The Company’s 2019 audit schedule had
to be revised to reflect the foregoing developments. The extension of time was necessary due to unanticipated delays being experienced
by the Company and its auditors in completing the field work associated with the audit of the Company’s financial statements
and the Company’s completing its Annual Report. The auditor personnel has been working remotely and has been unable to visit
field until May 2020. Considering the lack of time for the compilation, attesting and review of the information required to be
presented and the importance of markets and investors receiving materially accurate information in the Annual Report, as a result,
additional alternative procedures were required, and such measures delayed the overall audit process and filing of the Annual
Report.
PART
I
ITEM
1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not
required.
ITEM
2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
Not
required.
|
A.
|
Selected
financial data
|
In
the table below, we provide you with summary financial data of our company. The selected consolidated statement of income and
other comprehensive income data for the years ended December 31, 2016, 2017 and 2018, 2019 and the selected consolidated balance
sheet data as of December 31, 2016, 2017, 2018 and 2019 are derived from our audited consolidated financial statements, which
are included elsewhere in this Annual Report. Historical results are not necessarily indicative of the results that may be expected
for any future period. When you read this historical selected financial data, it is important that you read it along with the
historical statements and notes included elsewhere in this Annual Report.
Selected
Consolidated Financial Data
Selected
Consolidated Statement of Income and Other Comprehensive Income Data
|
|
For The Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
12,648,255
|
|
|
$
|
23,674,037
|
|
|
$
|
28,979,511
|
|
|
$
|
24,443,736
|
|
Cost of revenues
|
|
|
14,171,135
|
|
|
|
27,726,833
|
|
|
|
20,682,498
|
|
|
|
17,368,249
|
|
Gross profit
|
|
|
(1,522,880
|
)
|
|
|
(4,052,796
|
)
|
|
|
8,297,013
|
|
|
|
7,075,487
|
|
Total operating expenses
|
|
|
5,435,616
|
|
|
|
9,990,976
|
|
|
|
8,029,708
|
|
|
|
5,924,198
|
|
Income (loss) from operations
|
|
|
(6,958,496
|
)
|
|
|
(14,043,772
|
)
|
|
|
267,305
|
|
|
|
1,151,289
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government subsidies
|
|
|
129,255
|
|
|
|
81,882
|
|
|
|
414
|
|
|
|
21,912
|
|
Other income
|
|
|
1,189
|
|
|
|
20,242
|
|
|
|
19,305
|
|
|
|
51,535
|
|
Other expenses
|
|
|
(290,655
|
)
|
|
|
(26,992
|
)
|
|
|
(144,069
|
)
|
|
|
(23,490
|
)
|
Interest expenses
|
|
|
(1,378,755
|
)
|
|
|
(233,101
|
)
|
|
|
(82,946
|
)
|
|
|
(102,274
|
)
|
Loss from equity method investments
|
|
|
(127,965
|
)
|
|
|
(17,524
|
)
|
|
|
-
|
|
|
|
-
|
|
Total other income (expenses)
|
|
|
(1,666,931
|
)
|
|
|
(175,493
|
)
|
|
|
(207,296
|
)
|
|
|
(52,317
|
)
|
Income (loss) before income taxes provision
|
|
|
(8,625,427
|
)
|
|
|
(14,219,265
|
)
|
|
|
60,009
|
|
|
|
1,098,972
|
|
Income tax provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
(55,102
|
)
|
|
|
89,801
|
|
Net income (loss)
|
|
|
(8,625,427
|
)
|
|
|
(14,219,265
|
)
|
|
|
115,111
|
|
|
|
1,009,171
|
|
Earnings (loss) per common share attributable to TDH Holdings, Inc. – basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
0.01
|
|
|
$
|
0.13
|
|
Selected
Balance Sheet Data
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,114,175
|
|
|
$
|
893,020
|
|
|
$
|
2,346,109
|
|
|
$
|
1,145,103
|
|
Total current assets
|
|
|
7,192,890
|
|
|
|
7,803,062
|
|
|
|
15,579,344
|
|
|
|
9,822,363
|
|
Total non-current assets
|
|
|
7,894,320
|
|
|
|
9,626,344
|
|
|
|
4,231,396
|
|
|
|
3,417,556
|
|
Total assets
|
|
|
15,087,210
|
|
|
|
17,429,406
|
|
|
|
19,810,740
|
|
|
|
13,239,919
|
|
Total current liabilities
|
|
|
14,461,900
|
|
|
|
19,143,578
|
|
|
|
8,656,648
|
|
|
|
8,973,372
|
|
Total non-current liabilities
|
|
|
287,911
|
|
|
|
222,395
|
|
|
|
5,810
|
|
|
|
13,795
|
|
Total liabilities
|
|
|
14,749,811
|
|
|
|
19,365,973
|
|
|
|
8,662,458
|
|
|
|
8,987,167
|
|
Total equity (deficit)
|
|
|
337,399
|
|
|
|
(1,936,567
|
)
|
|
|
11,148,282
|
|
|
|
4,252,752
|
|
Total liabilities and shareholders’ equity (deficit)
|
|
$
|
15,087,210
|
|
|
$
|
17,429,406
|
|
|
$
|
19,810,740
|
|
|
$
|
13,239,919
|
|
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
On June 10, 2020, the buying rate announced by the Federal Reserve Statistical Release was RMB 7.0703 to $1.00.
|
|
Spot Exchange Rate
|
|
Period
|
|
Period Ended
|
|
|
Average (1)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per US$1.00)
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8767
|
|
|
|
6.9008
|
|
|
|
6.8360
|
|
|
|
6.9575
|
|
February
|
|
|
6.8665
|
|
|
|
6.8727
|
|
|
|
6.8517
|
|
|
|
6.8821
|
|
March
|
|
|
6.8821
|
|
|
|
6.8940
|
|
|
|
6.8700
|
|
|
|
6.9132
|
|
April
|
|
|
6.8937
|
|
|
|
6.888
|
|
|
|
6.8944
|
|
|
|
6.9060
|
|
May
|
|
|
6.8098
|
|
|
|
6.8843
|
|
|
|
6.8098
|
|
|
|
6.9060
|
|
June
|
|
|
6.7793
|
|
|
|
6.8066
|
|
|
|
6.7793
|
|
|
|
6.8382
|
|
July
|
|
|
6.7240
|
|
|
|
6.7694
|
|
|
|
6.7240
|
|
|
|
6.8039
|
|
August
|
|
|
6.5888
|
|
|
|
6.6670
|
|
|
|
6.5918
|
|
|
|
6.7272
|
|
September
|
|
|
6.6533
|
|
|
|
6.5690
|
|
|
|
6.4773
|
|
|
|
6.6591
|
|
October
|
|
|
6.6328
|
|
|
|
6.6254
|
|
|
|
6.5712
|
|
|
|
6.6498
|
|
November
|
|
|
6.6090
|
|
|
|
6.6200
|
|
|
|
6.5967
|
|
|
|
6.6385
|
|
December
|
|
|
6.5063
|
|
|
|
6.5932
|
|
|
|
6.5063
|
|
|
|
6.6210
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.2841
|
|
|
|
6.4233
|
|
|
|
6.2841
|
|
|
|
6.5263
|
|
February
|
|
|
6.3280
|
|
|
|
6.3183
|
|
|
|
6.2649
|
|
|
|
6.3471
|
|
March
|
|
|
6.2726
|
|
|
|
6.3174
|
|
|
|
6.2685
|
|
|
|
6.3565
|
|
April
|
|
|
6.2945
|
|
|
|
6.2859
|
|
|
|
6.2722
|
|
|
|
6.3045
|
|
May
|
|
|
6.4070
|
|
|
|
6.3694
|
|
|
|
6.3610
|
|
|
|
6.4193
|
|
June
|
|
|
6.6191
|
|
|
|
6.4625
|
|
|
|
6.3889
|
|
|
|
6.6191
|
|
July
|
|
|
6.8174
|
|
|
|
6.7137
|
|
|
|
6.6171
|
|
|
|
6.8174
|
|
August
|
|
|
6.8317
|
|
|
|
6.8445
|
|
|
|
6.8110
|
|
|
|
6.9145
|
|
September
|
|
|
6.8666
|
|
|
|
6.8529
|
|
|
|
6.8299
|
|
|
|
6.8801
|
|
October
|
|
|
6.9695
|
|
|
|
6.9173
|
|
|
|
6.8679
|
|
|
|
6.9695
|
|
November
|
|
|
6.9470
|
|
|
|
6.9359
|
|
|
|
6.8910
|
|
|
|
6.9555
|
|
December
|
|
|
6.8764
|
|
|
|
6.8666
|
|
|
|
6.8407
|
|
|
|
6.9568
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.7006
|
|
|
|
6.7894
|
|
|
|
6.7006
|
|
|
|
6.8764
|
|
February
|
|
|
6.6850
|
|
|
|
6.7381
|
|
|
|
6.6840
|
|
|
|
6.7765
|
|
March
|
|
|
6.7111
|
|
|
|
6.7109
|
|
|
|
6.6886
|
|
|
|
6.7315
|
|
April
|
|
|
6.7346
|
|
|
|
6.7147
|
|
|
|
6.6922
|
|
|
|
6.7370
|
|
May
|
|
|
6.8992
|
|
|
|
6.8139
|
|
|
|
6.7238
|
|
|
|
6.9212
|
|
June
|
|
|
6.8747
|
|
|
|
6.8870
|
|
|
|
6.8531
|
|
|
|
6.9210
|
|
July
|
|
|
6.8841
|
|
|
|
6.8779
|
|
|
|
6.7845
|
|
|
|
6.9000
|
|
August
|
|
|
7.0879
|
|
|
|
6.9909
|
|
|
|
6.8850
|
|
|
|
7.1748
|
|
September
|
|
|
7.0729
|
|
|
|
7.0804
|
|
|
|
7.0720
|
|
|
|
7.1640
|
|
October
|
|
|
7.0533
|
|
|
|
7.0631
|
|
|
|
7.0258
|
|
|
|
7.1668
|
|
November
|
|
|
7.0298
|
|
|
|
7.0368
|
|
|
|
6.9602
|
|
|
|
7.0535
|
|
December
|
|
|
6.9680
|
|
|
|
7.0030
|
|
|
|
6.8934
|
|
|
|
7.0470
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8876
|
|
|
|
6.9319
|
|
|
|
6.8870
|
|
|
|
6.9964
|
|
February
|
|
|
7.0066
|
|
|
|
6.9471
|
|
|
|
6.9102
|
|
|
|
7.0074
|
|
March
|
|
|
7.0851
|
|
|
|
7.0459
|
|
|
|
6.9211
|
|
|
|
7.1011
|
|
April
|
|
|
7.0571
|
|
|
|
7.0671
|
|
|
|
6.9924
|
|
|
|
7.1187
|
|
May
|
|
|
7.1316
|
|
|
|
7.0944
|
|
|
|
7.0270
|
|
|
|
7.1518
|
|
Source:
Federal Reserve Statistical Release.
(1)
|
Monthly
averages, lows, and highs are calculated using the average of the daily rates during the relevant period.
|
|
B.
|
Capitalization
and Indebtedness
|
Not
required.
|
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
required.
You
should carefully consider the following risk factors, together with all of the other information included in this Annual Report.
Risk
Related to Our Business
We
have incurred losses and anticipate continuing to incur losses in the future.
Our
net losses were $14,219,265 in 2018 and $8,625,427 in 2019. As of December 31, 2019, we had an accumulated deficit of approximately
$21.97 million. We anticipate that we will continue to incur losses. We cannot guarantee that going forward we will operate profitably.
In order to achieve profitability, among other factors, management must successfully execute our growth and operations in the
markets on which we are focused. If we are unable to successfully take necessary steps, we may be unable to sustain or increase
our profitability in the future.
We
may need to secure additional capital or reduce and/or cease our operations.
To
date, we have funded our operations primarily through the initial public offering proceeds, private placements, borrowings from
related parties, and our lines of credit. We anticipate incurring additional losses and may not regain profitability. Additionally,
even if we raise sufficient capital through equity or debt financing, strategic alliances or otherwise, there can be no assurances
that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable
or generate positive cash flow.
The
report of our independent registered public accounting firm expresses substantial doubt about the Company’s ability to continue
as a going concern.
Our
consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. However, for the year ended December 31, 2019, the
Company has incurred a net loss of approximately $8.63 million and working capital deficit of approximately $7.27 million and
its cash balance and revenues generated are not currently sufficient and cannot be projected to cover operating expenses and meet
the Company’s obligations as they become due for the next twelve months after the date that our financial statements are
issued. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s
plan to alleviate the substantial doubt about the Company’s ability to continue as a going concern include attempting to
improve its business profitability, its ability to generate sufficient cash flow from its operations to meet its operating needs
on a timely basis, obtain additional working capital funds through debt and equity financings to eliminate inefficiencies in order
to meet its anticipated cash requirements. However, there can be no assurance that these plans and arrangements will be sufficient
to fund the Company’s ongoing capital expenditures, working capital, and other requirements. If we are unable to achieve
these goals, our business would be jeopardized and the Company may not be able to continue. If we ceased operations, it is likely
that all of our investors would lose their investment.
If
we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm
our business and the trading price of our stock.
Effective internal controls are necessary for
us to provide reliable financial reports and effectively prevent fraud. As of the end of the most recently completed fiscal year
ended December 31, 2019, our SOX certifying officers concluded that, as of December 31, 2019, our disclosure controls and procedures
were not effective due to the presence of material weakness in internal control over financial reporting (Refer to Item 15 of
this Annual Report). We intend to carry out a number of measures to address and remediate the material weakness in our internal
controls. This work is ongoing and we intend to complete it on or before December 31, 2020. If we cannot provide financial reports
or prevent fraud, our business reputation and operating results could be harmed. Inferior internal controls also could cause investors
to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
The
Company will incur significant delays and/or expenses relating to the COVID-19 (coronavirus) outbreak in China and beyond.
Beginning
in late 2019, there were reports of the COVID-19 (coronavirus) outbreak originating in China, prompting government-imposed quarantines,
cessation of certain travel and business closures. Following this outbreak, in February 2020, the Company temporarily shut down
its main office and its remaining production facilities. Following the previously reported temporary cessation of its production
capabilities and the negative impact of the COVID-19 pandemic, the Company expects to continue to incur significant delays, reductions
in revenue and increases in expenses. The Company’s revenues remain negligible following the gradual resumption of its operations
in mid May 2020. Moreover, the Company expects that the impact of the COVID-19 outbreak on the domestic and global economic
environment will have a material adverse effect on the demand for its services and its ability to generate revenue going forward.
Any and all of the foregoing could have a material adverse impact on its business, operating results and financial condition.
Further, there can be no assurance that we would be able to secure commercial financing in the future in the event that we require
additional capital.
The
Company is party to various legal proceedings by its vendors and lenders, which proceedings distract our management, are expensive
to conduct and could result in significant damage award against the Company.
As discussed in Item 5 of this Annual Report, during the period
from November 2019 to June 2020, the Company has been named as a defendant in 48 lawsuits by its raw material supplies, printing
and packaging supplies, transportation companies and other vendors. The claims raised in these lawsuits pertain to the Company’s
non-payment of various invoices for supplier and vendor services rendered, with interest and costs. As of the date of this Annual
Report, 46 of the proceedings have been resolved such that in 30 lawsuits, the creditors agreed to settle if we paid the settlement
amounts; in 16 lawsuits, the Court ruled in favor of the creditors; and 2 proceedings against the Company remain ongoing. The mediation
and judgment is estimated approximately RMB11.8 million (USD1.69 million). In addition, several lending institutions have instituted
legal proceedings to recover loans made to the Company. Finally, there are several labor arbitration claims against the Company
brought by its former employees following the layoffs, claiming, among others, lost wages, severance payments and/or social security
obligations totaling RMB4.8 million (USD0.69 million). As of the reporting date, there were 97 labor arbitrations, of which 96
had entered the first phase of trial and 1 had entered the second phase of trial. We are currently litigating, mediating and/or
settling the claims. For lawsuits from employees, we have accrued approximately $0.4 million contingent liabilities in other current
liabilities on the consolidated balance sheet as of December 31, 2019 and recognized contingent losses of approximately $0.4 million
for the year ended December 31, 2019 upon the estimate of the management of the Company together with the trail counsel of these
cases.
The
turnaround of our business depends on our ability to accurately predict consumer trends and demand and successfully introduce
new products and product line extensions and improve existing products.
Our
turnaround depends, in part, on our ability to successfully introduce new products and product line extensions and improve and
reposition our existing products to meet the requirements of pet owners and the dietary needs of their pets. This, in turn, depends
on our ability to predict and respond to evolving consumer trends, demands and preferences. The development and introduction of
innovative new products and product line extensions involve considerable costs. In addition, it may be difficult to establish
new supplier relationships and determine appropriate product selection when developing a new product or product line extension.
Any new product or product line extension may not generate sufficient customer interest and sales to become a profitable product
or to cover the costs of its development and promotion and may reduce our operating income. In addition, any such unsuccessful
effort may adversely affect our brand. If we are not able to anticipate, identify or develop and market products that respond
to changes in requirements and preferences of pet parents and their pets or if our new product introductions or repositioned products
fail to gain consumer acceptance, we may not grow our business as anticipated, our sales may decline and our business, financial
condition and results of operations may be materially adversely affected.
We
may not be able to successfully implement our turning loss into profits strategy on a timely basis or at all.
Our
future success depends, in large part, on our ability to implement our turning loss into profits strategy, including expanding
distribution and improving placement of our products in the stores of our retail partners, attracting new consumers to our brands,
introducing new products and product line extensions and expanding into new markets. Our ability to implement this strategy depends,
among other things, on our ability to:
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enter
into distribution and other strategic arrangements with retailers and other potential distributors of our products;
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continue
to effectively compete in our distribution channels;
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increase
our brand recognition by effectively implementing our marketing strategy and advertising initiatives;
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expand
and maintain brand loyalty;
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develop
new products and product line extensions that appeal to consumers;
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maintain
and, to the extent necessary, improve our high standards for product quality, safety and integrity;
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maintain
sources for the required supply of quality raw ingredients to meet our growing demand; and
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identify
and successfully enter and market our products in new geographic markets and market segments.
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We
may not be able to successfully implement our turning loss into profits strategy and may need to change our strategy. If we fail
to implement our turning loss into profits strategy or if we invest resources in a turning loss into profits strategy that ultimately
proves unsuccessful, our business, financial condition and results of operations may be materially adversely affected.
Any
damage to our reputation or our brand may materially adversely affect our business, financial condition and results of operations.
Maintaining
our strong reputation with consumers, our retail partners and our suppliers is critical to our success. Our brands may suffer
if our marketing plans or product initiatives are not successful. The importance of our brands may increase if competitors offer
more products with formulations similar to ours. Further, our brands may be negatively impacted due to real or perceived quality
issues or if consumers perceive us as being untruthful in our marketing and advertising, even if such perceptions are not accurate.
Product contamination, the failure to maintain high standards for product quality, safety and integrity, including raw materials
and ingredients obtained from suppliers, or allegations of product quality issues, mislabeling or contamination, even if untrue
or caused by our third-party contract manufacturers or raw material suppliers, may reduce demand for our products or cause production
and delivery disruptions. We maintain guidelines and procedures to ensure the quality, safety and integrity of our products. However,
we may be unable to detect or prevent product and/or ingredient quality issues, mislabeling or contamination, particularly in
instances of fraud or attempts to cover up or obscure deviations from our guidelines and procedures. If any of our products become
unfit for consumption, cause injury or are mislabeled, we may have to engage in a product recall and/or be subject to liability.
Damage to our reputation or our brands or loss of consumer confidence in our products for any of these or other reasons could
result in decreased demand for our products and our business, financial condition and results of operations may be materially
adversely affected.
Our
business is dependent on trends that may change or not continue, and our historical growth may not be indicative of our future
results.
The
growth of the global pet food industry and the market in China, in particular, depends primarily on the continuance of current
trends in humanization of pets and premiumization of pet foods as well as on general economic conditions, the size of the pet
population and average dog size. These trends may not continue or may change. In the event of a decline in the overall number
or average size of pets, a change in the humanization, premiumization or health and wellness trends or during challenging economic
times, we may be unable to persuade our customers and consumers to purchase our branded products instead of lower-priced products,
and our business, financial condition and results of operations may be materially adversely affected.
There
may be decreased spending on pets globally in a challenging economic climate.
Our
business, financial condition and results of operations may be materially adversely affected by a challenging economic climate,
including adverse changes in interest rates, volatile commodity markets and inflation, contraction in the availability of credit
in the market and reductions in consumer spending. In addition, a slow-down in the general economy and/or PRC economy or a shift
in consumer preferences for economic reasons or otherwise to less expensive products may result in reduced demand for our products
which may affect our profitability. The keeping of pets and the purchase of pet-related products may constitute discretionary
spending for some of our consumers and any material decline in the amount of consumer discretionary spending may reduce overall
levels of pet ownership or spending on pets. As a result, a challenging economic climate may cause a decline in demand for our
products which could be disproportionate as compared to competing pet food brands since our products command a price premium.
In addition, we cannot predict how current or worsening economic conditions in the PRC and globally will affect our partners,
suppliers and distributors. If economic conditions result in decreased spending on pets and have a negative impact on our retail
partners, suppliers or distributors, our business, financial condition and results of operations may be materially adversely affected.
Our
business depends, in part, on the sufficiency and effectiveness of our marketing and trade promotion programs.
Due
to the competitive nature of our industry, we must effectively and efficiently promote and market our products through advertisements
as well as trade promotions and incentives to sustain our competitive position in our market. Marketing investments may be costly.
In addition, we may, from time to time, change our marketing strategies and spending, including the timing or nature of our trade
promotions and incentives. We may also change our marketing strategies and spending in response to actions by our competitors
and other pet food companies. The sufficiency and effectiveness of our marketing and trade promotions and incentives are important
to our ability to retain and/or improve our market share and margins. If our marketing and trade promotions and incentives are
not successful or if we fail to implement sufficient and effective marketing and trade promotions and incentives or adequately
respond to changes in our competitors’ marketing strategies, our business, financial condition and results of operations
may be adversely affected.
We
depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.
Our
future success depends heavily upon the continued service of our key executives. We rely on their business, industry, financial
and capital markets knowledge and experience. If our CEO or CFO became unable or unwilling to continue in their present positions,
we may not be able to replace them easily, our business may be significantly disrupted and our financial condition and results
of operations may be materially adversely affected.
We
do not maintain key man life insurance on any of our senior management or key personnel.
The
loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management
and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement
for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel
joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals
and staff members of our Company. In addition, we compete for qualified personnel with other companies, and we face competition
in attracting skilled personnel and retaining the members of our senior management team. These personnel possess technical and
business capabilities which are difficult to replace. There is intense competition for experienced senior management with technical
and industry expertise in our industry, and we may not be able to retain our key personnel. Intense competition for these personnel
could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future
success and ability to grow our business will depend in part on the continued service of these individuals and our ability to
identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be
unable to meet our business and financial goals.
If
we are unable to maintain or increase prices, we may fail to generate a positive margin.
We
rely in part on price increases to offset cost increases and improve the profitability of our business. Our ability to maintain
prices or effectively implement price increases may be affected by a number of factors, including competition, effectiveness of
our marketing programs, the continuing strength of our brands, market demand and general economic conditions, including inflationary
pressures. In particular, in response to increased promotional activity by other pet food companies, we have increased our promotional
spending, which has resulted in a lower average price per pound for our products and has adversely impacted our gross margins.
During challenging economic times, consumers may be less willing or able to pay a price premium for our branded products and may
shift purchases to lower-priced or other value offerings, making it more difficult for us to maintain prices and/or effectively
implement price increases. In addition, our retail partners and distributors may pressure us to rescind price increases that we
have announced or already implemented, whether through a change in list price or increased promotional activity. If we are unable
to maintain or increase prices for our products or must increase promotional activity, our margins may be adversely affected.
Furthermore, price increases generally result in volume losses, as consumers purchase fewer units. If such losses are greater
than expected or if we lose distribution due to a price increase, our business, financial condition and results of operations
may be materially adversely affected.
If
our products are alleged to cause injury or illness or fail to comply with PRC or other applicable governmental regulations, we
may need to recall our products and may experience product liability claims.
