2019 and the Company does not believe that its unrecognized tax benefits will change over the next twelve months.

 

18

 

 

11.RELATED PARTY TRANSACTIONS AND BALANCES

 

1)Nature of relationships with related parties

 

Name   Relationship with the Company

Chengdu Jianluo Technology Co., Ltd.

(“Chengdu Jianluo”)

  An associate of the Company, over which the Company has 40% equity interest and exercises significant influence

Shanghai Huxin Technology Co., Ltd.

(“Shanghai Huxin”)

  An associate of the Company, over which the Company has 40% equity interest and exercises significant influence

Shenzhen Qianhai Baiyu Supply Chain Co., Ltd.

(“Qianhai Baiyu”)

  Controlled by Mr. Zhiping Chen, the legal representative of Huamucheng
Guangzhou Chengji Investment Development Co., Ltd.
(“Guangzhou Chengji”)
  Controlled by Mr. Weicheng Pan, who is an independent director of the Company.
Jiaxi Gao   Chief Executive Office of the Company prior to January 9, 2020
Guotao Deng   Legal representative of an entity over which the Company exercised significant influence
Tao Sun   Senior Management of the Company
Shun Li   Legal representative of Beijing Tianxing
Lu Zhao   Senior Management of the Company

 

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11.RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

2)Balances with related parties

 

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

 

-Due from related parties

 

   March 31,
2020
   December 31,
2019
 
         
Qianhai Baiyu (i)  $4,360,948   $2,840,728 
Chengdu Jianluo (ii)   444,587    452,346 
Shanghai Huxin (iii)   17,503    17,809 
Total Due from related parties  $4,823,038   $3,310,883 

 

(i)The balance due from Qianhai Baiyu represented a loan principal and interest due from the related party. The Company charged the related party interest rates 10% per annum. Principal and interest are repaid on maturity of the loan. Interest income amounted to $54,193 and $nil for the three months ended March 31, 2020 and 2019. The balance of due from Qianhai Baiyu is fully collected as of the date of this report.

 

(i)As of March 31, 2020, the balance due from Chengdu Jianluo consisted of receivables for transfers of two used luxurious cars at consideration aggregating $461,302, netting off against car-related fees due to the related party of $16,715.

 

As of December 31, 2019, the balance due from Chengdu Jianluo consisted of receivables for transfers of two used luxurious cars at consideration aggregating $461,513, netting off against car-related fees due to the related party of $17,006.

 

The balance was fully collected as of the date of this report.

 

(ii)The balance due from Shanghai Huxin represented a loan due from the related party. The balance is collected on demand, and no interest income is charged to the associate. The balance was fully collected as of the date of this report.

  

20

 

 

11.RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

2)Balances with related parties (continued)

 

-Due to related parties, current

 

   March 31,
2020
   December 31,
2019
 
         
Guangzhou Chengji (1)  $1,920,589   $970,318 
Lu Zhao (2)   70,306    33,269 
Jiaxi Gao (3)   7,994    8,134 
Tao Sun (3)   6,515    4,206 
Guotao Deng (3)   487    1,435 
Total  $2,005,891   $1,017,362 

 

(1)The balance due to Guangzhou Chengji represents loan principal and interest due to the related parties. The loan has an interest rate of 8% per annum with a maturity date of September 4, 2020.

 

(2)As of March 31, 2020 and December 31, 2019, the balance due to Lu Zhao consisted of the operating expenses of $2,821 and $2,870, respectively, which was paid by the related party on behalf the Company and is payable on demand and interest free, and loan principal and interest aggregating $67,485 and $$30,399 due to the related party. The loans have an interest rate of 10% per annum with a maturity date of December 30, 2020

 

(3)The balances due to Jiaxin Gao, Guotao Deng and Tao Sun represents the operating expenses paid by the related parties on behalf of the Company. The balance is payable on demand and interest free.

 

-Due to related parties, noncurrent

 

   December 31,
2019
   December 31,
2018
 
           
Tao Sun  $149,515   $152,124 

 

The balance of related party loan was payable in September 2022, with an interest rate of 9.5% per annum.

 

For the above mentioned related party borrowings, interest expense amounted to $36,260 and $nil for the three months ended March 31, 2020 and 2019, respectively.