Our
products may be exposed to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of
injury or illness, or if they are alleged to have been mislabeled, misbranded or adulterated or to otherwise be in violation of
governmental regulations. We may also voluntarily recall or withdraw products in order to protect our brand or reputation if we
determine that they do not meet our standards, whether for palatability, appearance or otherwise. If there is any future product
recall or withdrawal, it could result in substantial and unexpected expenditures, destruction of product inventory, damage to
our reputation and lost sales due to the unavailability of the product for a period of time, and our business, financial condition
and results of operations may be materially adversely affected. We also may be subject to claims if the consumption or use of
our products is alleged to cause injury or illness. If there is a judgment against us or a settlement agreement related to a claim,
our business, financial condition and results of operations may be materially adversely affected.
We
are dependent on a limited number of retailer customers for a significant portion of our sales.
We
sell our products to retail partners and distributors in specialty channels. Our ten largest retail partners, accounted for 69%
of our net sales for the year ended December 31, 2016, 56% in 2017, 54% in 2018, and 44% in 2019. If we were to lose any of
our key customers, if any of our retail partners reduce the amount of their orders or if any of our key customers consolidate,
reduce their store footprint and/or gain greater market power, our business, financial condition and results of operations may
be materially adversely affected. In addition, we may be similarly adversely impacted if any of our key customers experience any
operational difficulties or generate less traffic.
Failure
to make adequate contributions to Housing Provident Fund for some of the employees could adversely affect our financial condition
and we may be subject to labor dispute or complaint.
Pursuant
to the Regulations on Management of Housing Provident Fund (HPF) which was promulgated by the State Council on April 3, 1999 and
was amended on March 24, 2002, PRC enterprises must register with relevant HPF management center, open special HPF accounts at
a designated bank and make timely HPF contributions for their employees. In accordance with Regulations on Management of Housing
Provident Fund and Implementation Measures for the Administration of Housing Provident Fund in Qingdao, if an enterprise fails
to pay in full or in part its HPF contributions, such enterprise will be ordered by the HPF enforcement authorities to make such
contributions, and may be compelled by the people’s court that has jurisdiction over the matter to make such contributions.
Furthermore, if the Company fails to make adequate contributions to HPF for some of its employees, such failure may give rise
to a private cause of action by such individual(s) against the Company. There is a certain discrepancy between interpretation
and enforcement of such regulations on the national and local level such that local and national enforcement practices at times
vary significantly. HPF contributions are only required for employees with urban housing registration; for employees with rural
registration contributions are voluntary and are not required. The Company has registered with relevant HPF authority in the PRC,
but has not made adequate contributions to the fund for some of its employees. The Company’s failures to make such contributions
were due to the inadvertent oversight of the Company’s staff. The Company estimates such amounts for the last three years
would not to exceed US$104,000. As of the date of this Annual Report, the Company has not received any demand or order from the
competent authorities with respect to settling the balance of the fund contributions. Mr. Cui and Ms. Wang have executed a deed
of indemnity in favor of the Company’s subsidiaries in the PRC on July 7, 2017 pursuant to which they agreed to indemnify
the Company’s subsidiaries in the PRC in full against any losses and penalties which they may suffer as a result of the
Company’s non-payment of the fund contributions. To the extent the Company is required to make such payments in full, such
payments may have adverse financial or operational impact on the Company. The Company may also be subject to labor dispute or
complaint from its employees.
We
rely upon a limited number of contract manufacturers to provide a significant portion of our supply of products.
There
is limited available manufacturing capacity that meets our quality standards. We have agreements with a network of contract manufacturers
that require them to provide us with specific finished products. Most of our agreements with our contract manufacturers are up
to three years. During the years ended December 31, 2017, 2018 and 2019, approximately 31%, 58% and 60% of our cost of sales, respectively,
was derived from products purchased from contract manufacturers. The manufacture of our products may not be easily transferable
to other sites in the event that any of our contract manufacturers experience breakdown, failure or substandard performance of
equipment, disruption of supply or shortages of raw materials and other supplies, labor problems, power outages, adverse weather
conditions and natural disasters or the need to comply with environmental and other directives of governmental agencies. From
time to time, a contract manufacturer may experience financial difficulties or other business disruptions, which could disrupt
our supply of finished goods or require that we incur additional expense by providing financial accommodations to the contract
manufacturer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new contract manufacturing
arrangement with another provider. The loss of any of these contract manufacturers or the failure for any reason of any of these
contract manufacturers to fulfill their obligations under their agreements with us, including a failure to meet our quality controls
and standards, may result in disruptions to our supply of finished goods. We may be unable to locate an additional or alternate
contract manufacturing arrangement that meets our quality controls and standards in a timely manner or on commercially reasonable
terms, if at all.
To
the extent our retailer customers purchase products in excess of consumer consumption in any period, our sales in a subsequent
period may be adversely affected as our customers seek to reduce their inventory levels.
From
time to time, our retailer customers may purchase more product than they expect to sell to consumers during a particular time
period. Our retailer customers may grow their inventory in anticipation of, or during, our promotional events, which typically
provide for reduced prices during a specified time or other customer or consumer incentives. Our retailer customers may also grow
inventory in anticipation of a price increase for our products, or otherwise over-order our products as a result of overestimating
demand for our products. If a retailer customer increases its inventory during a particular reporting period as a result of a
promotional event, anticipated price increase or otherwise, then sales during the subsequent reporting period may be adversely
impacted as our customers seek to reduce their inventory to customary levels. This effect may be particularly pronounced when
the promotional event, price increase or other event occurs near the end or beginning of a reporting period or when there are
changes in the timing of a promotional event, price increase or similar event, as compared to the prior year. To the extent our
retailer customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess
of consumer consumption, our net sales and results of operations may be materially adversely affected in that period.
We
operate in a highly competitive industry and may lose market share or experience margin erosion if we are unable to compete effectively.
We
compete on the basis of product quality and palatability, brand awareness and loyalty, product variety and ingredients, interesting
product names, product packaging and package design, reputation, price and promotional efforts. We compete with a significant
number of companies of varying sizes, including divisions or subsidiaries of larger companies who may have greater financial resources
and larger customer bases than we have. As a result, these competitors may be able to identify and adapt to changes in consumer
preferences more quickly than us due to their resources and scale. They may also be more successful in marketing and selling their
products, better able to increase prices to reflect cost pressures and better able to increase their promotional activity, which
may impact us and the entire pet food industry. If these competitive pressures cause our products to lose market share or experience
margin erosion, our business, financial conditions and results of operations may be materially adversely affected.
We
may face issues with respect to raw materials and other supplies, including increased costs, disruptions of supply, shortages,
contaminations, adulterations or mislabeling.
The
Company’s key raw material ingredients include meat and fish. We and our contract manufacturers use various raw materials
and other supplies in our business, including ingredients, packaging materials and fuel. We maintain one raw material procurement
center which provides a single-source supply for all our manufacturing facilities to maintain quality control throughout the production
facilities. The prices of our raw materials and other supplies are subject to fluctuations attributable to, among other things,
changes in supply and demand of crops or other commodities, weather conditions, agricultural uncertainty or governmental incentives
and controls. We generally do not have long-term supply contracts with our ingredient suppliers. The length of the contracts is
fixed for a period of time, typically up to a year or for a season and/or a crop year. In addition, some of our raw materials
are sourced from a limited number of suppliers. We may not be able to renew or enter into new contracts with our existing suppliers
following the expiration of such contracts on commercially reasonable terms, or at all. If commodity prices increase, we may not
be able to increase our prices to offset these increased costs. Moreover, our competitors may be better able than we are to implement
productivity initiatives or effect price increases or to otherwise pass along cost increases to their customers. Some of the raw
materials we use are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes
and pestilences and may be impacted by climate change and other factors. Adverse weather conditions and natural disasters can
reduce crop size and crop quality, which in turn could reduce supplies of raw materials, increase the prices of raw materials,
increase costs of storing raw materials and interrupt or delay our production schedules if harvests are delayed. Our competitors
may not be impacted by such weather conditions and natural disasters depending on the location of their suppliers and operations.
If any of our raw materials or supplies are alleged or proven to include contaminants affecting the safety or quality of our products,
we may need to find alternate materials or supplies, delay production of our products, discard or otherwise dispose of our products,
or engage in a product recall, all of which may have a materially adverse effect on our business, financial condition and results
of operations. We may be unable to detect or prevent the use of ingredients which do not meet our quality standards if our ingredient
suppliers engage in fraud or attempt to cover up or obscure deviations from our guidelines and procedures. Any such conduct by
any of our suppliers may result in a loss of consumer confidence in our brand and products and a reduction in our sales if consumers
perceive us as being untruthful in our marketing and advertising and may materially adversely affect our brand, reputation, business,
financial condition and results of operations. If our sources of raw materials and supplies are terminated or affected by adverse
prices, weather conditions or quality concerns, we may not be able to identify alternate sources of raw materials or other supplies
that meet our quality controls and standards to sustain our sales volumes or on commercially reasonable terms, or at all.
We
may not be able to manage our manufacturing and supply chain effectively which may adversely affect our results of operations.
We
must accurately forecast demand for our products in order to ensure we have adequate available manufacturing capacity. Our forecasts
are based on multiple assumptions which may cause our estimates to be inaccurate and affect our ability to obtain adequate manufacturing
capacity (whether our own manufacturing capacity or contract manufacturing capacity) in order to meet the demand for our products,
which could prevent us from meeting increased customer or consumer demand and harm our brand and our business. However, if we
overestimate our demand and overbuild our capacity, we may have significantly underutilized assets and may experience reduced
margins. If we do not accurately align our manufacturing capabilities with demand, our business, financial condition and results
of operations may be materially adversely affected. In addition, we must continuously monitor our inventory and product mix against
forecasted demand. If we underestimate demand, we risk having inadequate supplies. We also face the risk of having too much inventory
on hand that may reach its expiration date and become unsaleable, and we may be forced to rely on markdowns or promotional sales
to dispose of excess or slow-moving inventory. If we are unable to manage our supply chain effectively, our operating costs could
increase and our profit margins could decrease.
Our
market size estimate may prove to be inaccurate.
Data
for the PRC and global pet food retail sales is collected for most, but not all channels, and as a result, it is difficult to
estimate the size of the market and predict the rate at which the market for our products will grow, if at all. While our market
size estimate was made in good faith and is based on assumptions and estimates we believe to be reasonable, this estimate may
not be accurate.
Relocating
some of our production facilities may adversely affect our results of operations.
The
Company’s Canning Facility and Pude Facility are located in the old city of Huangdao District, Qingdao. The Company
has learned that the local governmental authorities proposed plans to redevelop certain portions of the old city to allow for
more residential dwellings in the area. In March 2018, we terminated the lease of the Canning facility in light of the implementation
of this plan. The relocation of Canning facility had adverse material effect on the Company’s operations by, among other
things, causing a decrease in our production capacity from 18 tons per day to 12 tons per day since March 2018. If and to the
extent we may be required to relocate the Pude Facility in the future, our results of operations may also be adversely affected.
We
may face difficulties as we expand into countries in which we have no prior operating experience.
We
intend to continue to expand our domestic and global footprint by entering into new markets. As we expand our business in China
and into new countries we may encounter foreign economic, political, regulatory, personnel, technological, language barriers and
other risks that increase our expenses or delay our ability to become profitable in such countries. These risks include:
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fluctuations
in currency exchange rates;
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the
difficulty of enforcing agreements and collecting receivables through some foreign legal systems;
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customers
in some foreign countries potentially having longer payment cycles;
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changes
in local tax laws, tax rates in some countries that may exceed those of the United States or Canada and lower earnings due
to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;
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seasonal
reductions in business activity;
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the
credit risk of local customers and distributors;
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general
economic and political conditions;
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unexpected
changes in legal, regulatory or tax requirements;
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differences
in language, culture and trends in foreign countries with respect to pets and pet care;
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the
risk that certain governments may adopt regulations or take other actions that would have a direct or indirect adverse impact
on our business and market opportunities, including nationalization of private enterprise; and
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non-compliance
with applicable currency exchange control regulations, transfer pricing regulations or other similar regulations.
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In
addition, our expansion into new countries may require significant resources and the efforts and attention of our management and
other personnel, which will divert resources from our existing business operations. We may seek to grow our business through acquisitions
of or investments in new or complementary businesses, facilities, technologies or products, or through strategic alliances, and
the failure to manage acquisitions, investments or strategic alliances, or the failure to integrate them with our existing business,
could have a material adverse effect on us. From time to time we may consider opportunities to acquire or make investments in
new or complementary businesses, facilities, technologies or products, or enter into strategic alliances, that may enhance our
capabilities, expand our manufacturing network, complement our current products or expand the breadth of our markets.
Potential
and completed acquisitions and investments and other strategic alliances involve numerous risks, including:
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problems
assimilating the purchased business, facilities, technologies or products;
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issues
maintaining uniform standards, procedures, controls and policies;
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unanticipated
costs associated with acquisitions, investments or strategic alliances;
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diversion
of management’s attention from our existing business;
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adverse
effects on existing business relationships with suppliers, contract manufacturers, retail partners and distribution customers;
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risks
associated with entering new markets in which we have limited or no experience;
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potential
loss of key employees of acquired businesses; and
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increased
legal and accounting compliance costs.
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We
do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to
successfully complete any such transactions on favorable terms or at all or whether we will be able to successfully integrate
any acquired business, facilities, technologies or products into our business or retain any key personnel, suppliers or customers.
Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and
integrate suitable target businesses, facilities, technologies and products and to obtain any necessary financing. These efforts
could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations.
If we are unable to integrate any acquired businesses, facilities, technologies and products effectively, our business, results
of operations and financial condition could be materially adversely affected.
Our
online activities are dependent on our ability to access the Internet and operate online in a fast, secure and reliable manner.
We
utilize online sale and multi-brand, multi-store brand sale strategies which use Tmall.com, pinduoduo.com, shopify, and ebay as
our marketing platforms. Our PRC marketing group has established a comprehensive network of various brand shops. In addition,
our cross-border marketing/sales group mainly relies on the Tiandihui Amazon and eBay platforms as well as direct sale websites
in Europe and the U.S. to operate its marketing and sales efforts. Our online activities are dependent on our ability to operate
online in a fast, secure and reliable manner which may be adversely affected as a result of PRC governmental regulations of e-commerce
and other services, electronic devices, and competition and restrictive governmental actions. In addition, we may face risks relating
to the governmental laws and regulations regarding consumer and data protection, privacy, network security, payments, and restrictions
on pricing or discounts, as well as lower levels of consumer access, use of and spending on the Internet. Occurrence of any of
the foregoing events (or a combination thereof) could have a material adverse effect on our ability to conduct online business,
our financial condition and results of operations.
Failure
to protect our intellectual property could harm our competitive position or require us to incur significant expenses to enforce
our rights.
Our
trademarks are valuable assets that support our brand and consumers’ perception of our products. We rely on trademark, copyright,
trade secret, patent and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods,
to protect our trademarks, trade names, proprietary information, technologies and processes. Our non-disclosure agreements and
confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and
may not provide an adequate remedy in the event of unauthorized disclosure of such information, which could harm our competitive
position. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some
of our trademarks and patents in some foreign countries. We may need to engage in litigation or similar activities to enforce
our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of
others. Any such litigation could require us to expend significant resources and divert the efforts and attention of our management
and other personnel from our business operations. If we fail to protect our intellectual property, our business, financial condition
and results of operations may be materially adversely affected.
We
may be subject to intellectual property infringement claims or other allegations, which could result in substantial damages and
diversion of management’s efforts and attention.
While
we believe that our products do not infringe in any material respect upon proprietary rights of other parties and/or that meritorious
defenses would exist with respect to any assertions to the contrary, we may from time to time be found to infringe on the proprietary
rights of others. If patents later issue on these applications, we may be found liable for subsequent infringement. Any claims
that our products or processes infringe these rights, regardless of their merit or resolution, could be costly and may divert
the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given the complex
technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome,
we could, among other things, be required to:
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pay
substantial damages;
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cease
the manufacture, use or sale of the infringing products;
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discontinue
the use of the infringing processes;
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expend
significant resources to develop non-infringing processes; and
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enter
into licensing arrangements from the third party claiming infringement, which may not be available on commercially reasonable
terms, or may not be available at all.
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If
any of the foregoing occurs, our ability to compete could be affected or our business, financial condition and results of operations
may be materially adversely affected.
Our
success depends on our ability to attract and retain key employees and the succession of senior management.
Our
continued growth and success require us to hire, retain and develop our leadership bench. If we are unable to attract and retain
talented, highly qualified senior management and other key executives, as well as provide for the succession of senior management,
our growth and results of operations may be adversely impacted.
We
are dependent on the state of the PRC’s economy and a general economic downturn, a recession or a sudden disruption in business
conditions in the PRC would have a material adverse effect on our business, financial condition and results of operations.
Significant
slowdowns in the PRC economy may cause our customers to reduce expenditures on our products. This may in turn lead to a decline
in the demand for the services we provide. Any such decline would have a material adverse effect on our business, financial condition
and results of operations. Consumer spending is generally affected by a number of factors, including general economic conditions,
the level of unemployment, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of
which are beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable
income is lower, and may impact sales of our services. In addition, sudden disruption in business conditions as a result of a
terrorist attack, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions and climate changes
or other natural disasters, pandemic situations or large scale power outages can have a short or, sometimes, long-term impact
on consumer spending. A downturn in the economy in the PRC, including any recession or a sudden disruption of business conditions
in the PRC, could adversely affect our business, financial condition or results of operation.
Since
our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets
of our company, our directors and executive officers.
Our
operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the
U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors
to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
We
hold the majority of our cash balances in RMB in uninsured bank accounts in China.
We
maintain the majority of our 2019 cash and deposit balances in bank accounts at financial institutions in China which accounts
which are not insured. While we have not experienced any losses in uninsured bank deposits and do not believe that we are exposed
to significant risks on cash held in bank accounts, if and to the extent we do experience such losses in the future, our access
to financial liquidity and working capital could be adversely affected.
We
may subject to PRC regulatory limitations on merger and acquisition (M&A) activities.
Foreign
enterprises that engage in M&A activities inside and outside China are subject to different regulatory limitations under Chinese
laws and regulations. The key regulations governing such activities within PRC are Wholly Foreign-Owned Enterprise Law, the Interim
Provisions on the Domestic Investment of Foreign-Funded Enterprise, the Catalogue for the Guidance of Foreign Investment Industries
(amended in 2017) and other relevant Chinese laws and regulations. Under these laws and regulations, conducting M&A in China
requires that our WFOE be profitable, and a timely application with and approval by of local regulatory agencies of any proposed
M&A transaction. The M&A activities outside the PRC are governed by several rules and regulations, including PRC Administrative
Measures on Offshore Investment, the Regulation on Foreign Exchange Administration of the PRC, the Notice of the State Administration
of Foreign Exchange on Issuing the Provisions on the Foreign Exchange Administration of the Overseas Direct Investment of Domestic
Institutions, the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Resident’s Financing and Round-trip
Investment Through Offshore Special Purpose Vehicles. Under these laws and regulations, our WFOE must get approval from the PRC
Ministry of Commerce or its branch offices for any proposed offshore M&A transaction, and complete its foreign exchange registration.
We cannot offer any assurance that in the event we seek such approvals or registrations we will be able to secure them in a timely
fashion or will be able to receive them at all; negative feedback from the regulatory agencies or our failure to register such
proposed transactions may have material adverse impact on our business expansion and could materially affect our business operation
and finance condition. In addition, since approval and/or registration procedures required time to complete, these processes may
cause additional delays to our onshore or offshore M&A projects, which, in turn, may have adverse impact on our business and
operations.
Fluctuation
of the Renminbi may indirectly affect our financial condition by affecting the volume of cross-border money flow.
The
value of the RMB fluctuates and is subject to changes in the PRC’s political and economic conditions. We do not currently
engage in hedging activities to protect against foreign currency risks. Even if we choose to engage in such hedging activities,
we may not be able to do so effectively. Future movements in the exchange rate of the RMB could adversely affect our financial
condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors
for services performed outside of China. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate
and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed
its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted
to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted
in an appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally
been positive, there remains international pressure on the PRC government to adopt an even more flexible currency policy, which
could result in a further and more rapid appreciation of the Renminbi against the U.S. dollar. Any material revaluation of Renminbi
may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends
payable on, our common shares in U.S. dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any
new Renminbi denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into
Renminbi for such purposes.
If
any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than
the U.S. dollar amount that you will actually ultimately receive.
If
you are a United States holder, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive
them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically,
if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your
income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate
of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether
the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert
the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will
actually ultimately receive.
We
may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
Based
on the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by
the U.S. Internal Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result
in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, a U.S. investor will become
subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and
will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S.
tax purposes if either:
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75%
or more of our gross income in a taxable year is passive income; or
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the
average percentage of our assets by value in a taxable year that produce or are held for the production of passive income
(which includes cash) is at least 50%.
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The
calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change.
We cannot assure that we will not be a PFIC for any taxable year.
Introduction
of new laws or changes to existing laws by the PRC government may adversely affect our business.
The
PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal
guidelines. Unlike common law jurisdictions such as the U.S., decided cases (which may be taken as reference) do not form part
of the legal structure of the PRC and thus have no binding effect. Furthermore, in line with its transformation from a centrally
planned economy to a more market-oriented economy, the PRC government is still in the process of developing a comprehensive set
of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or their interpretation may be
subject to further changes. Such uncertainty and prospective changes to the PRC legal system could adversely affect our results
of operations and financial condition.
Governmental
control of currency conversion may affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance
of currency out of the PRC, which may take as long as six months in the ordinary course. We receive the majority of our revenues
in Renminbi. Under our current corporate structure, our income is derived from payments from WFOE. The October 8, 2016 Provisional
Measures for Filling Administration of Establishment and Changes of Foreign-Investment Enterprise (the “Establishment and
Changes Provision”) promulgated by the PRC Ministry of Commerce and was amended on July 30, 2017, regulates the recordation
procedures with respect to the establishment and changes of a foreign-invested enterprise which do not fall within the scope of
special administration measures for foreign investment admission as stipulated by the state; for those entities that do fall within
the regulatory reach of special administration measures must go through approval procedures according to relevant laws and regulations
governing foreign investment. We do not believe that such measures will have any impact on our income derived from payment from
our WFOE because:
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As
a pet food producer and seller, we do not fall within the scope of special access administrative measures for foreign investment
admission as stipulated by the state, and therefore are not required to go through approval procedures.
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The
Establishment and Changes Provision regulates the recordation procedures relating to the establishment and changes of a foreign-invested
enterprise, which including but not limited to: (i) the changes of company name, registered address, duration of operation,
business scope, registered capital, total investment, shareholders, merger, division and termination of the enterprise; and
(ii) the corporate name change, domicile or place of incorporation, subscribed capital, investment period. Based on the foregoing
and our current corporate structure, our income is derived from payment from our WFOE, but the Establishment and Changes Provisions
do not regulate our origin of income or dividend policy, and therefore will not have any impact on our dividend distribution.
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Shortages
in the availability of foreign currency may restrict the ability of WFOE to remit sufficient foreign currency to pay dividends
or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the PRC SAFE by complying with certain procedural
requirements. However, approval from appropriate PRC government authorities is required where Renminbi is to be converted into
foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account
transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency
demands, we may not be able to pay dividends in foreign currencies to our shareholders.
PRC’s
labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production
costs.
In
June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which
became effective on January 1, 2008 and was amended on December 28, 2012, to clarify certain details in connection with the implementation
of the Labor Contract Law, the PRC State Council promulgated the Implementing Rules for the Labor Contract Law on September 18,
2008, which came into effect immediately (collectively as “new laws”). The legislation formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest
labor laws in the world, among other things, these new laws provide for specific standards and procedures for the termination
of an employment contract and places the burden of proof on the employer. In addition, the new laws require the payment of a statutory
severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term
employment contract. Further, the new laws require an employer to conclude an “employment contract without a fixed-term”
with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term
contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the
ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth
under the new laws. Because of the lack of precedent for the enforcement of such a law, the standards and procedures set forth
under the new laws in relation to the termination of an employment contract have raised concerns among foreign investment enterprises
in the PRC that such an “employment contract without a fixed term” might in fact become a “lifetime, permanent
employment contract.” Finally, under the new laws, downsizing of either more than 20 people or more than 10% of the workforce
may occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy
Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material
change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract,
thereby making the performance of such employment contract not possible. To date, there has been very little guidance or precedent
as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of
our employees working for us exclusively within the PRC are covered by the new laws and thus, our ability to adjust the size of
our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face
future periods of decline in business activity generally or adverse economic periods specific to our business, these new laws
can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.
Changes
in PRC’s political and economic policies could harm our business.
Our
results of operations, financial condition and prospects are subject to economic, political and legal developments in the PRC.
China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount
of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. The
PRC economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been
transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted
by the PRC government have had a positive effect on the economic development of PRC, we cannot predict the future direction of
these economic reforms or the effects these measures may have on our business, financial position or results of operations. In
addition, the PRC economy differs from the economies of most countries belonging to the Organization for Economic Cooperation
and Development (“OECD”). These differences include, without limitation:
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level
of government involvement in the economy;
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level
of capital reinvestment;
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control
of foreign exchange;
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methods
of allocating resources; and
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balance
of payments position.
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As
a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the PRC
economy were similar to those of the OECD member countries. Since 1979, the Chinese government has promulgated many new laws and
regulations covering general economic matters. Despite these efforts to develop a legal system, the PRC’s system of laws
is not yet complete. Even where adequate law exists in the PRC, enforcement of existing laws or contracts based on existing law
may be uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a
judgment by a court of another jurisdiction. The relative inexperience of the PRC’s judiciary, in many cases, creates additional
uncertainty as to the outcome of any lawsuit. In addition, interpretation of statutes and regulations may be subject to government
policies reflecting domestic political changes. Our activities in the PRC will also be subject to administration review and approval
by various national and local agencies of the PRC’s government. Because of the changes occurring in the PRC’s legal
and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Although we have
obtained all required governmental approvals to operate our business as currently conducted, to the extent we are unable to obtain
or maintain required governmental approvals, the PRC government may, in its sole discretion, prohibit us from conducting our business.
If
relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital
markets.
At
various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies
may arise in the future between these two countries. Any political or trade controversy between the United States and China could
adversely affect the market price of our common shares and our ability to access U.S. capital markets.
The
Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises,
which could result in the total loss of our investment in that country.
Our
business is subject to political and economic uncertainties and may be adversely affected by political, economic and social developments
in the PRC. Over the past several years, the PRC government has pursued economic reform policies including the encouragement of
private economic activity and greater economic decentralization. The PRC government may not continue to pursue these policies
or may alter them to our detriment from time to time with little, if any, prior notice. Changes in policies, laws and regulations
or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions
on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of
our investment in the PRC and in the total loss of any investment in us.
Because
our operations are located in the PRC, information about our operations is not readily available from independent third-party
sources.
Our
shareholders may have greater difficulty in obtaining information about them on a timely basis than would shareholders of a U.S.-based
company. Their operations will continue to be conducted in the PRC and shareholders may have difficulty in obtaining information
about them from sources other than the companies themselves. Information available from newspapers, trade journals, or local,
regional or national regulatory agencies such as issuance of construction permits and contract awards for development projects
will not be readily available to shareholders and, where available, will likely be available only in Chinese. Shareholders will
be dependent upon management for reports of their progress, development, activities and expenditure of proceeds.
If
our financial condition deteriorates as a NASDAQ listed company, we may not meet continued listing standards on the NASDAQ Capital
Market.
On
August 30, 2017, we received a listing approval letter approving our initial listing application to list our common shares on
the NASDAQ Capital Market. The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their
shares to continue to be listed. If our shares are listed on the NASDAQ Capital Market but are delisted from the NASDAQ Capital
Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our common shares are
delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin Board
or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets”
are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are not
so listed or are delisted at some later date, our common shares may be subject to the “penny stock” regulations. These
rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established
customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares
might decline. If our common shares are delisted from the NASDAQ Capital Market at some later date or become subject to the penny
stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to
sell their shares.
If
are unable to maintain compliance with the NASDAQ continued listing requirements subject to NASDAQ Panel Monitor, our securities
could be delisted from the NASDAQ Capital Market.
On
August 12, 2019, the Company received written notice from Nasdaq that the Company has regained compliance with the minimum bid
price continued listing requirement. The Company regained compliance with this requirement as a result of its common shares’
closing bid price having been at or above the minimum requirement of $1.00 per share for a minimum of ten consecutive trading
days. Subsequently, the Company has evidenced compliance with this listing requirement. On October 29, 2019, the Company received
Nasdaq confirmation of the Company’s regaining technical compliance with the minimum stockholders’ equity rule and
with other applicable requirements as set forth in the Panel’s decision following an oral hearing in August 2019. In connection
with this confirmation, the Nasdaq Panel imposes a Panel Monitor under Listing Rule 5815(d)(4)(A) until October 30, 2020 for the
purposes of monitoring the Company’s continued compliance with the stockholders’ equity requirement. If and to the
extent the Company’s stockholders’ equity falls below $2.5 million and the Company does not qualify for listing under
an alternative to the stockholders’ equity rule, the Panel (or a newly convened Panel if the initial Panel is unavailable)
will promptly conduct a hearing with respect to this deficiency, and the Company’s securities may be immediately delisted
from Nasdaq. During the monitoring period, the Company will be obligated to notify the Panel, in writing, in the event its stockholders’
equity falls below $2.5 million for any reason, and in the event the Company falls out of compliance with any other applicable
listing requirement. In the event that the Company fails to comply with any other requirement for continued listing during the
monitoring period, the Company will be provided written notice of the deficiency and an opportunity to present a definitive plan
to regain compliance to the Panel. The Panel will thereafter render a determination with respect to the Company’s continued
listing on Nasdaq. Notwithstanding Listing Rule 5810(c), the Company will not be permitted to provide the Listing Qualifications
Department a plan of compliance with respect to any deficiency that arises during the monitor period, and the Listing Qualifications
Department will not be permitted to grant additional time for the Company to regain compliance with respect to any deficiency.
If the Company is delisted from Nasdaq, its common shares may be traded over-the-counter on the OTC Bulletin Board or in the “pink
sheets” if one or more market makers seeks and obtains approval by the Financial Industry Regulatory Authority to continue
quoting in the Company’s common shares. If the Company is delisted from Nasdaq, its common shares may be traded over-the-counter
on the OTC Bulletin Board or in the “pink sheets” if one or more market makers seeks and obtains approval by the Financial
Industry Regulatory Authority to continue quoting in the Company’s common shares. Many over-the-counter stocks trade less
frequently and in smaller volumes than securities traded on Nasdaq, which would likely have a material adverse effect on the liquidity
and value of the Company’s common shares. If our common shares are delisted from the Nasdaq Capital Market at some later
date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders
would find it difficult to sell their shares.
We
are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies.
As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at
different times, which may make it more difficult for you to evaluate our performance and prospects.
We
are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the
Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those
of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We
will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive
officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider
short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of
Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific
information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation
rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign
private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information
about us and at the same time as the information provided by U.S. domestic reporting companies.
As
a relatively new public company, we incur increased costs and are subject to additional regulations and requirements, and our
management is required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult
to run our business.
As
a relatively newly public company, we incur significant legal, accounting and other expenses that we have not incurred as a private
company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive
directors. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by
the Securities and Exchange Commission, or the SEC, and NASDAQ. The expenses incurred by public companies generally for reporting
and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming and costlier, although we are currently unable to estimate these
costs with any degree of certainty. Our management will need to devote a substantial amount of time to ensure that we comply with
all of these requirements. These laws and regulations also could make it more difficult or costly for us to obtain certain types
of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more
difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive
officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our
common shares, fines, sanctions and other regulatory action and potentially civil litigation.
The
market price of shares may be volatile, which could cause the value of your investment to decline.
Worldwide
market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our
stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public
market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations,
additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research
reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing
interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities
we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community,
announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures
or capital commitments, adverse publicity about our industry in or individual scandals, and in response the market price of our
common shares could decrease significantly. In the past few years, stock markets have experienced extreme price and volume fluctuations.
In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities
class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s attention and resources, or at all.
As
the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as
a shareholder.
Our
corporate affairs will be governed by our memorandum and articles of association, the BVI Business Companies Act, 2004 (as amended),
referred to below as the “BVI Act”, and the common law of the British Virgin Islands. The rights of shareholders to
take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors
under British Virgin Islands law are governed by the BVI Act and the common law of the British Virgin Islands. The common law
of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as
well as from the common law of England and the wider Commonwealth, which has persuasive, but not binding, authority on a court
in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British
Virgin Islands law are largely codified in the BVI Act, but are potentially not as clearly established as they would be under
statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less
developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed
and judicially interpreted bodies of corporate law. As a result of all of the above, holders of our shares may have more difficulty
in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders
of a U.S. company.
British
Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability
to protect their interests.
Shareholders
of British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the
United States Shareholders of a British Virgin Islands company could, however, bring a derivative action in the British Virgin
Islands courts, and there is a clear statutory right to commence such derivative claims under Section 184C of the BVI Act. The
circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any
such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders
of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe
that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us
judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities
against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities
laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United
States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign
court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully,
they may not be able to recover anything to make up for the losses suffered.
The
laws of the British Virgin Islands may provide less protection for minority shareholders than those under U.S. law, so minority
shareholders may have less recourse than they would under U.S. law if the shareholders are dissatisfied with the conduct of our
affairs.
Under
the laws of the British Virgin Islands, the rights of minority shareholders are protected by provisions of the BVI Act dealing
with shareholder remedies and other remedies available under common law (in tort or contractual remedies). The principal protection
under statutory law is that shareholders may bring an action to enforce the constitutional documents of the company (i.e. the
memorandum and articles of association) as shareholders are entitled to have the affairs of the company conducted in accordance
with the BVI Act and the memorandum and articles of association of the company. A shareholder may also bring an action under statute
if he feels that the affairs of the company have been or will be carried out in a manner that is unfairly prejudicial or discriminating
or oppressive to him. The BVI Act also provides for certain other protections for minority shareholders, including in respect
of investigation of the company and inspection of the company books and records. There are also common law rights for the protection
of shareholders that may be invoked, largely dependent on English common law, since the common law of the British Virgin Islands
for business companies is limited.
We
may not be able to pay any dividends on our shares in the future due to British Virgin Islands law.
Under
British Virgin Islands law, we may only pay dividends to our shareholders if the value of our assets exceeds our liabilities and
we are able to pay our debts as they become due. We cannot give any assurance that we will declare dividends of any amounts, at
any rate or at all in the future. Future dividends, if any, will be at the discretion of our board of directors, and will depend
upon our results of operations, cash flows, financial condition, payment to us of cash dividends by our subsidiaries, capital
needs, future prospects and other factors that our directors may deem appropriate.
We
are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging
growth companies” will make our shares less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions and
relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”
In particular, while we are an “emerging growth company” (1) we will not be required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, (2) we will be exempt from any rules that may be adopted by the PCAOB
requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, (3) we will be
subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (4)
we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute
payments not previously approved. We currently intend to take advantage of the reduced disclosure requirements regarding executive
compensation. If we remain an “emerging growth company” after fiscal 2017, we may take advantage of other exemptions,
including the exemptions from the advisory vote requirements and executive compensation disclosures under the Dodd-Frank Wall
Street Reform and Customer Protection Act, or the Dodd-Frank Act, and the exemption from the provisions of Section 404(b) of the
Sarbanes-Oxley Act. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards,
meaning that the company can delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards
and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies. We may remain an “emerging growth company” until the fiscal year-end following the fifth anniversary
of the completion of our initial public offering, though we may cease to be an “emerging growth company” earlier under
certain circumstances, including (1) if we become a large accelerated filer, (2) if our gross revenue exceeds $1.07 billion in
any fiscal year or (3) if we issue more than $1.0 billion in non-convertible notes in any three year period. The exact implications
of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure
you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our shares
less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our shares less attractive
as a result, there may be a less active trading market for our shares and our stock price may decline and/or become more volatile.
We lack sufficient internal control procedures designed to ensure
the Company’s business is not adversely affected through the change of the key member of the management team.
During the period covered by this annual report
on Form 20-F, we identified material weakness in the company’s internal control that have materially affected, or are reasonably
likely to materially affect our company’s internal control over financial reporting.
The material weakness identified by
our management was a lack of control procedures designed to ensure the Company’s business is not adversely affected through
the change of the key member of the management team. As the Company suffered from many operating difficulties in 2019, the former
General Manager, Chief Financial Officer, Chief Production Officer and other senior executives of Tiandihui left the Company at
different times, resulting in the lack of continuiuty and coherence in the Company’s operations and management. In order
to address the foregoing material weakness, we have put in place additional controls, including, among others, hiring and replacing
certain management team members in 2019 and 2020, including our CFO. Our new CEO established a new management team to deal with
operation management challenges of the Company, and our new CFO is working on improving the Company’s financial and reporting
functions. Overall, the Company is working through and standardizing its business processes, instituting business procedures and
adding controls and additional supervision, particularly, in the areas of control duties and data sharing and supervision so as
to provide effective means of linking various functions and departments within the Company. We intend to complete the remediation
effort on or before the end of the 2020 fiscal year and will conduct periodic assessments of the state of the Company’s financial
reporting measures and systems, as a whole. Our inability to address this deficiency in a timely fashion or at all may have adverse
effects on our ability to prepare and deliver timely public reports and the results of our operations.
ITEM
4.
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INFORMATION
ON THE COMPANY
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A.
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History
and Development of the Company
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We
started our company in 2002 in Qingdao, Shandong Province, PRC. Our growth has been driven by two key factors: (i) a significant
increase in the number of pet owners and in the size of the pet food market in China which translated into expansion opportunities
for us, and (ii) a fundamental change in Chinese society towards pets, pet ownership and care, such that the trends of pet humanization
and consumer concerns for pet health and wellness have created a dynamically growing industry for pet food and products. We price
our products to be accessible to the average consumer, providing us with broad demographic appeal and allowing us to penetrate
multiple market segments. Founded on these building blocks, as well as on our in-depth research and development, production, and
sales capabilities, we strived to be one of the leading producers of pet food in the PRC and beyond.
Overseas
sales refer to overseas wholesale sales. Our overseas sales have decreased from approximately $15.8 million to $10.0 million,
or by approximately 37%, from the year ended December 31, 2018 to 2019. The decrease of revenue in 2019 was mainly due to: (1)
stop taking unprofitable orders; (2) temporary suspension of our manufacturing activities in late 2019. As a result, we received
reduced sales orders from our customers and our sales volume significantly decreased in 2019 as compared to 2018.
Domestic
sales refer to domestic wholesale sales. Our domestic sales were approximately $2.7 million and $4.1 million for the years ended
December 31, 2019 and 2018, respectively, which accounted for approximately 21% and 17% of our total revenues in 2019 and 2018.
The decrease of revenue in 2019 was mainly due to: (1) decrease in sales orders due to our uncompetitive sales price; (2) temporary
suspension of our manufacturing activities in late 2019. As a result, we received reduced sales orders from our customers and
our sales volume significantly decreased in 2019 as compared to 2018.
Electronic
commerce sales, including overseas and domestic electronic commerce sales, decreased from $3.8 million to $0.08 million, or by
approximately 98%, from the year ended December 31, 2018 to 2019. The decrease was due to the suspension of our oversea E-commerce
business, as it continued to incur operating losses. We have to stop selling unprofitable line products to avoid further worsen
our balance sheets.
Although
raw material costs of pet food increased significantly in 2019 and the industry is very competitive, the PRC pet food consumption
continues to grow. We still see significant opportunities for future growth:
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Strength
and variety of our brands – we offer in excess of 200 products, including dry meat treats, pet biscuits, canned
food and other products (including non-food items like dog leashes, pet toys, etc.) under multiple brands that are well-established
and recognizable by consumers in the PRC, Asia and Europe.
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Product
research & development – we believe our products are differentiated from those of our competitors in the PRC
markets due to our in-depth research and development effort, our proprietary recipes, cooking and packing techniques developed
over the last decade. Currently, we have been granted 20 invention and utility model patents, and have applied for 5 more
patents.
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Sales
and marketing distribution – our domestic and overseas multi-platform sales approach connects our production output
to customers in the PRC, Asia, Europe and North America. In addition to the traditional sales approach, we plan to seek opportunities
to re-utilize cross-border e-commerce platforms that contribute to the expansion of our business.
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Experienced
and committed management team – our workforce is highly skilled in animal nutrition, sales and marketing.
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Our
product line in excess of 200 products, including dry meat treats, pet biscuits, canned food and other products (including non-food
items, e.g., dog leashes, etc.) under multiple brands in various geographical markets. Our products are available in multiple
forms, including slice and serve rolls, strips, tubs, etc.
Currently,
we offer 6 product lines:
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Pet
chews represent approximately 51.2% of our production and include various bones, rawhide and similar products,
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Dried
pet snacks represent approximately 36.5% of our production and include various fillets, strips and jerkies (chicken, duck,
pork, lamb, etc.),
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Wet
canned pet foods represent approximately 10.4% of our production and include various fillets, strips and jerkies (chicken,
duck, pork, lamb, etc.),
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Dental
health snacks foods account for approximately 2.4% of our production, and
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Baked
pet biscuits account for 0.7% of our overall production.
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Others
account for 0% of our overall production.
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These
food products vary from those consisting of a single protein ingredient (e.g., duck jerky) to those consisting of a combination
of protein and other ingredients (e.g., twisted cod and chicken sandwich roll that includes chicken, cod and Vitamin E). Our proprietary
recipes include fresh meat (beef, chicken, fish, duck and lamb) and varying combinations of vitamin-rich vegetables and anti-oxidant
rich fruits. We believe our products appeal to diverse consumer needs and resonate across a broad cross-section of pet owner demographics.
We
manufacture these products at our Pude facility with 6 production lines: dried meat, chews, wet canned, biscuits and dentifrice
products and 1 dried meat production line at Jiaozhou facility.
In
addition, we strategically partner with a select group of contract manufacturers to supplement and enhance our production capabilities,
as needed. Currently, we have outsourcing agreements with multiple pet food manufacturers for the duration of up to 3 years,
to secure additional production capabilities to address peak or high demand for our products. Under the terms of these agreements,
our suppliers must meet all of our manufacturing requirements, including, among others, those relating to quality control, staffing,
training and equipment. All manufacturing under these agreements is made in accordance with our demands, timing and specifications.
These facilities are, at all times, staffed and supervised by our personnel.
We employ around 50 full-time employees at
our facilities. With the exception of our subsidiary’s offices located in Beijing, all of our production, executive, sales/marketing
and customer service facilities covering the PRC and overseas markets are located in Shandong Province, PRC. Our daily production
capacity for all of our production facilities is approximately 7 tons. The following is a summary description of our production
facilities (not including any of the outsourcing facilities used to support our production needs):
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The
Pude facility maintains a production area of 30,565 sq. feet with a 20-year export processing history. We maintain ISO9001,
hazard analysis critical Control Points (HACCP), British Retail Consortium (BRC) and International Characteristic Standards
(IFS) certification, as well as EU and Japanese registered facilities. The daily production capacity for this facility is
approximately 5.9 tons.
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The Haiqing facility has a production area of 100,233 sq. feet
and maintains an export commodity inspection registration from Shandong Huangdao Bureau of Inspection and Quarantine. Our daily
production capacity at this facility is approximately 1.3 tons. Haiqing facility was sold in November 2019.
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The
Zhangjialou facility has a usage area of 21,528 sq. feet. We closed it in June 2019 due to the expiration of the lease.
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The
Jiaozhou facility has production area of 30,062 square feet. Our daily production capacity at this facility is approximately
0.8 ton.
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We
also maintain a call service center in Qingdao with 3 trained, multilingual personnel to address customer service matters arising
from our sales in the PRC and abroad.
Our
sales and marketing team consists of 2 integral groups – an original design manufacturer (ODM) domestic (PRC) marketing
group, and an ODM overseas marketing group. We operate a B2F (business-2-factory) business model which is focused on the needs
of the business market. Our model relies on our R&D strength to devise product lines to cater to this market, providing our
customers with personalized and customized products. Our marketing team works in tandem with our brand promotion team which focuses
on brand promotion. As a part of our ODM production process, we continuously accumulate a large amount of market information about
our customers, in the PRC and abroad, which assists us in making appropriate selection of products. We utilize online sale and
multi-brand, multi-store brand sale strategies. Using Tmall.com and pinduoduo.com as our marketing platforms, our PRC marketing
group has established a comprehensive network of various brand shops. In addition, our cross-border marketing/sales group mainly
relies on the Shopify and eBay platforms as well as direct sale websites in Europe and the U.S. to operate its marketing and sales
efforts.
The
following chart reflects our organizational structure as of the filling date:
On
August 9, 2016, Qingdao Kangkang Development Co., Ltd. (“Kangkang Development”) was incorporated in Qingdao City, Shandong Province, PRC. Kangkang Development did not have active business operations since
its incorporation, and has been deregistered and dissolved in 2019.
On
November 14, 2017, a 55% owned subsidiary of the Company, Yichong (Qingdao) Technology Co., Ltd. (“Yichong”) was incorporated
in Qingdao City, PRC. Yichong had no active business operations since its incorporation. In September 2019, the Company transferred
all its ownership interests in Yichong to a third party. As a result, Yichong was deconsolidated from the Company.
On
November 29, 2017, a 55% owned subsidiary of the Company, Qingdao Lingchong Information Technology Co., Ltd. (“Lingchong”)
was incorporated in Qingdao City, PRC. Lingchong had no active business operations since its incorporation. In July 2019, the
Company transferred all its ownership interests in Lingchong to a third party. As a result, Lingchong was deconsolidated from
the Company.
On
January 3, 2018, a 100% owned subsidiary, Qingdao Lile Pet Foodstuffs Co., Ltd. (“Lile”) was incorporated in Qingdao
City, Shandong province, PRC. Lile had no active business operations since its incorporation, and it has been deregistered and
dissolved in 2019.
On September 20, 2018, the Board has approved
acquisitions by the Company of TDH Group BVBA, a company established under the laws of Belgium and TDH JAPAN, a company established
under the laws of Japan. In connection with the foregoing transactions the Company executed Share Sale and Purchase Agreements
(together, the “Agreements”) pursuant to which the Company agreed to pay approximately USD$ 936,782 and USD $156,130
(RMB 6 million and RMB 1 million), respectively, to acquire all of outstanding securities of TDH Group BVBA and TDH JAPAN, respectively,
from the sole shareholder of each entity, Rongfeng Cui, the Company’s former CEO. The purchase consideration under the Agreements
was paid by issuance of 936,782 and 156,130 restricted common shares of the Company, respectively. Rongfeng Cui incorporated TDH
Group BVBA in 2012 and TDH JAPAN in 2017 to develop and maintain all the clients in Europe and Japan, and to distribute and expand
product sales in European and Japanese markets. Effective August 2, 2019, Rongfeng Cui ceased to be Company’s CEO and Dandan
Liu was appointed as the CEO in his stead.
The
Initial Public Offering
On
September 25, 2017, we completed our initial public offering of 1,325,000 common shares at $4.25 per share, for total gross proceeds
of approximately $5.63 million. In addition, on September 28, 2017, we announced that ViewTrade Securities, Inc., who acted as
the managing underwriter and sole book-runner of our IPO, had exercised the full over-allotment option to purchase an additional
198,750 shares at the IPO price per share. As a result, the Company has raised gross proceeds of approximately $844,688, in addition
to the previously announced IPO gross proceeds of approximately $5.63 million, before underwriting discounts and commissions and
offering expenses. Our common shares began trading on the NASDAQ Capital Market on September 21, 2017 under the ticker symbol
“PETZ”.
Overview
We
started our company in 2002 in Qingdao, Shandong Province, PRC with a single mission of becoming a premier producer of high-quality
pet food for pet owners in China and worldwide. Our growth has been driven by two key factors: a significant increase in the number
of pet owners and in the size of the pet food market in China which translated into expansion opportunities for us, and a fundamental
change in Chinese society towards pets, pet ownership and care, such that the trends of pet humanization and consumer concerns
for pet health and wellness have created a dynamically growing industry for pet food and products. We price our products to be
accessible to the average consumer, providing us with broad demographic appeal and allowing us to penetrate multiple market segments.
Founded on these building blocks, as well as on our in-depth research and development, production, and sales capabilities, we
believe we are well prepared to be one of the leading producers of pet food in the PRC and beyond.
We
employ around 50 full-time employees at our facilities. With the exception of our subsidiary’s offices located in Beijing,
all of our production, executive, sales/marketing and customer service facilities covering the PRC and overseas markets are located
in Shandong Province, PRC.