 

21

 

 

11.RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

3)Transactions with related parties

 

-Purchase from a related party and cost of revenue associated with commodity trading business

 

For the three months ended March 31, 2020, the Company purchased aluminum ingots of $1,055,143 from Qianhai Baiyu, which was controlled by Mr. Zhiping Chen, the legal representative of Huamucheng. For the three months ended March 31, 2020, the Company sold all aluminum ingots to customers and recorded cost of revenue of $1,055,143 associated with commodity product sales.

  

-Lending to a related party

 

For the three months ended March 31, 2020, the Company lent loans aggregating $1,593,260 to Qianhai Baiyu, which was controlled by Mr. Zhiping Chen, the legal representative of the Company. The Company charged the related party interest rates 10% per annum. For the three months ended March 31, 2020, the Company recognized interest income of $54,193.

 

-Borrowings from related parties

 

For the three months ended March 31, 2020, the Company borrowed loans aggregating $36,617 form Mr. Lu Zhao, a senior management of the Company. The loan will expire on December 24, 2020. The interest rate charged on the borrowing was 10%. For the three months ended March 31, 2020, the Company accrued interest expenses of $1,574.

 

For the three months ended March 31, 2020, the Company borrowed a loan of $948,863. The Loan has an annual interest rate of 8% and a maturity date of December 4, 2020. For the three months ended March 31, 2020, the Company accrued interest expenses of $32,270.

 

22

 

 

12.SEGMENT REPORTING

 

In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different services. For the three months ended March 31, 2020, the Company has two operating business lines, including business with metal products trading and supply chain management services business conducted by Huamucheng (“Commodity Trading and Supply Chain Management Services” or “Huamucheng Business”) and used luxurious car leasing business conducted by Beijing Tianxing (“Used Car Leasing” or “Tianxing Business”). Based on management’s assessment, the Company has determined that the two operating business lines are two operating segments as defined by ASC 280. For the three months ended March 31, 2019, the Company had one operating business line and one reporting unit.

 

The following table presents summary information by segment for the three months ended March 31, 2020 and 2019:

 

   For the Three Months Ended March 31, 2020 
   Tianxing
Business
   Huamucheng
Business
   Unallocated   Total 
Revenue  $14,051   $1,469,009   $         -   $1,483,060 
Cost of revenue and related tax   (99,314)   (1,055,860)   -    (1,155,174)
Gross profit  $(85,263)  $413,149   $-   $327,886 
Interest (expense) income, net  $(57,425)  $44,061   $19,001   $5,637 
Income tax expense  $-   $(48,380)  $-   $(48,380)
Segment (loss) profit  $(213,444)  $143,930   $(70,458)  $(139,972)
Segment assets as of March 31, 2020  $4,724,042   $5,505,654   $2,384,485   $12,614,181 

 

   For the Three Months Ended March 31, 2019 
   Tianxing
Business
   Huamucheng
Business
   Unallocated   Total 
Revenue  $399,999   $          -   $           -   $399,999 
Cost of revenue and related tax   (237,651)   -    -    (237,651)
Gross profit  $162,348   $-   $-   $162,348 
Interest income, net  $10,463   $-   $-   $10,463 
Income tax expense  $-   $-   $-   $- 
Segment loss  $(1,829,826)  $-   $-   $(1,829,826)
Segment assets as of March 31, 2019  $2,941,747   $-   $-   $2,941,747 

 

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13.COMMITMENTS AND CONTINGENCIES

 

1Lease Commitments

 

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

 

The Company leases offices space with terms ranging from one to two years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of right of use assets and lease liabilities. Lease expense for lease payment is recognized on a straight-line basis over the lease term. Leases with initial term of 12 months or less are not recorded on the balance sheet.

 

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discount lease payments based on an estimate of its incremental borrowing rate.

 

As of March 31, 2020, the Company had two lease contracts with lease expiration in June 2021 and September 2020, respectively. The lease contract does not contain any material residual value guarantees or material restrictive covenants. The table below presents the operating lease related assets and liabilities recorded on the balance sheet. 

 

   March 31,
2020
   December 31,
2019
 
         
Rights of use lease assets  $401,034   $41,188 
           
Operating lease liabilities, current  $302,028   $- 
Operating lease liabilities, noncurrent   52,352    - 
Total operating lease liabilities  $354,380   $- 

 

As of March 31, 2020 and December 31, 2019, the weighted average remaining lease term was 1.09 years and 0.71 years, respectively, and discount rates were 4.75% for all of the operating leases.