Our
Industry and Market
China
Pet Food Industry
While
the global pet food market is well-established worldwide, in China it is a relatively new industry. China’s economy has
shown steady growth over the last decade, from a GDP per capita of $1,509 in 2004 to $10,261 in 2019. According to the National
Bureau of Statistics of China (NBS China) and GfK, in 2015, China ranked (i) 3rd in the world in the number of registered
pet dogs (27.4 million dogs), following the U.S. and Brazil, and (ii) 2nd in the number of registered pet cats (58.1
million cats), following the U.S. With an increase in the number of pets in most households in China, the pet food industry in
China has been and remains poised for significant growth. Pet food consumption in China increased from approximately RMB 5.26
billion in 2010 to RMB 9.74 billion in 2016, representing a growth rate of 85.2%. The average price per kilogram of pet food and
treats rose to about RMB45 (US$6.77) in April 2016, a 12.5% increase since 2013, reflecting the nascent yet increasing premiumization
of the market, projected to reach approximately RMB 11.82 billion (US$1.77 billion) by the end of 2016, representing approximately
19% growth, year over year. At this rate, we expect for the industry consumption rates to increase to approximately RMB 238 billion.
On the production side, production volume reached 1,000,000 metric tons in 2016.
The
growth in this industry is largely a function of consumer education and increased awareness of pet food products, product ingredients,
quality, brand awareness and loyalty. We consider pet humanization to be another driving factor behind the growth trend,
i.e., where pet owners view their pets as members of the family. As pets are increasingly viewed as companions, friends, and family
members, pet owners spare no expense for their pets, driving premiumization across pet categories. This trend is reflected
in food purchasing decisions such that pet owners are as concerned about the quality of their pet’s food as they are about
their own. The PRC consumers are becoming more discerning when it comes to quality of pet food for their pets, especially when
it comes to food specific to particular breed needs, etc. In addition, (i) an increase in living standards of urban population
which resulted from the growth of the PRC economy at large and the corresponding accelerated rates of urban development and expansion,
and (ii) higher rates of aging population in major urban areas in the PRC which tend to encourage more independent lifestyles
(e.g. the proportion of the PRC population over 65 has continued to grow, with the rate reaching over 10% in 2014), cause more
people to view and treat their pets as their close companions. In China, most people who have pet dogs or cats in China are, in
fact, elderly. According to the NBS China, approximately 61% of the 65+ age group live with a pet, as compared with the national
average of 44%; only the 25-29 age group exhibits similar levels of pet ownership. We anticipate that these trends will continue
in the foreseeable future.
While
the multinational brands still dominate the Chinese pet food market, the market growth is being driven by local brands, especially
in pet shops, with 81% growth for domestic cat food brands overall and 85% in pet shops (though cat food represents just 31% of
the market). With dog food, sales increase for domestic brands are more modest—about 9% overall and nearly 10% in pet shops—but
the average price per kilogram of domestic dog foods brands is growing much closer to that of multinational brands.
Aside
from rapid growth, the China pet food market is also characterized by increasing online sales as the share of overall sales, with
62% of all sales in 2017 to be made online. In 2016, online pet food sales in China have reached RMB 4.2 billion. In addition,
China’s sales skew heavily toward specialized retailers (80%) as contrasted with mass merchants in the rest of the world
(e.g. in Western Europe, the breakdown is almost exactly the reverse).
Our
Competitive Strengths
In
2019, we believe the following strengths differentiate us from our competitors in our market in China:
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Strength
and variety of our brands – we offer in excess of 200 products, including dry meat treats, pet biscuits, canned
food and other non-food products (e.g. dog leashes, pet toys etc.) under multiple brands that are well-established and recognizable
by consumers in the PRC, Asia and Europe.
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Product
research & development – we believe that our products are differentiated
from those of our competitors in the PRC markets due to our in-depth research and development
effort and our proprietary recipes and cooking techniques developed over the last decade.
Although we did not incur any R&D expenses in 2019, partly due to our temporary suspension
of our manufacturing activities in 2019, looking forward, in order to diversify
our product offering to meet customer demands in the future, we may incur additional
R&D expenses in the coming years to maintain our competitive advantage.
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Sales
and marketing distribution – our multi-platform sales approach connects our production output to customers in the
PRC, Asia, Europe and North America.
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Experienced
and committed management team - Tiandihui’s workforce is a highly skilled with specialized training designed to
address complex customer care engagements; our entrepreneurial management team includes employees who have significant experience
in animal nutrition, sales and marketing, among others. Our management team is comprised of an experienced group of executives,
many of whom have many years of operating experience.
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We
intend to continue capitalizing on our strengths and growing net sales and profitability.
Our
History and Corporate Structure
We
are a holding company incorporated in the British Virgin Islands (incorporated on September 30, 2015) that owns all of the outstanding
capital stock of TDH HK Limited, our wholly-owned Hong Kong subsidiary (TDH HK), and holds a 99% interest in TDH Petfood LLC,
a Nevada limited liability company. TDH HK, in turn, owns all of the outstanding capital stock of Qingdao Tiandihui Foodstuffs
Co., Ltd., our operating subsidiary based in Qingdao City, Shandong Province, China, incorporated in April 2002 as a PRC limited
liability company (Tiandihui). As of the date of this Annual Report, Tiandihui has the following subsidiaries:
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Beijing
Chongai Jiujiu Cultural Communication Co., Ltd. (incorporated on March 3, 2011),
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On
August 9, 2016, Qingdao Kangkang Development Co., Ltd. (“Kangkang Development”) was incorporated in Qingdao City, Shandong Province, PRC. Kangkang Development did not have active business operations since
its incorporation, and has been deregistered and dissolved in 2019.
On
November 14, 2017, a 55% owned subsidiary of the Company, Yichong (Qingdao) Technology Co., Ltd. (“Yichong”) was incorporated
in Qingdao City, PRC. Yichong had no active business operations since its incorporation. In September 2019, the Company transferred
all its ownership interests in Yichong to a third party. As a result, Yichong was deconsolidated from the Company.
On
November 29, 2017, a 55% owned subsidiary of the Company, Qingdao Lingchong Information Technology Co., Ltd. (“Lingchong”)
was incorporated in Qingdao City, PRC. Lingchong had no active business operations since its incorporation. In July 2019, the
Company transferred all its ownership interests in Lingchong to a third party. As a result, Lingchong was deconsolidated from
the Company.
On
January 3, 2018, a 100% owned subsidiary, Qingdao Lile Pet Foodstuffs Co., Ltd. (“Lile”) was incorporated in Qingdao
City, Shandong province, PRC. Lile had no active business operations since its incorporation, and it has been deregistered and
dissolved in 2019.
On September 20, 2018, the Board approved acquisitions by the
Company of TDH Group BVBA, a company established under the laws of Belgium and TDH JAPAN, a company established under the laws
of Japan. In connection with the foregoing transactions the Company executed Share Sale and Purchase Agreements (together, the
“Agreements”) pursuant to which the Company agreed to pay approximately USD$ 936,782 and USD $156,130 (RMB 6 million
and RMB 1 million), respectively, to acquire all of outstanding securities of TDH Group BVBA and TDH JAPAN, respectively, from
the sole shareholder of each entity, Rongfeng Cui, the Company’s former CEO. The purchase consideration under the Agreements
was paid by issuance of 936,782 and 156,130 restricted common shares of the Company, respectively. Rongfeng Cui incorporated TDH
Group BVBA in 2012 and TDH JAPAN in 2017 to develop and maintain all the clients in Europe and Japan, and to distribute and expand
product sales in European and Japanese markets.
Our
Products
The
pet food market consists of dog food and cat food sales. Food sales are further categorized as dry food, wet food and treats:
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Dry
food is the primary food form for both dogs and cats, with the same formula typically purchased regularly. Veterinarians
recommend dry food for healthy pets as the main meal, which is better for pets’ teeth, has better economic value and
is more convenient to handle and store
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Wet
food has higher penetration among cats as compared to dogs, as it helps to ensure that cats meet their required water
intake. Most cat owners feed their cats a combination of dry and wet foods as main meals, while most dog owners feed their
dogs wet foods as a treat or topper to provide variety
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Treats
are typically impulse purchases by pet owners made alongside staple, main meal dry and wet food purchases. Many treats
have dental and training benefits and also serve as nutritional supplements. Dog and cat treats have been growing rapidly
over the last decade driven by the humanization trend with pet owners indulging their pets more, including by purchasing treats
as gifts.
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Product
research and innovation is pivotal to our growth strategy. Our experienced team of marketing and R&D professionals is in constant
contact with our outside collaborators and experts. The success of our approach is evidenced by our broad product portfolio today.
For the year ended December 31, 2017, new product introductions represented 74% of our net sales; those numbers were to 40% in
2018. Although our R&D expense decreased in 2019, partly due to our temporary suspension of our manufacturing activities in
late 2019, we strive to maintain a strong innovation pipeline that expands the breadth of our current product offerings.
We
offer in excess of 200 products, including dry meat treats, pet biscuits, canned food and other products (including non-food items
like dog leashes and pet toys) under multiple brands in various geographical markets. Currently, we offer 6 product lines including
the following:
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Pet
chews represent approximately 51.2% of our output and include various bones, rawhide and similar products
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Dried
pet snacks represent approximately 36.5% of our output and include various fillets, strips and jerkies (chicken, duck, pork,
lamb, etc.)
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Wet
canned pet foods represent approximately 10.4% of our output and include various fillets, strips and jerkies (chicken, duck,
pork, lamb, etc.)
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Dental
health snack foods account for approximately 2.4% of our output
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Baked
pet biscuits account for only 0.7% of our overall production output.
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The
other account for 0% of the total products.
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We
manufacture these products at our Pude facility with 5 production lines: dried meat, chews, wet canned, biscuits and dentifrice
products, and one dried meat production line at Jiaozhou facility.
These
food products vary from those consisting of a single protein ingredient (e.g., duck jerky) to those consisting of a combination
of protein and other ingredients (e.g., twisted cod and chicken sandwich roll that includes chicken, cod and Vitamin E). Our proprietary
recipes include fresh meat (beef, chicken, lamb, and fish) and varying combinations of vitamin-rich vegetables, and anti-oxidant
rich fruits. We believe our products appeal to diverse consumer needs and resonate across a broad cross-section of pet owner demographics.
Our products are available in multiple forms, including slice and serve rolls, strips, tubs, etc.
Supply
Chain
Manufacturing
All
of our products are manufactured in the PRC. We own and operate several facilities in the Shandong province for a total production
area of approximately 191,300 square feet built to high quality food production standards. In 2019, 2018 and 2017, 40%, 42% and
69%, respectively, of our product volume was manufactured by us. We also strategically partner with a select group of contract
manufacturers that manufacturing facilities to supplement our production needs. Namely, as of the date of this Annual Report,
we have executed outsourcing agreements (up to 3 years) with seven provincial pet food manufacturers for the purposes of securing
additional production capabilities to address peak or high demand for our products. Under the terms of these agreements, our suppliers
must meet all of our manufacturing requirements, including, among others, those relating to quality control, staffing, training
and equipment. All manufacturing under these agreements is made in accordance with our demands, timing and specifications. These
facilities are, at all times, staffed and supervised by our personnel. These agreements have no automatic renewal provisions.
In our review and engagement of such third-party manufacturers, we apply rigorous review of manufacturing and quality control
practices at the facilities of such manufacturers to ensure compliance of such practices with those employed by our company at
various stages of production at all of our production facilities. Any loss of these supplemental production arrangements could
significantly impact our revenue and profits.
Ingredients
and Packaging
Our
products are made with fresh ingredients including meat (chicken, beef, lamb, fish, etc.), vegetables, fruits, vitamins and minerals.
We use quality food grade plastic packaging materials and maintain rigorous overall standards for ingredient quality and safety.
In addition, we maintain one raw material procurement center which provides a single-source supply for all our manufacturing facilities
to maintain quality control throughout the production facilities. Also, in order to retain operating flexibility and negotiating
leverage, we do not enter into exclusivity agreements or long-term commitments with any of our suppliers. All of our suppliers
are established PRC companies that have the scale to support our growth. For every ingredient, we have sources of supply that
meet our quality and safety standards.
Distribution
Our
facilities are located in the coastal city of Qingdao, near Qingdao International Airport and the international Qingdao harbor,
which proximity ensures efficient international transportation by sea/air. Outbound transportation from our facility is primarily
handled through transportation by sea, which deliver our products to our customers. As our volumes grow, we expect to be able
to leverage our distribution costs.
Quality
Control
We
are committed to the highest quality of products that leave our facilities. To that end, we have implemented a rigid quality control
system and devote significant attention to quality control procedures at every stage of our process, including spot testing of
finished products. Our entire food processing chain, from sourcing of raw materials to the finished products, is closely monitored
to ensure that all pet food products meet the highest level of global hygienic and quality standards. We monitor our manufacturing
process closely and conduct performance and reliability testing to ensure our products meet our end-user customer expectations.
Our quality control group as of December 2019 included 18 employees that implement various management systems to improve product
quality programs, most of whom are trained in quality control and nutrition. We spot test and inspect our raw materials to ensure
compliance with quality standards. We also evaluate the quality and delivery performance of each supplier periodically and adjust
quantity allocations accordingly. We also monitor in-process and outgoing stages of our processes.
We
have established control points throughout the entire supply chain from ingredient sourcing to finished goods to ensure compliance
with our quality program. We require our contract and owned manufacturing facilities to maintain the same quality standards as
those at our facilities and pass our own quality system and food safety inspections. We ensure that all of our ingredients are
rigorously tested prior to being approved for use in our products. Testing certifications which confirm that the ingredient meets
our specifications as to quality and safety, accompany every shipment. In addition, our food safety and quality program include
strict guidelines for incoming ingredients, batching, processing, packaging and finished goods. However, despite our strict quality
controls, it is possible that there may be from time to time, as there has been in the past, issues or concerns with respect to
our products.
Quality
Certifications and Accreditations
In
a continuous effort to meet various international production and quality manufacturing standards, we have a number of certifications
and accreditations. We have secured these certifications and accreditations to show evidence of high-quality manufacturing standards
that we apply to our production and managements processes and to access domestic and foreign markets. We believe that maintaining
objectively verifiable quality standards fosters consumer confidence and loyalty and maximizes customer satisfaction and recognition.
Sales
and Marketing
Our
sales and marketing team consists of 2 integral groups – an original design manufacturer (ODM) domestic (PRC) marketing
group, and an ODM overseas marketing group. We operate a B2F (business-2-factory) business model which is focused on the needs
of the business market. Our model relies on our R&D strength to devise product lines to cater to this market, providing our
customers with personalized and customized products. Our marketing team works in tandem with our brand promotion team which focuses
on brand promotion. As a part of our ODM production process, we continuously accumulate a large amount of market information about
our customers, in the PRC and abroad, which assists us in making appropriate selection of products. We utilize online sale and
multi-brand, multi-store brand sale strategies. Using Tmall.com and pinduoduo.com as our marketing platforms, our PRC marketing
group has established a comprehensive network of various brand shops. In addition, our cross-border marketing/sales group mainly
relies on the Shopify and eBay platforms as well as direct sale websites in Europe and the U.S. to operate its marketing and sales
efforts.
We
maintain a call service center in Qingdao with 3 trained, multilingual personnel to address customer service matters arising from
our sales in the PRC and abroad.
Competition
The
market for pet food and related products in the PRC is emerging and highly competitive. In prior years, Chinese pet food manufacturers
were viewed in the pet food industry as suppliers of cheaper food and snack products for pets which were almost always delivered
under Western brand name products. The competitive landscape is changing now as a number of PRC-based manufacturers operate and
compete domestically and worldwide alongside with other major industry players. The PRC market is characterized by price competition,
product quality and the presence of a number of medium to large companies, as discussed below. Relatively high barriers of entry
for new participants into this industry include relatively large initial capital outlays, uncertain regulatory environment, scarcity
of suitable production, raw material supply sources, and skilled management. Thus, we believe all of the foregoing fortifies our
competitive positions in the industry.
Mars
Foods (China) Co. Pvt. Ltd., Royal Canin Au Yu (Shanghai) Pet Food Co Ltd. and Nestle (China) are three largest players in the
PRC pet food industry. In recent years, Royal Canin Au Yu (Shanghai) Pet Food Co Ltd. consolidated its leadership in the category
with a market share of 28% in 2015, which represented an increase of one percentage point over 2014. Royal Canin enjoys a widespread
nationwide distribution network. In addition, the company runs an official flagship store on the largest B2C online platform in
China, Tmall.com, to reach out to wider range of consumers.
We
compete primarily on the basis of our product range, reputation, product quality, brand loyalty, and total value delivered. We
are subject to pricing pressures and may experience a decline in average selling prices for our products. We attempt to mitigate
these pricing pressures by differentiating ourselves from our competition based on the value we bring to our clients through the
quality and variety of our products.
Our
competitors include the following PRC-based manufacturers:
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Yantai
China Pet Foods Co., Ltd. - Established in 1998, Yantai China Pet Foods Co., Ltd. is one of the leading manufacturers
of pet snacks in China. This company is publicly traded in Shenzhen stock exchange (002891.SZ), which offers approximately
500 products in eleven product lines with products distributed to the UK, the US, Japan, Germany, Korea, Hong Kong, Singapore,
Russia, France, the Netherlands, Czech Republic, the Middle East, Australia, New Zealand, and other countries and regions.
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Wenzhou
Peidi Pet Products Co., Ltd. – Founded in 2002, Wenzhou Peidi is a Shenzhen stock exchange (300673.SZ) publicly
traded large-scale manufacturer of pet products and food in Zhejiang Province, China. It specializes in rawhide chews, leather
collars and leashes, as well as nutritional pet food, treats, toys and gifts and markets these products on a worldwide basis.
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Shouguang
Xincheng Food Co., Ltd. – A privately held pet food producer in Shandong province offers approximately 200 products
that are exported to USA, Canada, Germany, Japan, Korea, and Southeast Asia.
|
Seasonality
Overall
pet food sales experience modest seasonality during the fourth quarter, which is when pet owners tend to spend more on pet treats
as gifts, being approximately 22% higher than during summer months.
Research
& Development
Our
research and development team works to improve our existing and develop future pet food products. Our production processes
are developed based upon a number of in-house developed technologies. The primary focus of such technologies is on customer
needs, which allows us to maintain an effective market-oriented research and development model. We are dedicated to the
research and development of new products and the technical improvement and formulation updating of existing products. To this
end, we are equipped with a professional R&D team, and have obtained a number of invention and utility model patents. Our
R&D team consists of 6 technicians, including 3 with bachelor’s degree, 3 with associate’s degree and 1
external consultant with doctor’s degree as of December 31, 2019. Although we have lost most of our previous R&D
professionals since November 2019, we have retained key technologies. In addition, we cooperate with external technical
experts and suppliers to obtain new technologies and development directions in a timely manner.
In
order to strengthen its R&D capabilities, Tiandihui entered into several collaboration and research sharing agreements with
leading PRC universities and research institutions in joint research projects, including China Agricultural University (March
2016), Shandong Agricultural University (August 2015), Shandong Academy of Agricultural Sciences (March 2016), and Qingdao Agricultural
University (March 2016). For instance, as a part of our collaboration project with the Shandong Agricultural University, we share
the use of the University’s Laboratory and Physiochemical Property Analysis Room, as well as the Microbiological Examination
Room. In addition to these collaboration arrangements, we also gather and collect data on product customization for each pet species
to develop our internal research capabilities in devising scientifically balanced of pet nutrition. Research and development costs
of the years ended December 31, 2019 and 2018 were $Nil and $1,062,582, respectively. These expenses include personnel costs,
testing costs and expenses related to outside services. Although our R&D expense decreased in 2019, partly due to our temporary
suspension of our manufacturing activities in late 2019, looking forward, in order to diversify our product offering to meet customer
demands in the future, we may incur additional R&D expenses in the coming years to maintain our competitive advantage.
Having
built a scaled research and development infrastructure with a strong go-to-market model, we believe we are well positioned to
supplement our internal product development platform by incorporating new technologies or product forms through joint ventures
and collaboration arrangements. We will take a thoughtful approach to our business development efforts in this area and intend
to be selective in pursuing incremental opportunities aligned with our mission and strategy.
Intellectual
Property
The
PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory
to all of the world’s major intellectual property conventions, including:
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Convention
establishing the World Intellectual Property Organization (June 3, 1980);
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Paris
Convention for the Protection of Industrial Property (March 19, 1985);
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Patent
Cooperation Treaty (January 1, 1994); and
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Agreement
on Trade-Related Aspects of Intellectual Property Rights (November 11, 2001).
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The
PRC Trademark Law, adopted in 1982 and revised in 2013, with its implementation rules adopted in 2014, protects registered trademarks.
The Trademark Office of the State Administration of Industry and Commerce of the PRC, handles trademark registrations and grants
trademark registrations for a term of ten years.
Our
primary trademark portfolio consists of 31 registered trademarks (with 14 trademarks currently under review). Our trademarks are
valuable assets that reinforce the distinctiveness of our brand and our consumers’ favorable perception of our products.
The current registrations of these trademarks are effective for varying periods of time and may be renewed periodically, provided
that we, as the registered owner, comply with all applicable renewal requirements including, where necessary, the continued use
of the trademarks in connection with similar goods. In addition to trademark protection, we own 7 URL designations/domain names,
including tdhpet.cn, tdhpet.com,, tdhpetfood.com, tiandihui.com, tiandihui.cn and tiandihui.china . We also own 1 copyright, the
name of which is the Mascot of Chongai Jiujiu-Huihui, and will expire on December 31, 2064.
On
September 1, 2016, we entered into an exclusive 10-year trademark using agreement with TDH Group BVBA, a limited liability company
organized under the laws of Belgium (TDH BVBA), under which agreement we have secured right to the exclusive usage of “
Pet Cuisine” and “Hum & Cheer” trademarks worldwide, from September 1, 2016 to August 31, 2026 in consideration
for the exclusive fee of 5% of the total sales of such products which used those two trademarks, payable every six months. In
November 2018, we completed acquisition of TDH BVBA.
Patents
in China are principally protected under the Patent Law of China. The duration of a patent right is either 10 years (utility model
or design) or 20 years (invention) from the date of application, depending on the type of patent rights.
Currently,
we hold the following design patents pertaining to the pet food products:
No.
|
|
Name
of Patent
|
|
Patent
Number
|
|
|
Types
|
|
Date
of authorization
|
|
1
|
|
A
chicken cartilage composite functional dog food and preparation method
|
|
|
201310653084.4
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|
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Invention
|
|
|
May
20, 2015
|
|
2
|
|
A
pet dog food and its preparation method
|
|
|
201310651439.6
|
|
|
Invention
|
|
|
August
5, 2015
|
|
3
|
|
A
preparation method of beef flavor nutrition canned food canned food
|
|
|
201310651598.6
|
|
|
Invention
|
|
|
May
20, 2015
|
|
4
|
|
A
full price nutritive semi wet pet dog food and preparation method
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|
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201310654269.7
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|
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Invention
|
|
|
May
20, 2015
|
|
5
|
|
A
vegetarian dog bite
|
|
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2017104659172
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|
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Invention
|
|
|
September
26, 2017
|
|
6
|
|
A
duck meat round piece of dog food
|
|
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2017104646420
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|
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Invention
|
|
|
September
22, 2017
|
|
7
|
|
A
kind of soft puffed pet food
|
|
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2017104659191
|
|
|
Invention
|
|
|
September
15, 2017
|
|
8
|
|
A
hermaphrodite breeding device for pet dog
|
|
|
201520651073.7
|
|
|
utility
model
|
|
|
January
6, 2016
|
|
9
|
|
A
pet dog’s molars knot bone
|
|
|
201520651112.3
|
|
|
utility
model
|
|
|
March
2, 2016
|
|
10
|
|
A
new kind of pet food
|
|
|
201520651920.X
|
|
|
utility
model
|
|
|
March
2, 2016
|
|
11
|
|
A
pet cat bone cleaning bone
|
|
|
201520649912.1
|
|
|
utility
model
|
|
|
June
1, 2016
|
|
12
|
|
A
pet dog snack
|
|
|
201520651084.5
|
|
|
utility
model
|
|
|
April
27, 2016
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Our
intellectual property rights are important to our business. We rely on a combination of trade secrets, confidentiality procedures
and contractual provisions to protect our intellectual property. We also rely on and protect unpatented proprietary expertise,
recipes and formulations, continuing innovation and other trade secrets to develop and maintain our competitive position.
We
enter into confidentiality agreements with most of our employees and consultants, and control access to and distribution of our
documentation and other licensed information. Despite these precautions, it may be possible for a third party to copy or otherwise
obtain and use our technology without authorization, or to develop similar technology independently. Since the Chinese legal system
in general, and the intellectual property regime in particular, is relatively weak, it is often difficult to enforce intellectual
property rights in China. Policing unauthorized use of our technology is difficult and the steps we take may not prevent misappropriation
or infringement of our proprietary technology. In addition, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, which
could result in substantial costs and diversion of our resources and could have a material adverse effect on our business, results
of operations and financial condition.
We
require our employees to enter into non-disclosure agreements to limit access to and distribution of our proprietary and confidential
information. These agreements generally provide that any confidential or proprietary information developed by us or on our behalf
must be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties
in the course of our business must be kept confidential by such third parties. In the event of trademark infringement, the State
Administration for Industry and Commerce has the authority to fine the infringer and to confiscate or destroy the infringing products.
Properties
Under
Chinese law, all of the land in China is either state-owned or collectively-owned, depending on its location and the specific
laws governing such land. Collectively-owned land is owned by rural collectives and generally cannot be used for non-agricultural
purposes unless approved by the Chinese government. Collectively-owned land cannot be transferred, leased or mortgaged to non-collectives
without first being converted into state-owned land. Individuals and entities may acquire rights to use state-owned land, or land-use-rights,
for commercial, industrial or residential purposes by means of mutual agreement, tender, auction or listing for sale from local
land authorities or an existing holder of a land-use-right. Land-use-rights granted for commercial, industrial and residential
purposes may be granted for a period of up to 40, 50 or 70 years, respectively. This period may be renewed at the expiration of
the initial and any subsequent terms, subject to compliance with relevant laws and regulations. Land-use-rights are transferable
and may be used as security for borrowings and other obligations.
Our
principal executive office is located at Qingdao Tiandihui Foodstuffs Co. Ltd., 2521 Tiejueshan Road, Huangdao District, Qingdao,
Shandong Province, PRC. Our telephone number is +86 532-8615-7918. Our website address is www.tiandihui.com. The information on
our website is not part of this Annual Report.
In
addition, the Company manages and operates several other facilities, including three export subsidiaries/factories and one PRC
product processing factory that are located in Qingdao. Our facilities are located in the coastal city of Qingdao, near Qingdao
International Airport and the international Qingdao harbor, which proximity ensures efficient international transportation by
sea/air. Our facilities are used for customer service, sales and marketing, R&D and administrative functions. We believe our
facilities are adequate for our current needs.
A
summary description of our facilities is as follows (this list does not include any of the outsourcing facilities that we may,
from time to time, use to support our production needs):
|
|
|
|
Capacity
Ton per day
|
|
|
Location
|
|
Total
area (square feet)
|
|
|
rent/owned
|
1
|
|
Lingang
facility
|
|
|
N/A
|
|
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Building
10, 1388 Taifa Road, Huangdao District, Qingdao City
|
|
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211,047
|
|
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owned
|
2
|
|
Pude
facility
|
|
|
5.9
|
|
|
West
point, Tiejueshan Road, Huangdao District, Qingdao City
|
|
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30,565
|
|
|
owned
|
3
|
|
Haiqing
facility*
|
|
|
1.3
|
|
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Haiqing
Town, Huangdao District, Qingdao City
|
|
|
109,145
|
|
|
rent
|
4
|
|
Jiaozhou
facility
|
|
|
0.8
|
|
|
Shiqian
Village, Ducun Town, Jiaozhou City, Shandong Province
|
|
|
30,062
|
|
|
rent
|
|
|
Total
|
|
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8.0
|
|
|
|
|
|
380,819
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*Haiqing facility was sold in November 2019.
Our daily production capacity for all of our
production facilities is approximately 7 tons.
The
Lingang facility was purchased in December 2018 with a consideration of approximately $6,238,700 (RMB 42,900,000) in order
to make up for the loss of Canning facility production capacity. The purchase was financed by bank loans and seller financing.
It is a five story building with a total space of 211,047 square feet. The factory was mortgaged to obtain bank loans in 2018.
We were sued by the bank in 2020 for failing to make timely loan payments. The court ruled in 2020 that the collateral should
be sold off to repay the bank loan in priority.
We
own the Pude facility which has a 20-year export processing history. We maintain ISO9001, hazard analysis critical Control
Points (HACCP), British Retail Consortium (BRC) and International Characteristic Standards (IFS) certification, as well as EU
and Japanese registered facilities. The daily production capacity of our factory is approximately 5.9 tons..
We lease our Haiqing facility from the government of
Haiqing Town under the terms of 50-year lease agreement, which term commenced on December 31, 2011 and will expire on December
31, 2061. The lease payment of RMB700,000 was paid in lump sum in the beginning of the lease. This facility has a production area
of 100,233 square feet and 8,912 square feet of office space, and maintains export commodity inspection registration from Shandong
Huangdao Bureau of Inspection and Quarantine. Our daily production capacity at this facility is approximately 1.3 tons. Haiqing
facility was sold in November 2019.
We lease the Zhangjialou facility
under the terms of 3-year lease agreement from January 1, 2015 to December 31, 2017. This facility has production area of 21,528
square feet. Our daily production capacity at this facility is approximately 3.6 tons. We lease this space from Cui Runrang, former
CEO’s father. We renewed the lease on January 1, 2018 with a lease term of three years. We closed it in June 2019 due to
the expiration of the lease.
We
lease the Jiaozhou facility under the terms of 10-year lease agreement from September 11, 2017 to September 10, 2027.
This facility has production area of 30,062 square feet. Our daily production capacity at this facility is approximately 0.8
ton. We lease this space from Qingdao Saike Environmental Technology Co., Ltd., a company controlled by our former CEO, Mr.
Cui Rongfeng.
Government
Regulation
In
the U.S., the Food and Drug Administration regulates both content and labeling of all animal food, China does not have a significant
body of pet food laws, rules or regulations. Various regulatory agencies (e.g., the Ministry of Agriculture, the General Administration
for Quality Supervision, Inspection and Quarantine) administer a set of standards, but there appears to be no single regulatory
or administrative agency that is fulfills the comprehensive regulatory function. We are also subject to PRC labor and employment
laws, laws governing advertising and other laws. We monitor changes in these laws and believe that our operations are in compliance
in all material aspects with all PRC rules and regulations applicable to pet food production. However, many such rules and regulations
are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial uncertainty regarding
the future interpretation and application of these laws or regulations.
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign
Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration
Regulations (1996), as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
(1996) and the Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible
for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange
transactions, but not for most capital account items, such as direct investment, loans, repatriation of investment and investment
in securities outside China, unless the prior approval of State Administration of Foreign Exchange (SAFE) or its local counterparts
is obtained. In addition, any loans to an operating subsidiary in China that is a foreign-invested enterprise, cannot, in the
aggregate, exceed the difference between its respective approved total investment amount and its respective approved registered
capital amount. Furthermore, any foreign loan must be registered with SAFE or its local counterparts for the loan to be effective.
Any increase in the amount of the total investment and registered capital must be approved by the PRC Ministry of Commerce or
its local counterpart. We may not be able to obtain these government approvals or registrations on a timely basis, if at all,
which could result in a delay in the process of making these loans. The dividends paid by the subsidiary to its shareholder are
deemed shareholder income and are taxable in China. Pursuant to the Administration Rules of the Settlement, Sale and Payment of
Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject to a cap approved
by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the
capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC
governmental authorities.
Dividend
Distribution. The principal regulations governing the distribution of dividends by foreign holding companies include the Company
Law of the PRC (1993), as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000 and 2016 respectively,
and the Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014 respectively. Under
these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned investment enterprises
in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable
as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal
years have been offset.
Circular
37. On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, PRC residents
shall apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments
before contributing the domestic assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch
by such PRC resident is also required if the registered overseas SPV’s basic information such as domestic individual resident
shareholder, name, operating period, or major events such as domestic individual resident capital increase, capital reduction,
share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by overseas SPV, overseas
investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to
make foreign exchange registration if required by SAFE and its branches. Moreover, Circular 37 applies retroactively. As a result,
PRC residents who have contributed domestic assets or interests to a SPV, but failed to complete foreign exchange registration
of overseas investments as required prior to implementation of Circular 37, are required to send a letter to SAFE and its branches
for explanation. Under the relevant rules, failure to comply with the registration procedures set forth in Circular 37 may result
in receiving a warning from SAFE and its branches, and may result in a fine of up to RMB 300,000 for an organization or up to
RMB 50,000 for an individual. PRC residents who control our company are required to register with SAFE in connection with their
investments in us. If we use our equity interest to purchase the assets or equity interest of a PRC company owned by PRC residents
in the future, such PRC residents will be subject to the registration procedures described in Circular 37.
New
M&A Regulations and Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, China Security Regulation
Commission (CSRC) and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,
or the New M&A Rule, which became effective on September 8, 2006 and was amended on June 22, 2009. This New M&A Rule,
among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of
overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain
the approval of CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock
exchange. On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings
by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would
take several months to complete the approval process. The application of this new PRC regulation remains unclear with no consensus
currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement. Our
PRC counsel has advised us that, based on their understanding of the current PRC laws and regulations:
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●
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We
currently control the Operating Companies by virtue of TDH HK Holding acquiring 100% of the equity interests of Qingdao Tiandihui,
which are regulated by the New M&A Rule. According to the New M&A Rule, when a domestic company or a domestic natural
person, through an overseas company established or controlled by it, to acquire a domestic company’s equity interest
which is related to or connected with it, approval from Ministry of Commerce is required. At the time of our equity interest
acquisition, as the acquiree, Qingdao Tiandihui was not related to or connected with the foreign investor, or the acquirer,
TDH HK Holding. Accordingly, we did not need the approval from Ministry of Commerce. In addition, we have received all relevant
approvals and certificates required for the acquisition; and
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The
CSRC approval under the New M&A Rule only applies to overseas listings of SPVs that have used their existing or newly
issued equity interest to acquire existing or newly issued equity interest in Chinese domestic companies, or a SPV-domestic
company share swap. TDH Holdings, Inc. does not constitute a SPV that is required to obtain approval from the CSRC for overseas
listing under the New M&A Rule because there has not been any SPV-domestic company share swap in our corporate history;
and
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Notwithstanding
the above analysis, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like the one contemplated
by this Annual Report are subject to the New M&A Rule.
Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An
offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested
enterprise in China, which include the Wholly Foreign-owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing
rules; the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors; and the Notice of
the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct
Investment.
Under
the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the
prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total
investment amount shall both be registered with SAIC, MOFCOM and SAFE. Shareholder loans made by offshore parent holding companies
to their PRC subsidiaries are regarded as foreign debts in China for regulatory purpose, which is subject to a number of PRC laws
and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign
Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration
Rules on the Settlement, Sale and Payment of Foreign Exchange. Under these regulations, the shareholder loans made by offshore
parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts
that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total
investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to the governmental approval.
ITEM
4A.
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UNRESOLVED
STAFF COMMENTS
|
Not
applicable.
ITEM
5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
Overview
We
started our company in 2002 in Qingdao, Shandong Province, PRC with a single mission of becoming a premier producer of high-quality
pet food for pet owners in China and worldwide. Our growth has been driven by two key factors: a significant increase in the number
of pet owners and in the size of the pet food market in China which translated into expansion opportunities for us, and a fundamental
change in Chinese society towards pets, pet ownership and care, such that the trends of pet humanization and consumer concerns
for pet health and wellness have created a dynamically growing industry for pet food and products. We price our products to be
accessible to the average consumer, providing us with broad demographic appeal and allowing us to penetrate multiple market segments.
Founded on these building blocks, as well as on our in-depth research and development, production, and sales capabilities, we
believe we are well prepared to be one of the leading producers of pet food in the PRC and beyond.
We are a holding company incorporated in the
British Virgin Islands in September 2015. We own all of the outstanding capital stock of TDH HK Limited, our wholly owned Hong
Kong subsidiary, which, in turn, owns all of the outstanding capital stock of Qingdao Tiandihui Foodstuffs Co., Ltd., our operating
subsidiary based in Qingdao City, Shandong Province, China, which subsidiary incorporated in April 2002 as a domestic Chinese
limited liability company. As of the date of this filing, we hold a 99% interest in TDH Petfood LLC, a Nevada limited liability
company. We conduct all of our business through Tiandihui, which has one wholly-owned subsidiary: Beijing Chongai Jiujiu Cultural
Communication Co., Ltd. (incorporated on March 3, 2011). In addition, TDH Group BVBA, a Belgium company is wholly-owned by
TDH Holdings, Inc.; TDH JAPAN, a Japanese company is wholly-owned by TDH Holdings, Inc.
Our
principal executive office is located at Qingdao Tiandihui Foodstuffs Co. Ltd., 2521 Tiejueshan Road, Huangdao District, Qingdao,
Shandong Province, PRC. Our telephone number is +86 532-8615-7918. Our website address is www.tiandihui.com. The information on
our website is not part of this Annual Report.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
audited consolidated financial statements and the related notes included elsewhere in this annual filing. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth
under “Risk Factors” and elsewhere in this annual filing.
Recent
Developments
Impact
of COVID-19 Pandemic on the Company’s operations
Beginning in late 2019, there were reports
of the COVID-19 (coronavirus) outbreak originating in China, prompting government-imposed quarantines, cessation of certain travel
and business closures. On March 11, 2020, the World Health Organization categorized it as a pandemic. To contain the spread of
the COVID-19, the government took stringent measures, including restricting access to provinces and cities, reducing gathering
events, and postponing non-essential business activities. As of the filing date, the COVID-19 coronavirus outbreak in China appears
to have slowed down and certain provinces and cities have resumed some business activities under the guidance and support of the
government. Following this outbreak, in February 2020, the Company temporarily shut down its main office and its remaining production
facilities. Following the previously reported temporary cessation of its production capabilities and the negative impact of the
COVID-19 pandemic, the Company expects to continue to incur significant delays, reductions in revenue and increases in expenses.
In addition, due to the COVID-19 outbreak, some of our customers or suppliers may experience financial distress, delay or default
on their payments, reduce the scale of their business, or suffer disruptions in their business due to the outbreak. Any increased
difficulty in collecting accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses, or early
termination of agreements due to deterioration in economic conditions could negatively impact our results of operations. We resumed
our work in May 2020. In light of the current circumstances and available information, we estimate that for the first five months
of 2020, our revenues could be approximately 93% lower as compared to the same period of last year, to an estimated amount of
$0.32 million. At the same time, our employee salaries and benefits have decreased due to company restructuring started November
2019. We expect that our net loss could be approximately 66% lower as compared to the same period of last year, to an estimated
amount of $0.65 million for the first five months of 2020. Our assets primarily include cash, restricted cash, accounts receivable,
inventory, prepaid expense and other current assets, property, plant and equipment, intangible assets and operating lease right-pf-use
assets. As of the end of May 2020, based on our unaudited and unconsolidated financial statements of our operating subsidiaries,
the Company’s businesses, results of operations, financial position and cash flows were adversely affected in the first
quarter of 2020 with continuing impacts on subsequent periods, including but not limited to material negative impact to the Company’s
total revenues, slower collection of account receivables and significant impairment to the Company’s long-lived assets.
Although we resumed our business activities since May 2020, the extent of the impact of COVID-19 on the Company’s results
of operations and financial condition for the remaining months in our fiscal year 2020 will depend on future developments, including
the duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot
be reasonably estimated at this point of time. The Company’s revenues remain negligible following the gradual resumption
of its operations in May 2020. Moreover, the Company expects that the impact of the COVID-19 outbreak on the domestic and global
economic environment will have a material adverse effect on the demand for its products and its ability to generate revenue going
forward. Any and all of the foregoing could have a material adverse impact on its business, operating results and financial condition.
Due to the effects of the outbreak of COVID-19 discussed above, to the extent we experience a further adverse operating environment
or incur unanticipated capital expenditure requirements, or if we decide to accelerate our growth, then additional financing may
be required. Such financing may include the use of additional debt or the sale of additional equity securities. We cannot guarantee,
however, that additional financing, if required, would be available at all or on favorable terms.
Management Changes
Effective as of August 2, 2019, the Board resolved to remove the
Company’s Chief Executive Officer, Cui Rongfeng, and appoint Dandan Liu in his stead as the Company’s Chief Executive
Officer. Previously, the Company’s PRC operating entity, Qingdao Tiandihui, determined not to renew Cui Rongfeng’s
initial term of employment expiring on August 31, 2019 for another term. Dandan Liu has served as a Class A director of the Company
since February 2019. Ms. Liu founded Beijing Houxin Investments Co., Ltd. in June 2012 and has served as its CEO and Chairman since
its inception.
On February 19, 2020, the Company’s Board
appointed Feng Zhang as the Company’s Chief Financial Officer, effective immediately, at an annual base salary of approximately
$30,850. From August 2018 to September 2019, Feng Zhang worked as Senior Accounting Manager for Beijing Longguang Energy Technology
Co., Ltd. From July 2017 to July 2018, Mr. Zhang worked as Accounting Manager for Hebei Yinlong Renewable Energy Co., Ltd. From
March 2015 to June 2017, Mr. Zhang worked as Audit Manager for Beijing Xinghua Certified Public Accountants Firm (Partnership).
From June 2006 to February 2015, Mr. Zhang worked as Accounting Manager for Boda Instrument Group Co., Ltd. Mr. Zhang is a Certified
Public Accountant and received his bachelor’s degree in Assets Appraisal from Hebei Agricultural University.
Temporary
Cessation of Production; Legal Proceedings
Notwithstanding
operational improvement during the period from January to October of 2019, in November 2019 the Company determined to temporarily
cease its production for the following reasons:
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●
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Substantial
increase in the prices of major inputs and raw materials, particularly, chicken and duck meat. As the market prices for pork in
China rose in 2019, so did prices for chicken and duck meat. For example, the price of chicken breasts has risen from less than
RMB15 per kilogram in early 2019 to nearly RMB20 per kilogram now, or an increase more than 35%, while the average annual prices
in 2017 and 2018 were only RMB10.7 and RMB12.4, respectively. Raw meat accounts for the largest proportion of product costs, which
also makes the Company’s unit production costs to continue to increase, causing the gross profit margins to decline. Due
to the more competitive market environment, the Company is unable to pass such price changes onto its customers promptly and completely.
It is expected that if the Company continues to receive orders and sales based on existing market conditions, its monthly loss
will exceed RMB3 million (or USD0.43 million). As market conditions change and evolve, the Company will consider resuming its
currently ceased production operations. In the meantime, the Company continues to take orders and as such orders are taken, they
will be outsourced for production to third-party manufacturers the Company had previously utilized.
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●
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Lack
of operational efficiency at the Company’s production facilities. While the Company did achieve a certain degree of increase
in profitability and production efficiency through a series of adjustments in the first half of 2019, it still lags far behind
its competitors. The personnel costs are high, which makes the fixed cost allocation larger and lowers the gross profit margin
of the Company’s production.
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●
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Outstanding
indebtedness. Currently, a number of the outstanding loans have to be renewed at maturity, including short-term loans of RMB20
million related to the purchase of Lingang facility. The Company’s various production operations and capital expenditures
can be implemented only if these loans are renewed. Currently, however, some lenders are not willing to renew their loan arrangements
with the Company, which also raised significant concerns about the Company’s ability to maintain and continue its operations.
|
Following
the foregoing measures, the Company has been involving the following matters:
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●
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Legal
claims by vendors and lenders. During the months of November 2019 to June 2020, the
Company has been a subject of 48 lawsuits by its raw material supplies, printing and
packaging supplies, transportation companies and other vendors. The claims raised in
these lawsuits pertain to the Company’s non-payment of various invoices for supplier
and vendor services rendered, with interest and costs. As of the date of this report,
(i) 46 of the proceedings have been completed, among them, 30 of these cases, the creditors
agree to settle with us if we pay an agreed upon dollar amounts; 16 of these cases the
Court ruled in favor of the creditors, and (ii) 2 proceedings against the Company remain
ongoing. The mediation and judgment are estimated approximately RMB11.8 million (USD1.69
million).
|
On December 2, 2019, Qingdao Lingang Real Estate Co., Ltd.,
instituted a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges
that it executed a one-year loan agreement with the Company in the amount of RMB20.55 million (USD2.94 million) for the Company’s
working capital and general corporate purposes. Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this loan as personal guarantors
subject to joint and several liability in connection with the loan. The plaintiff claims non-payment of the principal of the loan
and a partial payment of the interest thereon. The plaintiff demands the Company to (i) repay the aggregate amount of RMB20.55
million (USD2.94 million), including interest, (ii) assume and pay the interest at the rate of 2% per month for the period from
the date of November 1, 2019 to the date of full discharge of the debt, and (iii) compensate the plaintiff’s legal fees of
RMB120,000 (USD17,143). The plaintiff also demands Rongfeng Cui and Yanjuan Wang to assume joint and several liability for the
Company’s debt. On March 4, 2020, the Court ordered the Company to pay RMB20.55 million (USD2.94 million) of principal and
interest to QLRE, and Rongfeng Cui to bear joint and several security liability for the payment, and the legal cost was RMB77,000(USD$10,050).
No payment has been made as of the date of this Report.
On January 15, 2020, China Construction Bank (“CCB”),
instituted a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges
that it executed a loan agreement with the Company in the amount of RMB19.93 million (USD2.86 million) for the purchase of manufacturing
facility and the associated land use right located at Lingang Economic Development Zone, Huangdao District, Qingdao, Shandong Province,
People’s Republic of China.. Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this loan as personal guarantors subject
to joint and several liability in connection with the loan. The plaintiff claims non-payment of the principal of the loan and a
partial payment of the interest thereon. The plaintiff demands the Company to (i) repay the aggregate amount of RMB19.93 million
(USD2.86 million), including interest, (ii) apply for execution of collateral of the associated land use right in the name of Tiandihui
located at Lingang Economic Development Zone. The plaintiff also demands Rongfeng Cui and Yanjuan Wang to assume joint and several
liability within the range of RMB22.65 million (USD3.25 million) for the Company’s debt. On April 14, 2020, the Court ordered
the Company to pay RMB19.93 million (USD2.86 million) of principal and interest to CCB, executed the sale of the mortgaged property
and Rongfeng Cui and Yanjuan Wang to bear joint and several security liability for the payment, and the legal cost was RMB70,678(USD$10,143).
No payment has been made as of the date of this Report.
On
November 11, 2019, Shanghai Pudong Development Bank Qingdao Branch(“CPDB”), instituted a civil claim against
Qingdao Tiandihui Foodstuffs Co., Ltd., Qingdao Saike Environmental Technology Co., Ltd. (“Saike”), Qingdao
Gaochuang Technology Finance Guarantee Co., Ltd. (“Gaochuang”), Rongfeng Cui, and Yanjuan Wang. The plaintiff
alleges that it executed the additional bank acceptance deposit of the Company in the amount of RMB4.85 million (USD0.7
million) for acceptance draft at maturity. Saike, Gaochuang, Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this
acceptance draft as guarantors subject to joint and several liability in connection with the acceptance draft. The plaintiff
claims non-payment of the acceptance draft . The plaintiff demands the Company to (i) repay the aggregate amount of RMB4.85
million (USD0.7 million), and (ii) apply for execution of collateral of the associated land use right and real estate in the
name of Saike, Rongfeng Cui and Yanjuan Wang. The plaintiff also demands Gaochuang to assume joint and several liability
within the range of RMB1.2 million (USD0.17 million) for the Company’s debt. The court has not ruled as of the
reporting date.
On December 10, 2019, Qingdao Gaochuang Technology Finance Guarantee
Co., Ltd. (“Gaochuang”), instituted a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Qingdao Saike Environmental
Technology Co., Ltd. (“Saike”), Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges that it executed the guarantee
of additional CPDB bank acceptance deposit of the Company in the amount of RMB1.2 million (USD0.17 million). Saike, Gaochuang,
Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this acceptance draft as guarantors subject to joint and several liability
in connection with the acceptance draft. The plaintiff demands the Company to (i) repay the aggregate amount of RMB1.2 million
(USD0.17 million), and (ii) apply for execution of the collateral of mortgage counter guarantee and the patent pledge in the name
of the Company. The court has not ruled as of the reporting date.
The
Company entered into two loan agreements with China Postal Savings Bank – Qingdao Weihai Road Sub Branch.