 

Lease expenses for the three months ended March 31, 2020 and 2019 were $95,124 and $16,624, respectively.

 

The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2020:

 

Twelve months ended March 31, 2021  $312,413 
Twelve months ended March 31, 2022   52,663 
Total lease payments   365,076 
Less: imputed interest   (10,696)
Present value of lease liabilities  $354,380 

 

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13.COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

2Contingencies

 

a 2015 Derivative Action

 

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

 

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

 

b 2017 Arbitration with Sorghum

 

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

 

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

 

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

 

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13.COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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

 

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

 

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

 

d2020 Court Matter with Harrison Fund

 

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

 

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

 

14.SUBSEQUENT EVENTS

 

Please see “Note 8 – Capital Transactions” for all subsequent capital transactions

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

As of March 31, 2020, the Company had two business lines, used luxury car leasing business and commodities trading business.

 

Used luxury car leasing business

 

Currently the Company has eleven used luxurious cars with net book value of approximately US$2.43 million. In addition, the Company also leased used luxurious cars from peer companies and individuals to provide more varieties of luxurious cars to our customers. To determine the model of vehicles to be purchased, we collect data related to customers’ demands and preferences through sales and online promotions. Our professional procurement personnel will then compare models of vehicles offered by different sellers. The decision to purchase a specific vehicle is based on a number of considerations including time of delivery, vehicle condition, vehicle safety features, mileage, repair and maintenance history, accident history, market scarcity, etc. Due to the effects of COVID-19, we had closed our luxury car rental facilities from the end of January 2020 and have resumed our operations since April 2020. For the three months ended March 31, 2020 and 2019, the Company earned income from operating lease of $14,051 and $399,999, respectively.

 

We rent our luxurious cars to our customers from our offices in Beijing, Shanghai, Zhejiang and Chengdu. We market our cars to targeted potential customers via phone calls or messages. The rental price varies based on the rental term which ranges from one day to one month. The longer the rental term, the cheaper the price. The daily rental price is the highest, while the average weekly rental price and average monthly rental price are 10% to 20% cheaper and 20% to 30% cheaper, respectively, than that of the daily rental price.

 

We conduct a comprehensive credit check against customers who place orders. We work with credit rating platforms such as JD Wanxiang and TYi Online to evaluate the customer’s credit. We may reject an order for any reason including unacceptable credit ratings. Once an order is accepted, we will require a deposit ranging from US$7,500 to US$15,000 based on the vehicle being ordered and the customer’s credit score. The deposit covers vehicle deposit and traffic violation deposit. Customer can confirm the time and place for vehicle delivery and rental term via SMS messages, phone calls or face-to-face communication with our sales personnel. After that, our sales personnel will deliver the vehicle to the customers at their designated location. The customer, before signing the car rental agreement, will inspect the vehicle in person and pay the lease fee along with the deposit via credit card, Wechat Pay or Alipay. The customer is responsible for the gas, toll fee, fees incurred to return the car, and any other expenses related to the use of the vehicle during the rental term.

 

We install five GPS trackers on each vehicle to track the location of the vehicles. Once the rental period is over, the vehicle needs to be returned to our designated location. In the event the vehicle is returned with no damage other than normal wear and tear, we will process the refund of the vehicle deposit on the next business day. The traffic deposit will be refunded after we confirm that there are no traffic violation records associated with the vehicle from the local police (approximately a month after the return).

 

Competition

 

We compete with car rental companies, many of which are more established and have more resources than us. Currently we compete primarily with Benson, V-FLY Travel and Wagons.

 

27

 

 

Commodities trading business

 

In order to diversify the Company’s business and generate additional revenue, on November 22, 2019, the Company’s wholly-owned subsidiary, Hao Limo Technology (Beijing) Co., Ltd. (“Hao Limo”), entered into a series of contractual agreements (the “Huamucheng VIE Agreements”) with Shenzhen Huamucheng Trading Co., Ltd. (“Huamucheng”) and certain shareholders of Huamucheng (“Huamucheng Shareholders”), who collectively hold 100% of Huamucheng. The Huamucheng VIE Agreements are designed to provide Hao Limo with the power, rights and obligations equivalent, in all material respects, to those it would possess as the sole equity holder of Huamucheng, including absolute control rights and the rights to the management, operations, assets, property and revenue of Huamucheng. The purpose of the VIE Agreements is solely to give Hao Limo the exclusive control over Huamucheng’s management. Through Huamucheng VIE structure, the Company is able to consolidate operations of Huamucheng effective November 22, 2019 and now operates a separate commodity trading business.