(“CPSB”) to borrow RMB9.9 million (USD1.42 million). Both loans were due in April 2020. CPSB applied to the
court for property preservation in November 2019 and has not sued the Company as of the reporting date.
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●
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Labor
arbitration claims by former employees. The Company estimates that its headcount will be around 50 full-time
employees through the end of this adjustment period. As a result of the layoffs, certain of the Company’s former
employees commenced arbitration proceedings against the Company under applicable labor rules and standards, claiming, among
others, lost wages, severance payments and/or social security obligations totaling RMB4.8 million (USD0.69 million). As of
the reporting date, there were 97 labor arbitrations, of which 96 had entered the first phase of trial and 1 had entered the
second phase of trial.
|
Nasdaq
Compliance Confirmation and a Panel Monitor
On October 29, 2019, the Company received
Nasdaq confirmation of the Company’s regaining technical compliance with the minimum stockholders’ equity rule and
with other applicable requirements as set forth in the Panel’s decision following an oral hearing in August 2019. In connection
with this confirmation, the Nasdaq Panel imposes a Panel Monitor under Listing Rule 5815(d)(4)(A) until October 30, 2020 for the
purposes of monitoring the Company’s continued compliance with the stockholders’ equity requirement. If and to the
extent the Company’s stockholders’ equity falls below $2.5 million and the Company does not qualify for listing under
an alternative to the stockholders’ equity rule, the Panel (or a newly convened Panel if the initial Panel is unavailable)
will promptly conduct a hearing with respect to this deficiency, and the Company’s securities may be immediately delisted
from Nasdaq. During the monitoring period, the Company will be obligated to notify the Panel, in writing, in the event its stockholders’
equity falls below $2.5 million for any reason, and in the event the Company falls out of compliance with any other applicable
listing requirement. In the event that the Company fails to comply with any other requirement for continued listing during the
monitoring period, the Company will be provided written notice of the deficiency and an opportunity to present a definitive plan
to regain compliance to the Panel. The Panel will thereafter render a determination with respect to the Company’s continued
listing on Nasdaq. Notwithstanding Listing Rule 5810(c), the Company will not be permitted to provide the Listing Qualifications
Department a plan of compliance with respect to any deficiency that arises during the monitor period, and the Listing Qualifications
Department will not be permitted to grant additional time for the Company to regain compliance with respect to any deficiency.
If the Company is delisted from Nasdaq, its common shares may be traded over-the-counter on the OTC Bulletin Board or in the “pink
sheets” if one or more market makers seeks and obtains approval by the Financial Industry Regulatory Authority to continue
quoting in the Company’s common shares. On August 12, 2019, the Company announced that it had received written notice from
Nasdaq that the Company has regained compliance with the minimum bid price continued listing requirement. The Company regained
compliance with this requirement as a result of its common shares’ closing bid price having been at or above the minimum
requirement of $1.00 per share for a minimum of ten consecutive trading days.
September
2019 Private Placement
Following
the Annual Meeting and upon receipt of the requisite shareholder vote, on September 27, 2019, the Company closed a private placement
of its securities pursuant to subscription agreements with several individual accredited investors, including with the Company’s
Chief Executive Officer and a Board member (together, the “Investors”), under which such Investors have agreed to
purchase from the Company up to an aggregate of $10 million worth of the Company’s common shares, at the per share price
of $0.30, or a total of 33,333,333 of the Company’s common shares (the “Private Placement”). The Company’s
intends to use the net proceeds from the sale of its securities in this Private Placement to pay off certain debt, complete the
first phase of the Lingang production plant and for working capital and general corporate purposes. The closing of this Private
Placement was subject to certain conditions, including the stockholder approval requirement pursuant to Nasdaq Marketplace Rule
5635(d). The Company sold the securities in this Private Placement in reliance upon an exemption from registration under the Securities
Act. There were no discounts or brokerage fees associated with this offering.
Overview
We
specialize in the development, manufacturing and sale of a variety of pet food products under multiple brands that are well-established
and recognizable by consumers in the PRC, Asia, Europe and North America. We offer more than 200 different products, which are
classified into 6 product categories: pet chews, dried pet snacks, wet canned pet food, dental health snacks, and baked pet
biscuits (as well as non-food items like dog leashes, pet toys, etc.), and the other pet food products. Our multi-platform sales
approach enables us to connect our production output to customers in the PRC, Asia, Europe and North America.
Product
research and development plays an important role in our business. Our production processes are developed based upon a number of
in-house developed technologies. The primary focus of such technologies is driven by customer needs, which allows us to maintain
an effective market-oriented research and development model. We have been granted certain invention and utility model patents.
Because of our in-depth research and development efforts and our proprietary recipes, cooking techniques and packaging developed
over the last decade, we are able to provide high quality pet food products to consumers throughout the world.
We own several facilities and lease others,
built to high quality food production standards, all of which are located at the areas with well-established transportation facilities
in the coastal city of Qingdao City, Shandong Province, PRC.
We
also maintain an office in Qingdao with 3 well-trained, multilingual employees to address customer service matters arising from
our sales in the PRC and abroad.
We
have employed approximately 50 full-time employees at our facilities. With the exception of our subsidiaries’ offices located
in Beijing, all of our production, administration, sales/marketing and customer service facilities covering the PRC and overseas
markets are located in Shandong Province, PRC.
Our
workforce consists of employees who are knowledgeable about animal nutrition, and employees with strong sales and marketing skills.
Our management team is comprised of an experienced group of executives, many of whom have years of operating experience in their
respective departments.
We
actively pursue markets in which our products can make a substantial difference to customers. Our current capabilities allow us
to develop new and innovative products and expand new distribution channels to extended potential markets. Starting from 2013,
we have been utilizing an online sale and multi-brand, multi-store brand sale strategies to expand our market coverage. However,
we suspended our overseas E-commerce business in 2019 due to continuous losses.
Our
sales and marketing team consists of an original design manufacturer (ODM) domestic (PRC) marketing group. Our business model
relies on our strength to provide our customers with personalized and customized products. As a part of our ODM production process,
we continuously accumulate a large amount of market information about our customers, in the PRC and abroad, which helps us to
make appropriate product offering decision.
We
operate our business in China through our wholly-owned subsidiaries, Tiandihui and Chongai Jiujiu.
Revenues
We
derive our revenues from wholesale and retail of our pet food products, mainly through our overseas and domestic distribution
agents, and online sales through various electronic commerce platforms. Revenue consists of the invoiced value for the sales,
net of value-added tax (“VAT”), business tax, applicable local government levies and returns.
The
following factors affect the revenues we derive from our operations.
Maintain
our competitive advantages. Based on our research and development strength, we are able to provide more than 200 different
variety of pet snack products to our targeted customers to satisfy their needs. We focus on the needs of the market and provide
our customers with personalized and customized products. We have established our own unique and competitive advantages in the
marketplace. However, the market conditions and consumer preferences change rapidly. If we fail to maintain our reputation and
competitive advantages, customers demand for our products could decline.
Competition. The
market of pet food is very competitive. The number of pet food manufacturers is increasing due to the growth of actual and
predicted demand for pet food products and the relatively low barriers to entry. Moreover, Our PRC market is characterized by
price competition, product quality and the presence of a number of medium to large companies. We are subject to pricing pressure
and may experience a decline in average selling prices for our products. We compete with a significant number of companies of
varying sizes, including divisions or subsidiaries of larger companies who may have greater financial resources and larger customer
bases than we have. Some of our current or potential competitors may have significantly greater financial resources and expertise
in research and development, manufacturing, and marketing pet products than we do, they may also be able to identify and adapt
to changes in consumer preferences more quickly than us, these factors could result in our competitors establishing a strong market
position before our products are able to enter the potential market. Additionally, technologies developed by our competitors may
render our product candidates uneconomical or obsolete. If we do not compete effectively, our operating results could be harmed.
Some
of our competitors have established more prominent market positions. We believe that our major competitors include the following
companies: Yantai China Pet Foods Co., Ltd., Wenzhou Peidi Pet Products Co., Ltd., Gambol Pet Group, and Shouguang Xincheng Food
Co., Ltd.
Expansion
of E-commerce sales. With the popularization and development of Internet, E-commerce accounts for an increasing
proportion in the industry. If we fail to expand our E-commerce business, our total revenue could continue to decrease.
E-commerce sales in 2019, 2018 and 2017 were $83,779, $3,800,668 and $5,734,121, accounting for 1%, 16% and 20% of total
revenue, respectively. Although we suspended our overseas e-commerce business in 2019, we are still preparing to expand our
domestic e-commerce business in the near future.
Loss
of key personnel. Our revenue was derived from our competitive advantages in our products. We rely heavily on the expertise
and leadership of our senior management to maintain our core competence. The loss of the service of any of our key personnel could
adversely affect our business. We have obtained non-compete agreements and confidentiality agreements from our scientist and technique
staffs in our research and development and manufacturing departments.
Potential
trade protection action. Trade protectionism actions in the United States, the European Union or elsewhere around the
world could result in additional duties and tariffs on the importation of pet food from China to each respective national market.
Any determination of duties and tariffs against importation of our modules into the United States and Europe could adversely affect
our ability to sell products in these countries that could impact our sales, business operations, competitiveness, and profitability.
Group
boycott initiated by the local pet food association. We continue to rely on the local agents to expand our sales in overseas
market. It has been our experience that pet food associations in certain countries are influential in local markets. It is possible
that these associations may boycott our pet snack products for the reasons such as low prices and other market specific concerns.
If and to the extent that happens, our revenues will be adversely affected.
Macro-economic
conditions. Our business, financial condition and results of operations may be materially adversely affected by a challenging
economic climate, including adverse changes in interest rates, volatile commodity markets and inflation, contraction in the availability
of credit in the market and reductions in consumer spending. A macroeconomic downturn, which decreases the disposable personal
income and reduces the need for luxury goods, may contribute to decreased sales of our pet food products. Conversely, the economic
growth may result in more sales of our pet food products.
Costs
and Expenses
Our
costs and expenses primarily include the following:
Costs
of revenues. Cost of revenues consists primarily of direct raw materials, direct payroll of workshop staff, utility and supply
costs consumed in the manufacturing process, manufacturing labor, depreciation expense and overhead expenses necessary to manufacture
finished goods as well as distribution costs such as inbound freight charges.
Selling,
general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation expense
for our corporate staff in supporting departments, communication costs, gasoline, shipping and handling cost, welfare expenses,
education expenses, professional fees (including consulting, audit and legal fees), travel and business hospitality expenses.
Income
tax expense. We account for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification,
which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the financial statements or tax returns.
The
following factors affect our cost of revenues and expense.
Price
fluctuation of raw materials. The raw materials purchase costs significantly impact our cost of goods sold. Any significant
fluctuation of the market price of raw materials may negatively affect our operating results. Even if
our current materials supply is relatively stable, we could be impacted by material price fluctuation in coming years.
Prevailing
salary levels. Our cost of revenues is impacted by prevailing salary levels. Although we have not been subject to significant
wage inflation in China, a significant increase in the market rate for wages could harm our operating results and our operating
margin. Our ability to attract, retain, and expand our senior management and our professional and technical staff is an important
factor in determining our future success. The market for qualified scientists and researchers is competitive. From time to time,
it may be difficult to attract and retain qualified individuals with the required expertise at a fair wage. An increase in compensation
of our scientists and researchers may increase our operating cost.
Depreciation.
Our depreciation expenses are mainly driven by the net value of machinery equipment, motor vehicles, buildings and other items.
Depreciation of property, plant and equipment is calculated based on cost, less their estimated residual value, if any, using
the straight-line method over estimated useful life from 5 years to 50 years. Any change of the depreciation accounting policy
or impairment of our property may affect our operating results.
Shipping
and handling expense. Our shipping and handling expense includes domestic freight, oversea freight, domestic express
shipping fee, distribution cost in European Union and North America. Our domestic express shipping fee accounted for approximately
29.45% of the related revenue in 2019. In order to reduce shipping and handling cost, we are trying to negotiate with and establish
closer cooperation with several shipping companies providing express shipping services in order to lock favorable fee rates and
reduce the domestic express fees.
Research
and Development expense. Due to the uncertainty for the result of our R&D activities, we expensed all of our R&D
expenditure. The R&D expense for the years ended December 31, 2019, 2018 and 2017 was $Nil, $1,062,582 and $1,051,665, respectively.
Although our R&D expense decreased in 2019 due to our temporary suspension of our manufacturing activities in late 2019 in
order to improve our operational efficiency, looking forward, in order to diversify our product offering to meet customer demands
in the future, we may incur additional R&D expenses in the coming years to maintain our competitive advantage.
Results
of Operations
For
the years ended December 31, 2019, 2018 and 2017
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December 31
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|
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2019
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2018
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2017
|
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2019 vs 2018
|
|
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2018 vs 2017
|
|
|
|
$
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|
|
|
$
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|
|
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$
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|
|
|
|
|
|
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Net revenues
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|
12,455,414
|
|
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22,154,506
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|
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28,473,016
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|
|
-43.78
|
%
|
|
|
-22.19
|
%
|
Net revenues-related parties
|
|
192,841
|
|
|
|
1,519,531
|
|
|
|
506,495
|
|
|
|
-87.31
|
%
|
|
|
200.01
|
%
|
Cost of revenues
|
|
13,992,499
|
|
|
|
26,278,300
|
|
|
|
20,283,321
|
|
|
|
-46.75
|
%
|
|
|
29.56
|
%
|
Cost of revenues-related parties
|
|
178,636
|
|
|
|
1,448,533
|
|
|
|
399,177
|
|
|
|
-87.67
|
%
|
|
|
262.88
|
%
|
Gross profit (loss)
|
|
(1,522,880
|
)
|
|
|
(4,052,796
|
)
|
|
|
8,297,013
|
|
|
|
-62.42
|
%
|
|
|
-148.85
|
%
|
Gross margin
|
|
-12.04
|
%
|
|
|
-17.12
|
%
|
|
|
28.63
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Selling expense
|
|
920,237
|
|
|
|
4,535,945
|
|
|
|
4,882,367
|
|
|
|
-79.71
|
%
|
|
|
-7.10
|
%
|
R&D expense
|
|
-
|
|
|
|
1,062,582
|
|
|
|
1,051,665
|
|
|
|
-100
|
%
|
|
|
1.04
|
%
|
General and administrative expenses
|
|
3,702,035
|
|
|
|
2,792,858
|
|
|
|
2,095,676
|
|
|
|
32.55
|
%
|
|
|
33.27
|
%
|
Impairment of long-lived assets other than goodwill
|
|
813,344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
%
|
|
|
-
|
|
Impairment of goodwill
|
|
-
|
|
|
|
1,599,591
|
|
|
|
-
|
|
|
|
-100
|
%
|
|
|
100
|
%
|
Income (loss) from operations
|
|
(6,958,496
|
)
|
|
|
(14,043,772
|
)
|
|
|
267,305
|
|
|
|
-50.45
|
%
|
|
|
-5353.84
|
%
|
Revenues.
Our
revenue was $12,648,255, $23,674,037 and $28,979,511 for the years ended December 31, 2019, 2018 and 2017, respectively.
Our revenue decreased by $11,025,782 or 46.6% when comparing 2019 to 2018, and also decreased by $5,305,474, or 18.3% when comparing
2018 to 2017.
The
following table displays our revenue by different marketing channels.
|
|
December
31
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
vs 2018
|
|
|
2018
vs 2017
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
Oversea
sales
|
|
9,995,136
|
|
|
15,832,362
|
|
|
21,190,063
|
|
|
-37
|
%
|
|
-25
|
%
|
Domestic
sales
|
|
2,711,445
|
|
|
|
4,102,457
|
|
|
|
2,086,462
|
|
|
|
-34
|
%
|
|
|
97
|
%
|
Electronic
commerce sales
|
|
83,779
|
|
|
|
3,800,668
|
|
|
|
5,734,121
|
|
|
|
-98
|
%
|
|
|
-34
|
%
|
Less:
Sale tax and addition
|
|
(142,105
|
)
|
|
|
(61,450
|
)
|
|
|
(31,135
|
)
|
|
|
131
|
%
|
|
|
97
|
%
|
Total
revenues
|
|
12,648,255
|
|
|
|
23,674,037
|
|
|
|
28,979,511
|
|
|
|
-47
|
%
|
|
|
-18
|
%
|
Year
Ended December 31, 2019 Compared to Year Ended December 31, 2018
For
the year ended December 31, 2019, our overseas sales, domestic sales and E-commerce sales decreased by $5,837,226, $1,391,012
and $3,716,889, respectively, compared with the year ended December 31, 2018.
The
decrease of revenue in 2019 was mainly due to these three facts: (1) decrease in sales orders due to our uncompetitive sales
price; (2) partially suspension of our overseas E-commerce business due to the estimated gross loss; and (3) temporary
suspension of our manufacturing activities in 2019 to improve our operational deficiency. As a result, we received reduced
sales orders from our customers and our sales volume significantly decreased in 2019 as compared to 2018.
Notwithstanding
operational improvement during the period from January to October 2019, we determined to temporarily suspend our production mainly
for the following reasons:(1) substantial increase in the prices of major inputs and raw materials which reduced our competitive
strength and profitability; (2) lack of operational efficiency at the Company’s production facilities; and (3) some of our
outstanding indebtedness cannot be renewed with the lenders upon loan maturity, which may negatively impact our capital sources
to be used to support our continuous operations.
As
a result, our total revenues for the fiscal year 2019 decreased dramatically as compared with the fiscal year 2018.
Year
Ended December 31, 2018 Compared to Year Ended December 31, 2017
For
the year ended December 31, 2018, our overseas sales and E-commerce sales decreased by $5,357,701 and $1,933,453, respectively,
compared with the year ended December 31, 2017. The decrease was mainly due to heavy competition, resulting in decreased demand
on our products. In addition, the Company experienced the Shanghai Cooperation Organization summit and relocation of Canning facility
during 2018, and the production capacity and productivity had been adversely impacted.
For
the year ended December 31, 2018, our domestic sales increased by $2,015,995, compared with the year ended December 31, 2017.
The increase was mainly due to our effort on expanding domestic market.
The
revenue generated from different product lines are set forth as following:
|
|
December
31
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
vs 2018
|
|
|
2018
vs 2017
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
Pet chews
|
|
6,469,755
|
|
|
|
6,271,777
|
|
|
|
9,614,426
|
|
|
|
3
|
%
|
|
|
-35
|
%
|
Dried pet snacks
|
|
4,617,742
|
|
|
|
13,611,010
|
|
|
|
14,851,868
|
|
|
|
-66
|
%
|
|
|
-8
|
%
|
Wet canned pet food
|
|
1,310,001
|
|
|
|
2,782,382
|
|
|
|
3,035,196
|
|
|
|
-53
|
%
|
|
|
-8
|
%
|
Dental health snacks
|
|
305,452
|
|
|
|
495,581
|
|
|
|
856,875
|
|
|
|
-38
|
%
|
|
|
-42
|
%
|
Baked pet biscuits
|
|
87,410
|
|
|
|
95,169
|
|
|
|
8,226
|
|
|
|
-8
|
%
|
|
|
1057
|
%
|
Others
|
|
-
|
|
|
|
479,568
|
|
|
|
644,055
|
|
|
|
-100
|
%
|
|
|
-26
|
%
|
Less:
Sale tax and addition
|
|
(142,105
|
)
|
|
|
(61,450
|
)
|
|
|
(31,135
|
)
|
|
|
131
|
%
|
|
|
97
|
%
|
Total
revenues
|
|
12,648,255
|
|
|
|
23,674,037
|
|
|
|
28,979,511
|
|
|
|
-47
|
%
|
|
|
-18
|
%
|
Year
Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenue
generated from dried pet snacks decreased by $8,993,268 or 66%, from the year ended December 31, 2018 to the year ended December
31, 2019. Revenue generated from wet canned pet foods decreased by $1,472,381 or 53 %, from the year ended December 31, 2018 to
the year ended December 31, 2019. Revenue generated from dental health snacks decreased by $190,129 or 38%, from the year ended
December 31, 2018 to the year ended December 31, 2019. The decrease was due to the rejection of certain unprofitable orders, suspension
of our E-commerce business and suspension of our manufacturing activities from late October 2019.
Year
Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue
generated from pet chews pet foods decreased by $3,342,649 or 35%, from the year ended December 31, 2017 to the year ended December
31, 2018. Revenue generated from dried pet snacks decreased by $1,240,858 or 8%, from the year ended December 31, 2017 to the
year ended December 31, 2018. Revenue generated from wet canned pet foods decreased by $252,814 or 8%, from the year ended December
31, 2017 to the year ended December 31, 2018. These decreases were mainly due to the facts that (1) we did not renew certain sale
contracts as the selling prices offered were unprofitable; and (2) our total daily production capacity decreased from 16 tons
to 12 tons in 2018 due to the lease expiration for the Canning facility in 2018.
The
revenue generated from different countries are set forth as following:
|
|
December
31
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
vs 2018
|
|
|
2018
vs 2017
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
South Korea
|
|
1,335,791
|
|
|
|
2,870,998
|
|
|
|
5,397,982
|
|
|
|
-53
|
%
|
|
|
-47
|
%
|
China
|
|
2,662,247
|
|
|
|
6,569,382
|
|
|
|
6,553,715
|
|
|
|
-59
|
%
|
|
|
0
|
%
|
United Kingdom
|
|
1,573,546
|
|
|
|
2,415,043
|
|
|
|
3,213,303
|
|
|
|
-35
|
%
|
|
|
-25
|
%
|
Germany
|
|
2,062,110
|
|
|
|
2,522,149
|
|
|
|
3,585,535
|
|
|
|
-18
|
%
|
|
|
-30
|
%
|
Other
countries
|
|
5,156,666
|
|
|
|
9,357,915
|
|
|
|
10,260,111
|
|
|
|
-45
|
%
|
|
|
-9
|
%
|
Less:
Sale tax and addition
|
|
(142,105
|
)
|
|
|
(61,450
|
)
|
|
|
(31,135
|
)
|
|
|
131
|
%
|
|
|
97
|
%
|
Total
revenues
|
|
12,648,255
|
|
|
|
23,674,037
|
|
|
|
28,979,511
|
|
|
|
-47
|
%
|
|
|
-18
|
%
|
“Other
countries” is comprised of all countries whose revenues, individually, were less than 10% of the Company’s revenues.
Year
Ended December 31, 2019 Compared to Year Ended December 31, 2018
Overall,
our sales to most of the overseas countries significantly decreased in 2019 as compared to 2018, mainly due to the fact that the
Company has declined certain unprofitable orders and suspended E-commerce business.
Year
Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue
generated from South Korea decreased by $2,526,984 or 47%, which resulted from the loss of a big customer in 2018.
As
the production cost and oversea delivery cost increased significantly, some sales contract could not cover the related total cost.
We did not accept these kinds of orders, which resulted in the decrease of revenue from some countries in 2018, for example, the
United Kingdom and Germany.
Cost
of revenues
Our
cost of revenues, decreased by $13,555,698 or 48.89% for the year ended December 31, 2019 as compared to the year ended December
31, 2018. This decrease in cost of revenues was mainly due to the 46.57% decrease in our total net revenue for the year ended
December 31, 2019. Our cost of revenues as a percentage of revenue was 112.04% and 117.12% for the years ended December 31,
2019, and 2018, respectively.
Our
cost of revenues is primarily comprised of the cost of our raw materials, labor and factory overhead. Our cost of revenues, increased
by $7,044,335, or 34.06%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. This dollar
increase in cost of revenues was mainly due to increased raw material costs, such as chicken, beef and pork, write-down of obsolete
inventories and low productivity after the relocation of one of our main production facilities. Our cost of revenues as a percentage
of revenue was 117.12%, and 71.37% for the years ended December 31, 2018, and 2017, respectively.
Gross
margin
Our
gross margin was negative 12.04% for the year ended December 31, 2019, compared with negative gross margin of 17.12% for the year
ended December 31, 2018. The improvement in gross margin was mainly due to the rejection of certain unprofitable orders and
the slightly improvement of our cost management.
Our
gross margin was negative 17.12% for the year ended December 31, 2018, and decreased by 45.75%, from 28.63% for the year ended
December 31, 2017. This sharply decrease in 2018 was primarily due to the fact that the significant decrease in revenue due
to the heavy competition and the significant increase in price of raw materials due to market price fluctuations. In particular,
the reasons could be concluded as follows:
|
●
|
Unit
price for our main raw materials increased significantly in 2018. For example, the average
unit price for big chicken breasts increased to RMB11.69 in 2018 from RMB9.33 in 2017,
representing an increase of 20%, and the average unit price for small chicken breast
increased to RMB10.93 in 2018 from RMB9.33 in 2017, representing an increase of 17%.
We could not pass the rising raw material costs to our customers. In addition, after
we raised prices on new orders, we saw some of our customers, including a few significant
ones, cease purchasing from us.
|
|
●
|
The
relocation of our largest factory, the Canning facility, resulted in reducing our total
production capacity from 18 tons to 12 tons per day. The relocation of Canning facility
resulted in more inventory damage, and low productivity led to more materials consumed.
|
|
●
|
Parts
of our completed and semi-finished products were damaged by the summer rainstorms. We
had to dispose of damaged inventory at a much lower price or scrap the inventory and
record as cost.
|
Operating
expenses
Operating expenses were $5,435,616, and $9,990,976 for the years
ended December 31, 2019 and 2018, respectively, a decrease of $4,555,360, or 45.59%. Accordingly, the ratio of operating expenses
as a percentage of revenue increased from 27.71% for the year ended December 31, 2017 to 42.20% for the year ended December 31,
2018 and increased to 42.98% for the year ended December 31, 2019.
Selling
expense was $920,237 and $4,535,945 for the years ended December 31, 2019, and 2018, respectively, a decrease of $3,615,708 or
negative 79.71%. The decrease in our selling price was in line with our decreased revenue in 2019. As our revenue declined, our
distribution costs, sales promotion and marketing campaign related costs and sales commission paid to our sales teams decreased
in 2019 as compared to 2018.
General
and administrative expenses was $3,702,035, and $2,792,858 for the years ended December 31, 2019 and 2018 respectively, representing
an increase of $909,177, or 32.55%. The increase was mainly resulted from the increase in bad debt expenses and an increase in
severance compensation to the employees due to suspension of production at our plants since late October 2019.
Operating
expenses were $9,990,976, and $8,029,708 for the years ended December 31, 2018, and 2017, respectively, an increase of $1,961,268,
or 24.43%. The ratio of operating expenses as a percentage of revenue increased from 27.71% for the year ended December 31, 2017,
to 42.20% for the year ended December 31, 2018.
Selling
expense was $4,535,945, and $4,882,367 for the years ended December 31, 2018, and 2017, respectively, a decrease of $346,422,
or negative 7.10%. Some related expense was saved due to the decline of sales in 2018, such as distribution cost, which decreased
the total selling expense for the year ended December 31, 2018.
General
and administrative expenses was $2,792,858, and $2,095,676 for the years ended December 31, 2018, and 2017, respectively, representing
an increase of $697,182, or 33.27%. The increase was mainly resulted from increase in overall payroll level and increase in rental
expenses.
Our
research and development expense was $Nil, $1,062,582 and $1,051,665 for the years ended December 31, 2019, 2018 and 2017, respectively.
Although we cut expenses to reduce operating losses of the year ended December 31, 2019, looking forward, in order to diversify
our product offering to meet customer demands in the future, we may incur additional R&D expenses in the coming years to maintain
our competitive advantage.
Impairment of long-lived assets other than
goodwill was $813,344, and $Nil for the year ended December 31, 2019, and 2018. Due to our continuous operating loss in 2019,
we reassessed our long-lived assets using on a forecast of the Company’s future performance, and accordingly recognized
approximately $0.8 million impairment loss measured based on their fair value of the assets in the consolidated financial statements
for the year ended December 31, 2019.
Impairment
of goodwill was $1,599,591 for the year ended December 31, 2018. We took full impairment provision for the goodwill generated
in connection with the acquisition of TDH JAPAN and TDH Group BVBA.
Income
(loss) from operations.
Our
loss from operations was $6,958,496 for the year ended December 31, 2019, while our loss from operations was $14,043,772 for the
year ended December 31, 2018. Our operating loss as a percentage of total revenues was negative 55.02%, and 59.32% for the
years ended December 31, 2019 and 2018, respectively. The continuous deficit from operation was mainly
due to the fact that our sales revenue continued to decrease, while the raw material cost increased continuously
and significantly through the year. The decrease in loss from operations was the combined result of improvement in gross margin
and decrease in operating expenses.
Our
loss from operations was $14,043,772 for the year ended December 31, 2018, while our income from operations was $267,305 for the
year ended December 31, 2017. Our operating loss as a percentage of total revenues was negative 59.32%, and positive 0.92%
for the years ended December 31, 2018 and 2017, respectively. The significant deficit from operation was due to the fact that
the raw material cost and manufacturing cost increased significantly, resulted in adverse bargaining position of the Company and
loss of customers in 2018.
Income
taxes expense (benefit).
Due
to our continuous operating loss for the years ended December 31, 2019 and 2018, we did not report income tax provision for the
years ended December 31, 2019 and 2018, respectively
We
incurred income tax expense of $0 for the year ended December 31, 2018 and incurred income tax benefit of $55,102 for the
years ended December 31, 2017. We did not incur any income tax expense due to the deficit in 2018.
Net
income (loss).
Our
net loss was $8,625,427or the year ended December 31, 2019, compared to the net loss of $14,219,265 for the year ended December
31, 2018. The decrease in our net loss was the combined result of improvement in gross margin, decrease in operating expenses
and temporary cessation of production from November 2019.
Our
net loss was $14,219,265 for the year ended December 31, 2018, compared to the net income of $115,111 for the year ended December
31, 2017. The large deficit was due to the negative margin and larger operating expense incurred in 2018.
Liquidity
and Capital Resources
For
the years ended December 31, 2019, 2018 and 2017
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise
operate on an ongoing basis.
As reflected in our consolidated financial
statements, our revenue decreased by approximately $11 million from approximately $23.6 million in 2018 to approximately $12.6
million in 2019. Net cash used in operating activities amounted to approximately $5.6 million for the year ended December 31,
2019. As of December 31, 2019, we had working capital deficit of approximately $7.3 million as compared to working capital deficit
of approximately $11.3 million as of December 31, 2018. In addition, in November 2019, we temporarily suspended our manufacturing
activities due to operating inefficiency, the suspension our manufacturing activities led to reduced sales and operating cash
flows, and consequently caused our inability to make the payments to settle vendor bills and repay the bank loans upon maturity.
As a result, in late 2019, some of our vendors and several financial institutions initiated lawsuits against us for payment. Our
inability to resolve these matters satisfactorily will have material adverse effect the Company’s financial condition in
2020. Furthermore, in December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout
China and worldwide, which has caused significant volatility in the PRC and international markets. There is significant uncertainty
around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international
economies. To reduce the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines,
travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak
and all the other aspects of our operating challenges, including, but not limited to, the extending temporary closure of our facilities
and operations to until the middle of May 2020, pending lawsuits for supplier arrears, bank loans and employee compensation, limited
support from the Company’s employees, delayed access to raw material supplies, reduced customer sales orders, and our inability
to promote the sales to customers on a timely basis, our revenue for the year ended December 31, 2020 will be much lower than
expected. Certain premises including factory building and warehouse would be frozen for a period of three years following a court
order issued in April 2020. These facts raised substantial doubt about our ability to continue as a going concern for the next
12 months from the date of this report.
In
assessing our liquidity, management monitors and analyzes our cash and cash equivalent, our ability to generate sufficient revenue
sources in the future, and our operating and capital expenditure commitments. As of December 31, 2019, we had cash and cash equivalent
and restricted cash of approximately $6.5 million. We also had an aggregate approximately $9.5 million notes payable and loans
(including approximately $0.9 million notes payable, approximately $7.7 million short-term loans and approximately $0.9 million
short-term loans from related parties). For the pending legal proceedings as of December 31, 2019 regarding our delayed repayment
of certain bank loans upon maturity as described above, subsequently in March and April 2020, we received court rulings to require
us to make an aggregate RMB 40.48 million (approximately $5.80 million) to the financial institutions. The Company is negotiating
with creditors for repayment. However, if we fail to reach an agreement with our creditors, we may be forced into bankruptcy proceedings.
Based
on our current financial conditions, our cash balance and revenues generated from our business operations may not be currently
sufficient and cannot be projected to cover our future operating expenses and meet our obligations as they become due for the
next twelve months after the date that our financial statements are issued.
Management’s
plan to alleviate the substantial doubt about our ability to continue as a going concern include attempting to improve our
business profitability, our ability to generate sufficient cash flow from our operations to meet our operating needs on a
timely basis, obtain additional working capital funds through debt and equity financings to eliminate inefficiencies in order
to meet our anticipated cash requirements. Given the operating difficulties and the COVID-19 outbreak, we resumed our
business activities on May 18, 2020, with the support of the local government. We expect the negative impact of the COVID-19
coronavirus outbreak on our business to be temporary and for our sales activities have started to run as normal, which will
help us to increase our sales in the upcoming months. Due to the effects discussed above, to the extent that we experience a
more adverse operating environment, incur unanticipated capital expenditures, or if we decide to accelerate our growth, then
additional financing may be required. Currently, we are working to improve our liquidity and capital sources primarily
through financial support from our principal shareholder and explore debt or equity financing possibilities. In order to
fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our
expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as
needed. At the present time, however, we do not have commitments of funds from any third party. No assurance can be given
that additional financing, if required, would be available on favorable terms or at all. If we do not secure capital needed for our operations, we may have
to temporarily suspend or cease our operations.
Based
on above reasons, there is a substantial doubt about the Company’s ability to continue as a going concern for the next 12 months
from the date of this filing.
During
the year ended December 31, 2019, our cash used in operating activities was $5,626,618, cash provided by investing activities
was $113,552, cash provided by financing activities was $9,520,386 and we had the negative effect of prevailing exchange rates
on our cash of $ 203,247. During the year ended December 31, 2018, we used cash in operating activities of $2,173,742, used
cash in investing activities of $6,594,458, provided cash by financing activities of $7,728,120, and had the positive effect of
prevailing exchange rates on our cash of $96,808.
Net
cash used in operating activities for the year ended December 31, 2019 totaled $5,626,618. The activities were mainly
comprised of a net loss of $8,625,427, depreciation and amortization of $571,528, impairment of long-lived assets other than goodwill
of $813,344, inventory write-down of $518,119, bad debt provision $659,569, a decrease in net accounts receivable of $329,042,
a decrease in account receivable- related parties of $306,301, a decrease in net inventory of $2,009,862, a decrease in prepayment
and other current net asset 516,018, and offset by a decrease in notes payable of $1,046,257, and a decrease in account payable
of $2,775,356.
Net
cash used in operating activities for the year ended December 31, 2018 totaled $2,173,742. The activities were mainly
comprised of a net loss of $14,219,265, depreciation and amortization of $395,355, impairment of goodwill of $1,599,591, inventory
write-down of $1,668,508, a decrease in net accounts receivable of $1,302,573, a decrease in net inventory of $4,203,927, an increase
in notes payable of $1,204,910, an increase in account payable of $1,870,157, and offset by an increase in account receivable-
related party of $778,516, an increase in prepayment and other current asset of $291,336.
Net
cash provided by investing activities for the year ended December 31, 2019 totaled $113,552. The activities were primarily
comprised of $233,747 proceeds from disposal of property, plant and equipment, disposal of subsidiaries of $83, collections from
related parties of $1,282, and offset by $121,560 payment to purchase property and equipment.
Net
cash used in investing activities for the year ended December 31, 2018 totaled $6,594,458. The activities were
primarily comprised of $5,627,422 payment to purchase property and equipment, payment to purchase of land use right of $854,221,
loan of $132,147 offered to related parties, payment for long term investment of $235,605, and offset by collections from related
parties of $235,049.
For
the year ended December 31, 2019, net cash provided by financing activities was $9,520,716. We received these funds from
borrowing of short term loans of $1,046,275, borrowing of short term loan-related parties of $4,791,403, and proceeds from shares
subscription of $6,760,000 offset by repayment to related parties of $1,000, repayment of short term loan of $2,073,177 and repayments
of short term loans to related parties of $1,080,947.
For
the year ended December 31, 2018, net cash provided by financing activities was $7,728,120. We received these funds from
borrowing of short term loan of $8,400,090, and borrowing of short term loan-related parties of $1,176,690, offset by repayment
to related parties of $385,420 and repayment of short term loan of $1,508,056.
Loan
facilities
In
2017, 2018 and 2019, we secured the following revolving lines of credit:
On
August 10, 2016, we obtained a line of credit of approximately $705,676 (RMB 4,900,000) from Industrial & Commercial Bank
of China - Qingdao Shinan Second Branch. The borrowing under the line of credit was guaranteed by Rongfeng Cui and his wife, Yanjuan
Wang. Under the term of the loan documentation, the loan term commenced on the date the borrowed capital was transferred to the
borrower and continued until the all principal and accrued interest thereon were repaid in full. On June 6, 2017, we drew down
the full amount of this loan; the term of this loan is 15-day, with this loan bearing interest at approximately 120% of the prevailing
PRC prime rate. On July 6, 2017, this loan was repaid in full. On July 12, 2017, we obtained a new line of credit of approximately
$412,371 (RMB 2,800,000) with the same lender. On July 14, 2017, we drew down the full amount of this loan. The loan maturity
date is July 10, 2018 with annual interest rate of 5.22%. On July 9, 2018, this loan was repaid in full and the line of credit
was recovered. On August 2, 2018, we drew down the full amount of this loan. The loan maturity date is July 16, 2019 with annual
interest rate of 5.22%. In July 2019 this loan was repaid in full. The outstanding balance on this loan was $0 as of December
31, 2019.
On
March 25, 2017, we obtained a line of credit of approximately $290,361 (RMB 2,000,000) from China Postal Savings Bank –
Qingdao Weihai Road Sub Branch. The borrowing under the line of credit was guaranteed by Rongfeng Cui and his wife, Yanjuan Wang.
Under the term of the loan documentation, the loan term commenced on the date the borrowed capital was transferred to the borrower
and continued until the all principal and accrued interest thereon are repaid in full. On March 29, 2017, we drew down the full
amount of this loan. The loan maturity date is March 28, 2018, bearing interest at approximately 140% of the prevailing PRC prime
rate. On March 16, 2018, this loan was repaid in full and the line of credit is recovered. On March 21, 2018, we drew down the
full amount of this loan. The loan maturity date is March 19, 2019 with annual interest rate of 6.96%. We made partial repayment
of this loan during the year ended December 31, 2018 and the outstanding balance on this loan was approximately $147,000 (RMB
1,008,675) as of December 31, 2018. In 2019 we repaid the rest of the loan in full, and the outstanding balance on this loan was
$0 as of December 31, 2019.
On
November 23, 2017, we obtained a line of credit of approximately $614,779 (RMB 4,000,000) from China Postal Savings Bank –
Qingdao Weihai Road Sub Branch (“CPSB”). The borrowing under the line of credit was guaranteed by Rongfeng Cui and
his wife, Yanjuan Wang. Under the term of the loan documentation, the loan term commenced on the date the borrowed capital was
transferred to the borrower and continued until the all principal and accrued interest thereon are repaid in full. On December
13, 2017, we drew down the full amount of this loan. The loan maturity date is December 12, 2018 with annual interest rate of
5.655%. On November 14, 2018, this loan was repaid in full and the line of credit is recovered. On November 19, 2018, we drew
down the full amount of this loan. The loan maturity date is November 18, 2019 with annual interest rate of 5.22%. In 2019 we
didn’t repay the loan when it came due, and the outstanding balance on this loan was approximately $574,053 (RMB 4,000,000)
as of December 31, 2019. As of December 31, 2019, we were in default on the loan.
On
April 27, 2018, the above line of credit from China Postal Savings Bank – Qingdao Weihai Road Sub Branch increased from
approximately $582,000 (RMB 4,000,000) to approximately $1,439,700 (RMB 9,900,000). On May 8, 2018, we drew down the full amount
of this loan. The loan maturity date is May 7, 2019 with annual interest rate of 5.8725%. The full amount of this loan was outstanding
as of December 31, 2018. In 2019 we repaid the loan in full, and the outstanding balance on this loan was $0 as of December 31,
2019.
On
April 29, 2019, we entered a line of credit of approximately $845,732 (RMB 5,900,000) from China Postal Savings Bank - Qingdao
Branch. The borrowing under the line of credit was guaranteed by Rongfeng Cui and his wife, Yanjuan Wang. The term of this loan
is one-year; the loan maturity date is April 17, 2020, with this loan bearing interest rate of 5.0025% at approximately 150% of
the prevailing PRC prime rate. The outstanding balance of this loan was approximately $845,732 (RMB 5,900,000) as of December
31, 2019. As of December 31, 2019, we were in default on the loan.
Our
long-term future capital requirements will depend on many factors, including our level of revenue, the timing and extent of our
spending to support the maintenance and growth of our operations, the expansion of our sales and the continued market acceptance
of our products and projects. Compared to $8,263,038 short-term loans outstanding as of December 31, 2018, we had $7,624,061
short-term loans outstanding as of December 31, 2019.
We
expect to incur additional costs associated with being a reporting company in the United States, primarily due to increased expenses
that we incur to comply with the requirements of the Sarbanes-Oxley Act of 2002, as well as costs related to accounting and tax
services, legal expenses and investor and stockholder-related expenses. These additional long-term expenses may require us to
seek other sources of financing, such as additional borrowings or public or private equity or debt capital. The availability of
these other sources of financing will depend upon our financial condition and results of operations as well as prevailing market
conditions, and may not be available on terms reasonably acceptable to us or at all.
Regulatory
Restrictions on Capital Injections
We
are using proceeds from our initial public offering and private placement to fund our business. Accordingly, the following regulations
have to be followed, regarding capital injections to foreign-invested enterprises.
Chinese
regulations relating to investments in offshore companies by Chinese residents. SAFE promulgated the Circular on Relevant
Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Round-trip Investment through Offshore Special
Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires Chinese residents to register and update certain
investments in companies incorporated outside of China with their local SAFE branch. SAFE also subsequently issued various guidance
and rules regarding the implementation of SAFE Circular 37, which imposed obligations on Chinese subsidiaries of offshore companies
to coordinate with and supervise any Chinese-resident beneficial owners of offshore entities in relation to the SAFE registration
process.
We
may not be aware of the identities of all of our beneficial owners who are Chinese residents. We do not have control over our
beneficial owners and cannot assure you that all of our Chinese -resident beneficial owners will comply with SAFE Circular 37
and subsequent implementation rules. The failure of our beneficial owners who are Chinese residents to register or amend their
SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future
beneficial owners of our Company who are Chinese residents to comply with the registration procedures set forth in SAFE Circular
37 and subsequent implementation rules, may subject such beneficial owners or our Chinese subsidiaries to fines and legal sanctions,
which may be substantial. Failure to register may also limit our ability to contribute additional capital to our Chinese subsidiaries
and limit our Chinese subsidiaries’ ability to distribute dividends to our Company. These risks may have a material adverse
effect on our business, financial condition and results of operations.
China
regulates loans to and direct investment in Chinese entities by offshore holding companies and there is governmental control of
currency conversion. We are an offshore holding company conducting our operations in China through our wholly owned subsidiary
Tiandihui. As an offshore holding company, we may make loans and additional contributions to Tiandihui subject to approval from
government authorities.
Any
loan to Tiandihui, which is treated as a foreign-invested enterprise under Chinese law, is subject to Chinese regulations and
foreign exchange loan registrations. In January 2003, the China State Development and Reform Commission, SAFE and Ministry of
Finance jointly promulgated the Circular on the Interim Provisions on the Management of Foreign Debts, or the Circular 28, limiting
the total amount of foreign debt a foreign-invested enterprise may incur to the difference between the amount of total investment
approved by the Ministry of Commerce or its local counterpart for such enterprise and the amount of registered capital of such
enterprise, and requiring registration of any such loans with SAFE. As of December 31, 2016, the amount of approved total investment
of Tiandihui was $2,707,490 (RMB 18,800,000) and TDH HK have invested the same amount of $2,707,490 (RMB 18,800,000) into Tiandihui,
which means Tiandihui needs to obtain additional approval for total investment amount from the local counterpart of Ministry of
Commerce. During 2017, we have successfully obtained the investment approval from Ministry of Commerce for our proceeds of IPO.
In
March 2015, SAFE issued the Circular Concerning the Reform of the Administration of the Settlement of Foreign Currency Capital
of Foreign-Invested Enterprises, or SAFE Circular 19, which became effective in June 2015. SAFE Circular 19 regulates the conversion
by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used.
Furthermore, SAFE promulgated a circular in June 2016, SAFE Circular 16, which further revises some clauses in the SAFE Circular
19. SAFE Circular 19 and 16 provide that the capital-account foreign exchange incomes of a domestic enterprise shall not be directly
or indirectly used for expenditures that are forbidden by relevant laws and regulations, for purposes that are not included in
the business scope approved by the applicable government authority, shall not be directly or indirectly used for investments in
securities or for any other kind of wealth-managing investments than banks’ principal-secured products unless otherwise
prescribed by other laws and regulations, shall not be directly or indirectly used for issuing RMB entrusted loans (unless expressly
permitted in the business scope approved by the competent governmental authorities) or repaying inter-enterprise loans (including
advances by the third party) or repaying bank loans in RMB which have been sub-lent to third parties, shall not be used for granting
loans to non-affiliated enterprises unless expressly permitted in the business scope and shall not be used for the construction
or purchase of real estate not for self-use (except for real estate enterprises). In addition, SAFE supervises the flow and use
of the RMB capital converted from foreign currency registered capital of a foreign-invested company by further focusing on ex
post facto supervision and violations. These two circulars may limit our ability to use the net proceeds from this offering to
invest in or acquire any other Chinese companies in China, which may adversely affect our liquidity and our ability to fund and
expand our business in China.