 

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

 

For the three months ended March 31, 2020, the Company recorded revenue of $1,053,632 from commodities trading business and $415,377 from supply chain management services (all from loan recommendation services), respectively, from Huamucheng’s operations.

 

Through Huamucheng’s business, the Company sources bulk commodity products from non-ferrous metal and mines or its designated distributors and then sells to manufactures who need these metals in large quantity. The Company works with upstream 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. 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.

  

Competition

 

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

 

Applicable Government Regulations

 

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

 

Key Factors Affecting Our Results of Operation

 

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

 

We have a limited operating history having just launched the car leasing business in May 2018 and started our commodities trading business in late November 2019. We believe our future success depends on our ability to significantly increase sales as well as maintain profitability from our operations. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving industry. These risks and challenges include, among other things,

 

  our ability to integrate commodities trading business with car leasing business;

 

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

 

  preservation of our competitive position in both of the luxurious car leasing and car service industry and 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 continuously grow our fleet, to purchase bulk volume of commodities, and expand our business in existing markets and to additional markets where we currently do not have operations.

 

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Results of Operations

 

Three Months Ended March 31, 2020 as Compared to Three Months Ended March 31, 2019

 

   For the Three Months Ended
March 31,
   Change 
   2020   2019   Amount   % 
Revenues                
Revenue from sales of commodity products  $1,053,632   $-   $1,053,632    100%
Revenue from supply chain management services   415,377    -    415,377    100%
Income from operating leases   14,051    399,999    (385,948)   (96)%
Total Revenue   1,483,060    399,999    1,083,061    271%
                     
Cost of revenue                    
Cost of revenue - commodity product sales - related party   (1,055,143)   -    (1,055,143)   100%
Cost of revenue - supply chain management services   (717)   -    (717)   100%
Cost of operating lease   (99,314)   (237,651)   138,337    (58)%
Total cost of revenue   (1,155,174)   (237,651)   (917,523)   386%
                     
Gross profit   327,886    162,348    165,538    102%
                     
Operating expenses                    
Selling, general, and administrative expenses   (425,115)   (1,906,319)   1,481,204    (78)%
Impairment on leasing business assets   -    (96,318)   96,318    (100)%
Total operating cost and expenses   (425,115)   (2,002,637)   1,577,522    (79)%
                     
Other income, net                    
Interest income, net   5,637    10,463    (4,826)   (46)%
Total other income, net   5,637    10,463    (4,826)   (46)%
                     
Loss Before Income Taxes   (91,592)   (1,829,826)   1,738,234    (95)%
                     
Income tax expenses   (48,380)   -    (48,380)   100%
                     
Net Loss  $(139,972)  $(1,829,826)  $1,689,854    (92)%

   

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Revenue

 

We generate revenue from the following three sources, including (1) revenue from sales of commodity products, (2) revenue from supply chain management services, and (3) income from operating lease. Both revenue from sales of commodity and revenue from supply chain management services were newly incorporated into our operations as a result of the consolidation of Huamucheng through VIE contractual agreements in November 2019. Total revenue increased by $1,083,061 or 271%, from $399,99 for the three months ended March 31, 2019 to $1,483,060 for the three months ended March 31, 2020, among which revenue from commodity trading, supply chain management and car leasing accounted for 71.1%, 28.0% and 0.9%, respectively, of our total revenue for the three months ended March 31, 2020. For the three months ended March 31, 2019, 100% of our revenue was generated from the used luxurious car leasing business.

 

(1)Revenue from sales of commodity products

 

For the three months ended March 31, 2020, the Company sold non-ferrous metals to two customers at fixed prices, and earned revenues when the product ownership was transferred to its customers. The Company earned revenues of $1,053,632 from sales of commodity products. There was no such revenue for the three months ended March 31, 2019.

 

(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 upstream metal and mineral suppliers sell their metal products, the Company launched its supply chain management service business in December 2019, which primarily consisted of loan recommendation services and distribution services. For the three months ended March 31, 2020, the Company provided loan recommendation services to customers.

 

Loan recommendation service fees

 

The Company refers customers who have financing needs for metal product trading to various financial institutions and assists these customers in obtain loans from the financial institutions. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by the customer. The referral service fee is set at 2.5% of the amount of loans obtained by the customers from the financial institutions. The Company earned $415,377 from loan recommendation services from the facilitation of a loan volume of approximately $17.6 million (RMB 123.0 million) with six customers.

 

(3)Income from operating lease

 

The Company commenced its business of lease services of used luxurious cars in May 2018. As of March 31, 2020 and 2019, the Company had eleven and eight used luxurious cars, respectively. The lease term is generally within one month. The operating lease income is recognized on a straight-line basis over the scheduled lease term.

 

As affected by COVID-19, we closed our car rental facilities from the end of January to March 2020, and gradually resumed business in April 2020. As a result, we generated minimal operating lease income for the three months ended March 31, 2020. The extent to which COVID-19 impacts our income from operating lease for the fiscal year 2020 will depend on certain future developments, including the duration and spread of the outbreak, emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses in attempting to contain the spread of COVID-19, all of which is uncertain at this point.

 

For the three months ended March 31, 2019, the Company generated operating lease income from used luxurious cars which are either owned by the Company or leased from third party vendors. The Company generated operating lease income of $399,999 for the three months ended March 31, 2019.

 

 

30

 

 

Cost of revenue

 

Our cost of revenue primarily include cost of revenue associated with commodity product sales, cost of revenue associated with management services of supply chain and cost of operating lease. Total cost of revenue increased by $917,523 or 386% from $237,651 for the three months ended March 31, 2019 to $1,155,174 for the three months ended March 31, 2020, primarily due to an increase of $1,055,143 in cost of revenue associated with commodity product sales which was just launched in December 2019, against a decrease of $138,337 in cost of operating lease as affected by COVID-19.

 

Cost of revenue associated with commodity trading

 

Cost of revenue primarily consists of purchase costs of non-ferrous metal products. For the three months ended March 31, 2020, the Company purchased non-ferrous metal products of $1,055,143 from Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Shenzhen Baiyu”), a related party controlled by the legal representative of Huamucheng, and sold non-ferrous metal products to two customers. The Company recorded cost of revenue of $1,055,143. There was no such cost for the three months ended March 31, 2019 because this was a new business launched in December 2019.

 

Costs associated with Operating lease

 

The operating lease expense mainly consisted of depreciation expenses on leasing business assets and car related expenses arising from lease of cars.

 

The depreciation expenses on leasing business assets increased from $46,858 for the three months ended March 31, 2019 to $79,578 for the three months ended March 31, 2020, representing an increase of $32,720, or 70%. The increase was mainly caused by the Company’s continuous investments in used luxurious cars. As of March 31, 2020, the Company had eleven used luxurious cars, as compared with eight cars as of March 31, 2019.

 

In the three months ended March 31, 2019, the Company officially launched sub-lease of luxurious car business through leasing cars from both third party peer companies and individuals. The Company recorded car leasing expenses of $19,736 and $190,793 for the three months ended March 31, 2020 and 2019, respectively. The decrease was mainly caused by the Company’s closure of car rental facilities from the end of January 2020 to March 2020, as affected by COVID-19.

 

Selling, general, and administrative expenses

 

Selling, general and administrative expenses decreased from $1,906,319 for the three months ended March 31, 2019 to $425,115 for the three months ended March 31, 2020, representing a decrease of $1,481,204, or 78%. Selling, general and administrative expenses primarily consisted of salary and employee benefits, office rental expense, business tax and surcharge, professional service fees, office supplies. The decrease was mainly attributable to combined effects of a decrease of other operating expenses of $358,518 as a result of closures of our car rental facilities for the three months ended March 31, 2020, and a decrease of legal and consulting expenses of $1,220,923 as a result of 1) issuance of 502,391 restricted shares as compensation of $884,208 to certain service providers for the three months ended March 31, 2019, while no such issuance for the three months ended March 31, 2020, and 2) a decrease in expenses incurred for the registered direct offerings in April and May 2019, including an increase of audit related fees of $156,659, an increase of commission of $100,000 to a third party vendor for referral of underwriters. 

 

Net loss

 

As a result of the foregoing, net loss for the three months ended March 31, 2020 was $139,972, representing a decrease of $1,689,854 from net loss of $1,829,826 for the three months ended March 31, 2019.

 

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Cash Flows and Capital Resources

 

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

 

For the three months ended March 31, 2020, the Company issued an aggregate of 17,000,000 shares of its common stock, and unsecured senior convertible promissory notes (“Notes”) in the aggregate principal amount of $30,000,000 accompanied by warrants to purchase 20,000,000 shares of Common Stock issuable upon conversion of the Notes at an exercise price of $1.80. In April 2020, the Holders elected to convert the Notes at a conversion price of $1.50 per share and also exercise the Warrants at an exercise price of $1.80 per share. The Company raised an aggregation of $81.1 million from these equity financing transactions, among which $1.6 million was advanced from investors in November 2019, and the remaining $79.5 million was collected in April and May 2020.

 

Liquidity 

 

During the three months ended March 31, 2020, the Company entered into additional private placement agreements with certain private investors and issued 15,000,000 shares of common stock at $0.90 per share and also sold unsecured senior convertible promissory notes (“Notes”) in the aggregate principal amount of $30,000,000 accompanied by warrants to purchase 20,000,000 shares of Common Stock issuable upon conversion of the Notes at an exercise price of $1.80. On April 14 and 15, 2020, the holders of Notes exercised warrants and paid cash consideration of $36,000,000   to the Company. Total equity financing from this transaction was $79.5 million. The Company received $79.5 million proceeds by April 15, 2020. The Company expects to use the proceeds from this equity financing as working capital to expand its commodity trading business.

 

Based on above financing activities, the management believes that the Company will continue as a going concern in the following 12 months.

 

Statement of Cash Flows

 

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

 

   For the Three Months Ended
March 31,
 
   2020   2019 
Net Cash Used in Operating Activities   (156,559)   (758,633)
Net Cash Used in Investing Activities   (3,424,968)   (999,481)
Net Cash Provided by Financing Activities   1,063,773    592,724 
Effect of exchange rate changes on cash and cash equivalents   98,172    21,969 
Net decrease in cash and cash equivalents   (2,419,582)   (1,143,421)

 

Net Cash Used in Operating Activities

 

During the three months ended March 31, 2020, we had a cash outflow from operating activities of $156,559, a decrease of $602,074 from a cash outflow of $758,633 for the three months ended March 31, 2019. We incurred a net loss for the three months ended March 31, 2020 of $139,972, a decrease of $1,689,854 from the three months ended March 31, 2019, during which we recorded a net loss of $1,829,826. In addition to the change in profitability, the decrease in net cash used in operating activities was the result of several factors, including:

 

An increase of $132,271 in changes of other current assets for the three months ended March 31, 2020 because the Company recognized but yet collected interest income of $85,275, and deferred NASDAQ service fees of $33,750, as compared with a decrease of $29,320 in changes of other current assets for the three months ended March 31, 2019 as a result of timely collection of petty cash from staff; and

  

502,391 restricted shares were issued to service providers as compensation for past services, at a fair value of $884,208

 

Net Cash Used in Investing Activities 

 

Net cash used in investing activities for the three months ended March 31, 2020 was $3,424,968 as compared to net cash used in investing activities of $999,481 for the three months ended March 31, 2019.

 

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The cash used in investing activities for the three months ended March 31, 2020 was for the loans disbursed to third parties and related parties of $1,831,708 and $1,593,260, respectively.

 

Net cash used in investing activities for the three months ended March 31, 2019 was combined effects of purchase of two used luxurious cars of $406,757 and loans disbursed to two third parties of $592,724.

 

Net Cash Provided by Financing Activities

 

During the three months ended March 31, 2020, the cash provided by financing activities was mainly attributable to borrowings from related parties of $1,063,773. During the three months ended March 31, 2019, the cash provided by financing activities was mainly attributable to borrowings from third parties of $592,724.

 

Off-balance Sheet Arrangements

 

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

 

Contractual Obligations

 

As of March 31, 2020, the annual amounts of future minimum payments under certain of our contractual obligations were:

 

       Less than         
   Total   1 year   1-2 years   Thereafter 
Contractual obligations:                
Operating lease (1)  $365,076   $312,413   $52,663             - 
Total  $365,076   $312,413   $52,663   $- 

 

(1)During the three months ended March 31, 2020, the Company entered into one additional lease contract. As of March 31, 2020, we had one rental free office lease agreement with a third party and four office lease agreement with third parties which expire through June 30, 2021, among which two lease agreements have leases term over 12 months.

 

(2)The Company classifies these lease agreements as operating leases in accordance with Topic 842.

 

Critical Accounting Policies

 

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

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.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 March 31, 2020 (please refer to Item 9A. Controls and Procedures enclosed in Form 10-K filed on May 29, 2020).

 

Limitations on the Effectiveness of Disclosure Controls. Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions.

  

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

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

 

a)2015 Derivative Action

 

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

 

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

 

b)2017 Arbitration with Sorghum

 

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

 

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

 

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

 

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

 

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

 

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

 

d)2020 Court Matter with Harrison Fund

 

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

 

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ITEM 1A.RISK FACTORS

 

As of the date of this Report, there have been no material changes to the risk factors disclosed in our annual report on Form 10-K filed with the SEC on May 29, 2020.

  

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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

 

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

 

The Warrants will be exercisable immediately upon the date of issuance at the exercise price of $1.80 for cash (the “Warrant Shares”. The Warrants may also be exercised cashless if at any time after the six-month anniversary of the issuance date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares, exercised, The Warrants will expire five years from its date of issuance. The Warrants are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions. The Warrants contain a mandatory exercise right for the Company to force exercise of the Warrants if the Company’s common stock trades at or above $3.00 for 20 consecutive trading days, provided, among other things, that the shares issuable upon exercise of the are registered or may be sold pursuant to Rule 144 and the daily trading volume exceeds 300,000 shares of Common stock per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date.

 

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

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.OTHER INFORMATION

 

None. 

 

ITEM 6.EXHIBITS

 

Exhibit No.   Description
     
3.1*   Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the draft registration statement on Form DRS filed on February 14, 2013)
3.2*   Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of the draft registration statement on Form DRS filed on February 14, 2013)
3.3*   Articles of Association of Wujiang Luxiang Rural Microcredit Co. Ltd. (incorporated by reference to Exhibit 3.3 of the registration statement on Form S-1/A filed on June 27, 2013)
3.4*   Certificate of Approval of Wujiang Luxiang Rural Microcredit Co. Ltd. (incorporated by reference to Exhibit 3.4 of the registration statement on Form S-1 filed on June 7, 2013)
3.5*   Certificate of Amendment of the Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.5 of the registration statement on Form S-1/A filed on July 16, 2013)
3.6*   Certificate of Amendment to the Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on January 16, 2019)
3.7*   Certificate of Amendment to the Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on June 7, 2019
3.8*   Certificate of Amendment to the Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on March 12, 2020
4.1*   Form of Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on April 12, 2019
4.2*   Form of Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on May 22, 2019

 

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4.3*   Form of Amended & Restated Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K filed on May 22, 2019
4.4*   Form of Exchange Warrant, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed on September 3, 2019
10.1*   Form of Securities Purchase Agreement, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 22, 2020
10.2*   Form of Note Securities Purchase Agreement, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on January 22, 2020
10.3*   Unofficial Translation of Warehousing Agreement dated January 22, 2020, by and between Huamucheng and Foshan Nanchu Storage Management Co., Ltd., incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on January 22, 2020
10.4*   Unofficial Translation of Purchase Agreement dated January 22, 2020, by and between Huamucheng and Shenzhen Qianhai Baiyu Supply Chain Co., Ltd., incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on January 22, 2020
10.5*   Unofficial Translation of Sales Agreement dated January 22, 2020, by and between Huamucheng and Yunfeihu Cross-border E-Commerce Co., Ltd., incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed on January 22, 2020
10.6*   Amended and Restated Employment Agreement dated January 9, 2020 by and between Registrant and Renmei Ouyang, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 10, 2020
10.7*   Employment Agreement dated January 9, 2020 by and between Registrant and Qun Xie, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on January 10, 2020
10.8*   Director Offer Letter dated January 9, 2020 by and between Registrant and Qun Xie, incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on January 10, 2020
31.1**   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2**   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Previously filed
   
** Filed herewith

  

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TD HOLDINGS, INC.  

 

Date: June 26, 2020 By: /s/ Renmei Ouyang
  Name:   Renmei Ouyang
  Title:

Chief Executive Officer

(Principal Executive Officer)

     
  By: /s/ Yang An
  Name:  Yang An
  Title: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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