Capital
Resources
As
of December 31, 2019 and 2018
The
following table provides certain selected balance sheets comparisons between years ended December 31, 2019 and 2018:
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Fluctuation
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,114,175
|
|
|
$
|
893,020
|
|
|
|
4,221,155
|
|
|
|
473
|
|
Restricted cash, current
|
|
|
1,390,403
|
|
|
|
1,807,485
|
|
|
|
(417,082
|
)
|
|
|
-23
|
|
Accounts receivable, net
|
|
|
21,657
|
|
|
|
845,800
|
|
|
|
(824,143
|
)
|
|
|
-97
|
|
Accounts receivable - related parties
|
|
|
-
|
|
|
|
435,513
|
|
|
|
(435,513
|
)
|
|
|
-100
|
|
Advanced to suppliers
|
|
|
39,806
|
|
|
|
77,280
|
|
|
|
(37,474
|
)
|
|
|
-48
|
|
Inventories
|
|
|
473,216
|
|
|
|
3,019,804
|
|
|
|
(2,546,588
|
)
|
|
|
-84
|
|
Due from related parties
|
|
|
-
|
|
|
|
43,554
|
|
|
|
(43,554
|
)
|
|
|
-100
|
|
Prepayment and other current assets
|
|
|
153,633
|
|
|
|
680,606
|
|
|
|
(526,973
|
)
|
|
|
-77
|
|
Total current assets
|
|
|
7,192,890
|
|
|
|
7,803,062
|
|
|
|
(610,172
|
)
|
|
|
-8
|
|
Restricted cash, non-current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
6,562,669
|
|
|
|
8,410,525
|
|
|
|
(1,847,856
|
)
|
|
|
-22
|
|
Land use rights, net
|
|
|
973,224
|
|
|
|
1,014,538
|
|
|
|
(41,314
|
)
|
|
|
-4
|
|
Equity investment
|
|
|
71,757
|
|
|
|
201,281
|
|
|
|
(129,524
|
)
|
|
|
-64
|
|
Operating lease right-of-use assets - related parties
|
|
|
286,670
|
|
|
|
-
|
|
|
|
286,670
|
|
|
|
100
|
|
Total non-current assets
|
|
|
7,894,320
|
|
|
|
9,626,344
|
|
|
|
(1,732,024
|
)
|
|
|
-18
|
|
Total assets
|
|
$
|
15,087,210
|
|
|
$
|
17,429,406
|
|
|
|
(2,342,196
|
)
|
|
|
-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,436,939
|
|
|
$
|
6,220,375
|
|
|
|
(2,783,436
|
)
|
|
|
-45
|
|
Account payable - related parties
|
|
|
116,834
|
|
|
|
125,126
|
|
|
|
(8,292
|
)
|
|
|
-7
|
|
Notes payable
|
|
|
908,008
|
|
|
|
2,462,044
|
|
|
|
(1,554,036
|
)
|
|
|
-63
|
|
Advances from customers
|
|
|
116,155
|
|
|
|
160,828
|
|
|
|
(44,673
|
)
|
|
|
-28
|
|
Bank overdrafts
|
|
|
78,320
|
|
|
|
-
|
|
|
|
78,320
|
|
|
|
100
|
|
Short term loans
|
|
|
7,624,061
|
|
|
|
8,263,038
|
|
|
|
(638,977
|
)
|
|
|
-8
|
|
Short term loans - related parties
|
|
|
892,510
|
|
|
|
1,061,360
|
|
|
|
(168,850
|
)
|
|
|
-16
|
|
Long-term loans - related parties, current portion
|
|
|
-
|
|
|
|
68,673
|
|
|
|
(68,673
|
)
|
|
|
-100
|
|
Taxes payable
|
|
|
57,521
|
|
|
|
44,319
|
|
|
|
13,202
|
|
|
|
30
|
|
Due to related parties
|
|
|
39,387
|
|
|
|
45,146
|
|
|
|
(5,759
|
)
|
|
|
-13
|
|
Operating lease liabilities - related parties, current
|
|
|
137,347
|
|
|
|
-
|
|
|
|
137,347
|
|
|
|
100
|
|
Other current liabilities
|
|
|
1,054,818
|
|
|
|
692,669
|
|
|
|
362,149
|
|
|
|
52
|
|
Total current liabilities
|
|
|
14,461,900
|
|
|
|
19,143,578
|
|
|
|
(4,681,678
|
)
|
|
|
-24
|
|
Long term loans
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Long term loans - related party
|
|
|
-
|
|
|
|
217,466
|
|
|
|
(217,466
|
)
|
|
|
-100
|
|
Operating lease liabilities - related party, non-current
|
|
|
286,875
|
|
|
|
-
|
|
|
|
286,875
|
|
|
|
100
|
|
Deferred tax liabilities
|
|
|
1,036
|
|
|
|
4,929
|
|
|
|
(3,893
|
)
|
|
|
-79
|
|
Total liabilities
|
|
|
14,749,811
|
|
|
|
19,365,973
|
|
|
|
(4,616,162
|
)
|
|
|
-24
|
|
We
maintain cash and cash equivalents in mainland China and U.S. on December 31, 2019 and 2018, bank deposits
were as follows:
|
|
December 31,
|
|
Country
|
|
2019
|
|
|
2018
|
|
China (Mainland)
|
|
$
|
5,987,484
|
|
|
$
|
825,176
|
|
Japan
|
|
|
-
|
|
|
|
3,056
|
|
Belgium
|
|
|
-
|
|
|
|
275
|
|
U.S.
|
|
|
510,235
|
|
|
|
10,960
|
|
Total
|
|
$
|
6,497,719
|
|
|
$
|
839,467
|
|
The
majority of our cash balances at December 31, 2019 and December 31, 2018 are in the form of RMB and held in bank accounts
at financial institutions located in China. Cash held in banks in China is not insured. In 1996, the Chinese government introduced
regulations relaxing restrictions on the conversion of the RMB; however restrictions still remain, including restrictions on foreign-invested
entities. Foreign-invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents
at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including
direct investments and loans, is subject to China government approval. Chinese entities are required to establish and maintain
separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose
more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly,
cash on deposit in banks in China is not readily deployable by us for use outside of China.
Cash
and cash equivalents and restricted cash
As
of December 31, 2019, cash and cash equivalents were $5,114,175, compared to $893,020 at December 31, 2018. The components
of this increase of $4,221,155 reflected below.
|
|
2019
|
|
|
2018
|
|
Net
cash used in operating activities
|
|
$
|
(5,626,618
|
)
|
|
$
|
(2,173,742
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
113,552
|
|
|
|
(6,594,458
|
)
|
Net
cash provided by financing activities
|
|
|
9,520,716
|
|
|
|
7,728,120
|
|
Exchange
rate effect on cash and restricted cash
|
|
|
(203,577
|
)
|
|
|
96,808
|
|
|
|
|
|
|
|
|
|
|
Net
cash inflow (outflow)
|
|
$
|
3,804,073
|
|
|
$
|
(943,272
|
)
|
We
had current restricted cash of $1,390,403 and $1,807,485 as of December 31, 2019 and 2018, respectively. This restricted cash
represents the bank deposit balance for issuing bank acceptance and bank letters of credit, bank balance that are currently frozen
as a result of our pending litigations as well as $500,000 deposit in an escrow account in connection with our IPO. The balances
of notes payable were $908,008 and $2,462,044 as of December 31, 2019 and 2018 respectively. As the deposit was provided and only
used by us as pledge for its bank acceptance notes and bank letters of credit, could not be used for other purposes during the
term of the notes, and directly used to settle the liabilities when the bank acceptance notes and bank letters of credit became
due, it was recorded as restricted cash as of December 31, 2019 and 2018. Due to the pending legal proceedings, certain of our
bank deposit under Tiandihui has been temporarily frozen by the court.
Accounts
receivable
Accounts
receivable, net as of December 31, 2019 was $21,657, a decrease of $824,143 compared to $845,800 as of December 31,
2018. $612,249 and $0 allowance for account receivable was recorded for the years ended December 31, 2019 and 2018, respectively.
Inventories
As
of December 31, 2019, our inventory balance was $473,216, a decrease of $2,546,588, or 84% compared to $3,019,804 as of December 31,
2018. The decrease was due to the fact that (1) the increasing raw material prices prevented us from storing extra inventory for
the year ended December 31, 2019, (2) temporary cessation of our production from November 2019, and (3) inventory write-down of
$518,119 was recorded as of December 31, 2019
Due
from related parties
As
of December 31, 2019, the balances of due from related parties were $0, a decrease of $43,554 compared to $43,554 on December
31, 2018 due to collection of the same amount from related parties.
Due
to related parties
As
of December 31, 2019, the balances of due to related parties were $39,387, a decrease of $5,759, compared to $45,146 on December
31, 2018. The balance of due to related parties represented expenses incurred by related parties in the ordinary course of business,
expense paid by related parties on behalf of the Company as well as the loans the Company obtained from related parties for working
capital purpose. The loans owed to the related parties are interest free, unsecured and repayable on demand.
Property,
plant and equipment, net
Property,
plant and equipment, net as of December 31, 2019 were $6,562,669, a decrease of $1,847,856 compared to $8,410,525, as of
December 31, 2018. The company disposed certain property, plant and equipment during the year ended December 31, 2019 and
did not dispose any during the year ended December 31, 2018. Depreciation expense for the years ended December 31, 2019 and 2018
was $543,311 and $388,256, respectively.
Land
use rights, net
Land
use rights, net as of December 31, 2019 were $973,224, a decrease of $41,314, compared to $1,014,538 as of December 31,
2018. During the years ended December 31, 2019 and 2018, amortization expense amounted to $28,217 and $7,099, respectively.
Accounts
payable and Notes payable
Accounts
payable represents our commercial credit offered to the suppliers. And notes payable was the bank acceptance notes to suppliers.
Accounts
payable decreased by $2,783,436, to $3,436,939 as of December 31, 2019, from $6,220,375 as of December 31, 2018 due to our reduced
material purchase and inventory stockpile as a result of our temporary suspension of our manufacturing activities in 2019 to improve
our operational deficiency.
Notes
payable decreased by $1,554,036, to $908,008 as of December 31, 2019, from $2,462,044 as of December 31, 2018.
Short
term loan
Balance
of short-term loan as of December 31, 2019 was $7,624,061, representing a decrease of $638,977 or 8%, compared with balance of
$8,263,038 as of December 31, 2018 due to repayment of the loans upon maturity.
Taxes
payable
Taxes
payable represents the accrued enterprise income tax at the year end.
Balance
of taxes payable as of December 31, 2019 was $57,521 representing an increase of $13,202, or 30%, compared with balance of $44,319
as of December 31, 2018.
Tabular
Disclosure of Contractual Obligations
We
have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty
regarding the timing and amounts of payments.
As of December 31, 2019, The Company was in
default on substantially all of the outstanding loans. According to the contractual agreements and court judgements, the Company
is obligated to make full repayment during the year ended December 31, 2020. The following table summarizes our contractual obligations
as of December 31, 2019, and the effect of these obligations expected to have on our liquidity and cash flows in future periods:
2020
|
|
$
|
8,653,918
|
|
2021
|
|
|
44,844
|
|
2022
|
|
|
47,535
|
|
2023
|
|
|
50,387
|
|
2024
|
|
|
53,410
|
|
Thereafter
|
|
|
147,505
|
|
Total
|
|
$
|
8,997,599
|
|
Off-Balance
Sheet Arrangements
Under
SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a
transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which
we have:
|
●
|
Any
obligation under certain guarantee contracts,
|
|
|
|
|
●
|
Any
retained or contingent interest in assets transferred to an unconsolidated entity or
similar arrangement that serves as credit, liquidity or market risk support to that entity
for such assets,
|
|
|
|
|
●
|
Any
obligation under a contract that would be accounted for as a derivative instrument, except
that it is both indexed to our stock and classified in shareholder equity in our statement
of financial position, and
|
|
|
|
|
●
|
Any
obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
|
We
do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary
course of business, we enter into operating lease commitments, and other contractual obligations. These transactions are recognized
in our financial statements in accordance with generally accepted accounting principles in the United States.
Trend
Information
Other
than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events
for the period since January 1, 2019 that are reasonably likely to have a material adverse effect on our net revenues, income,
profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative
of future operating results or financial conditions.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to revenue
recognition and income taxes. We base our estimates on our historical experience and on various other assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying
values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending
on the situation, actual results may differ from the estimates.
The
critical accounting policies summarized in this section are discussed in further detail in the notes to the audited consolidated
financial statements appearing elsewhere in this Annual Report. Management believes that the application of these policies on
a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Use
of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions
and information that are believed to be reasonable under the circumstances, including but not limited to the potential impacts
arising from the recent novel coronavirus (COVID-19). Estimates and assumptions of future events and their effects cannot be perceived
with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. Significant estimates and assumptions by management include,
among others, allowance for doubtful accounts, useful lives and impairment of long-lived assets and goodwill, write-down in value
of inventories, income taxes including the valuation allowance for deferred tax assets, estimate of contingent liabilities and
allowance for sales return. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates
and assumptions may evolve as conditions change. Actual results could differ from those estimates. Estimates and assumptions are
periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined
to be necessary.
Inventories
Inventories, consisting of raw materials, low-valued consumables,
work in progress, good sold in transit and finished goods, are stated at the lower of cost or net realizable value, with cost computed
on a weighted-average basis. The valuation of inventory requires us to estimate excess and slow-moving inventory. We evaluate the
recoverability of our inventory based on assumption about expected demand, market conditions, forecasts prepared by its customers,
sales contracts and orders in hand.
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. The Company performed an impairment test on December 31, 2019 considering the fact of decreased revenue and recurring losses,
and recorded impairment loss on long-lived assets other than goodwill of $813,344 and $0 for the years ended December 31, 2019
and 2018, respectively.
The Company’s goodwill is tested for impairment on an annual
basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
In testing for goodwill impairment, the Company compares the fair value of its reporting unit to its carrying value including the
goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will
recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss
recognized cannot exceed the total amount of goodwill allocated to that reporting unit. The Company recorded impairment loss on
goodwill of $0 and $1,599,591 for the years ended December 31, 2019 and 2018, respectively.
Lease Commitments
Recent adoption of accounting pronouncement ASU 2016-02
On January 1, 2019, the Company adopted Accounting Standards Update
(ASU) 2016-02, Leases (together with all amendments subsequently issued thereto, “ASC Topic 842”), using the modified
retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing
a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this
transition method, previously reported financial information has not been restated to reflect the application of the new standard
to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance
within ASC Topic 842, which among others, allows the Company to carry forward certain historical conclusions reached under ASC
Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected
not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12
months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term. In addition,
the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement
is a lease or contains a lease if it has not historically been accounted for as a lease.
The initial lease liability is equal to the future fixed minimum
lease payments discounted using the Company’s incremental borrowing rate, on a secured basis. The lease term includes option
renewal periods and early termination payments when it is reasonably certain that the Company will exercise those rights. The initial
measurement of the right-of-use asset is equal to the initial lease liability plus any initial direct costs and prepayments, less
any lease incentives.
The primary impact of applying ASC Topic 842 is the initial recognition
of approximately $0.4 million of operating lease liabilities, and approximately $0.4 million of corresponding right-of-use assets,
on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under ASC Topic
840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings
or other components of equity recognized as of January 1, 2019. The Company does not have finance lease arrangements as of December
31, 2019. See Note 14 for further discussion.
Payments made under operating leases are charged to the consolidated
statements of operations and comprehensive income (loss) on a straight-line basis over the lease period.
Loss Contingencies
The Company records accruals for certain of its outstanding legal
proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.
When a loss contingency is not both probable and estimable, the Company does not record an accrued liability but discloses the
nature and the amount of possible loss, if material, in the notes to the consolidated financial statements.
The Company reviews the developments in contingencies that could
affect the amount of the provisions that has been previously recorded, and the matters and related possible losses disclosed.
The Company makes adjustments to provisions and changes to its disclosures accordingly to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel, and updated information. The assessment of whether a loss is probable or reasonably
possible, and whether the loss or a range of loss is estimable, often involves complex judgments about future events. Management
is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the
proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the industry-specific
complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution
of such matters, including eventual loss, fine, penalty or business impact, if any.
Revenue
Recognition
On January 1, 2018, the Company adopted
ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts that were
not completed as of January 1, 2018. Results for the reporting period beginning after January 1, 2018 are presented under ASC Topic
606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic
accounting under ASC Topic 605.
Revenue for sale of products is derived
from contracts with customers, which primarily include the sale of pet food products. The Company recognizes revenue upon transfer
of control of promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to
receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product,
generally upon shipment or once delivery and risk of loss has transferred to the customer.
Revenue is recognized net of any taxes collected
from customers that are subsequently remitted to governmental authorities, including value-added tax (“VAT”), business
tax, applicable local government levies. At the time revenue is recognized, allowances are recorded, with the related reduction
to revenue, for estimated sales returns based upon historical experience and related terms of customer arrangements.
The allowance for sales returns recorded
by the Company was $0.06 million, $0.89 million and $0 for the years ended December 31, 2019, 2018 and 2017, respectively. The
Company does not provide rebate, pricing protection or any other concessions to its customers.
The Company elected to account for shipping
and handling fees that occur after the customer has obtained control of goods, for instance, free onboard shipping point arrangements,
as a fulfillment cost and accrues for such costs.
Management has concluded that the disaggregation
level is the same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard
is measured on the same basis as under the revenue standard. See Note 13 for information regarding revenue disaggregation by product
lines, marketing channels and countries.
Contract liabilities are recorded when consideration is received
from a customer prior to transferring the control of goods to the customer or other conditions under the terms of a sales contract.
As of December 31, 2019 and 2018, the Company recorded contract liabilities of $116,155 and $160,828, respectively, which were
presented as advances from customers on the accompanying consolidated balance sheets. During the years ended December 31,
2019 and 2018, the Company recognized $158,274 and $238,750 of contract liabilities as revenue, respectively.
Foreign
Currency Translation
The accompanying consolidated financial
statements are presented in United States dollar (“$”), which is the reporting currency of the Company. The functional
currency of TDH Holdings, TDH HK and TDH Petfood LLC is United States dollar. The functional currency of Tiandihui, Chongai Jiujiu,
Kangkang Development, Yichong, Lingchong and Lile is Renminbi (“RMB”). The functional currency of TDH Group BVBA is
Euro (“€”). The functional currency of TDH JAPAN is Yen (“¥”). For the subsidiaries whose functional
currencies are RMB, Euro and Yen, results of operations and cash flows are translated at average exchange rates during the period,
assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical
exchange rates. The resulting translation adjustments are included in determining other comprehensive income or loss. Transaction
gains and losses are reflected in the consolidated statements of operations.
The exchange rates used to translate
amounts in RMB into U.S. Dollars for the purpose of preparing the consolidated financial statements were as follows
(USD$1=RMB):
|
|
Balance
Sheet
|
|
|
Average
|
|
Period Covered
|
|
Date Rates
|
|
|
Rates
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
6.9680
|
|
|
|
6.9088
|
|
Year ended December 31, 2018
|
|
|
6.8764
|
|
|
|
6.6146
|
|
The exchange rates used to translate amounts in Euro into U.S.
Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=€):
|
|
Balance
Sheet
|
|
|
Average
|
|
Period Covered
|
|
Date Rate
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
0.8916
|
|
|
|
0.8934
|
|
Period from acquisition completion date to December 31, 2018
|
|
|
0.8737
|
|
|
|
0.8789
|
|
The exchange rates used to translate amounts in Yen into U.S.
Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=¥):
|
|
Balance
Sheet
|
|
|
Average
|
|
Period
Covered
|
|
Date
Rate
|
|
|
Rate
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2019
|
|
|
108.6384
|
|
|
|
109.0086
|
|
Period
from acquisition completion date to December 31, 2018
|
|
|
110.0039
|
|
|
|
112.1693
|
|
Fair
Value of Financial Instruments
Accounting guidance defines fair value as
the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurement for assets and liabilities required or permitted
to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it
considers assumptions that market participants would use when pricing the asset or liability.
The Company measures certain financial assets,
including the investment under the measurement alternative method and equity method on other-than-temporary basis, intangible assets,
goodwill and fixed assets at fair value when an impairment charge is recognized.
Accounting guidance establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure
fair value:
Level 1 — Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly
observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little
or no market activity.
Accounting guidance also describes three main approaches to
measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
For certain of the Company’s financial instruments, including
cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, inventories, prepayments and other current
assets, accounts payable, notes payables, advances from customers, taxes payable, bank overdrafts, short term loans and other current
liabilities, the carrying amounts approximate their fair values due to the short maturities.
Recently
Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable recognition
threshold for credit impairments. The new guidance broadens the information that an entity must consider in developing its expected
credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past
events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply
methods that reasonably reflect its expectations of the credit loss estimate. ASU 2016-13 is effective for the Company beginning
on January 1, 2020. The Company does not expect any material impact on net assets and the consolidated statement of comprehensive
income (loss) as a result of adopting the new standard.
On December 18, 2019, the FASB issued ASU 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its overall simplification initiative
to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions from Topic 740, Income
Taxes, including (i) the exception to the incremental approach for intra period tax allocation; (ii) the exception to accounting
for basis differences when there are ownership changes in foreign investments; and (iii) the exception in interim period income
tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also simplifies GAAP in several other areas
of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) transactions with a government that result
in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject to tax; and (iv) enacted
changes in tax laws in interim periods. ASU 2019-12 is effective for public entities for annual reporting periods and interim
periods within those years beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating
the impact of adopting ASU 2019-12 on its consolidated financial statements and related disclosures.
Impact
of Inflation
We
do not believe the impact of inflation on our Company is material. Our operations are in China and China’s inflation rates
have been relatively stable in the last three years: 2.3% in 2019, 3.1% in 2018, and 7.5% in 2017.
Impact
of Foreign Currency Fluctuations
We
do not believe the impact of foreign currency fluctuations on our Company is material. Regarding purchase of raw materials, we
are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally
been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market
conditions influenced by the overall economic conditions in China.
Most
of our oversea sales are denominated in US dollars, for which our oversea sales are exempted from the risk of foreign currency
fluctuation.
We
have not had any foreign currency investments hedged by currency borrowings or other hedging instruments. We manage our price
risks through productivity improvements and cost-containment measures.
ITEM
6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors
and senior management
|
The
following table sets forth our executive officers and directors, their ages and the positions held by them as of June 12, 2020:
Name
|
|
Age
|
|
Position
|
Rongfeng
Cui
|
|
48
|
|
Chairman,
Class A Director
|
Dandan
Liu
|
|
32
|
|
Chief
Executive Officer, Class A Director
|
Feng
Zhang
|
|
37
|
|
Chief
Financial Officer, Corporate Secretary
|
Caifen
Zou(1) (2) (3)
|
|
55
|
|
Class
B Director, independent
|
Qiu
Li (1) (2) (3)
|
|
59
|
|
Class
B Director, independent
|
Owens
Meng (1) (2) (3)
|
|
42
|
|
Class
C Director, independent
|
(1)
|
Member
of the Audit Committee.
|
(2)
|
Member
of the Compensation Committee.
|
(3)
|
Member
of the Nominating and Corporate Governance Committee.
|
Rongfeng
Cui is the founder of our Company. He has served as our Chairman of the Board of Directors since July 2006. From July 2006
to August 2019, he served as the Company’s Chief Executive Officer. From May 2004 to June 2006, he served in the capacity
of the Company’s General Manager. From 1994 to 2004, he held several managerial positions at various Qingdao based companies.
Mr. Cui holds an undergraduate degree in International Trade from the Central Radio and Television University and an EMBA degree
from Peking University. The Board of Directors determined that Mr. Cui should continue serving as our Chairman given his pivotal
role in the Company’s founding.
Dandan
Liu was appointed as the Company’s Chief Executive Officer effective as of August 2, 2019. Dandan Liu has served as
a Class A director of the Company since February 2019. Ms. Liu founded Beijing Houxin Investments Co., Ltd. in June 2012 and has
served as its CEO and Chairman since its inception. Ms. Liu’s valuable entrepreneurial, management, and investment experience
together with her in-depth knowledge of the Company provide her with the qualifications and skills to serve as a director of our
Company.
Feng
Zhang was appointed as the Company’s Chief Financial Officer on February 19, 2020. From August 2018 to September 2019,
Feng Zhang worked as Senior Accounting Manager for Beijing Longguang Energy Technology Co., Ltd. From July 2017 to July 2018,
Mr. Zhang worked as Accounting Manager for Hebei Yinlong Renewable Energy Co., Ltd. From March 2015 to June 2017, Mr. Zhang worked
as Audit Manager for Beijing Xinghua Certified Public Accountants Firm (Partnership). From June 2006 to February 2015, Mr. Zhang
worked as Accounting Manager for Boda Instrument Group Co., Ltd. Mr. Zhang is a Certified Public Accountant and received his bachelor
degree in Assets Appraisal from Hebei Agricultural University.
Qiu
Li is an independent director of the company. Ms. Li has been Senior Consultant of Hangzhou Guohan Financial Holding Co.,
Ltd. since November 2015. Between March 2010 and October 2015, Ms. Li was director of audit of Hengfeng Bank Hangzhou Branch.
Between November 1987 and March 2010, Ms. Li held several managerial positions at Hengfeng Bank headquarter. Ms. Li is a China
Certified Public Accountants (CPA). Ms. Li holds a Bachelor’s degree in Management from Shandong Cadres Correspondence University.
The Board of Directors determined that Ms. Li should serve as our director based on her experience in business and accounting
matters.
Caifen
Zou has served as Senior Advisor of Shandong Renhe Guarantee Company since August 2019. From December 1993 to July 2019, Ms.
Zou has served in a number of senior executive roles within CITIC Bank Weihai Branch, including senior manager of Personal Credit
Department, general manager of Retail Banking Department, and deputy section chief of Accounting Department, etc. Ms. Zou received
her Associate’s degree in Administration Management from Shandong Normal University, and held Intermediate Accountant Qualification
Certificate and Intermediate Economist Qualification Certificate in China. The Board of Directors determined that Ms. Zou should
serve as our director based on her experience and expertise in accounting, management and internal controls.
Owens
Meng is an independent director. Since September 2013, Owens Meng has been the managing director of Beijing Songlin Xinya
Financial Consultants, Ltd. From November 2007 to September 2013, he served as chief representative of Sherb Consulting LLC Beijing
Representative Office, and managing director of Sherb & Co, LLP, a mid-sized accounting firm which has audited more than 25
China-based, US publicly traded companies. From July 2003 to October 2007, Mr. Meng worked as an audit manager for Grant Thornton
Beijing. Mr. Meng received his CPA permit from the state of Delaware, and is a member of China Institute of Certified Public Accountants
(CICPA), and a Certified Internal Auditor of the Institute of Internal Auditors. Mr. Meng holds a Bachelor’s degree in accounting
and economics from Beijing Technology and Business University. Mr. Meng has served as an independent director of China Customer
Relations Centers, Inc. (Nasdaq: CCRC) since September 2014. Mr. Meng was nominated as a director because of his experience in
auditing, US GAAP and compliance issues.
Under
British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our
directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of
association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board
of directors include, among others:
|
●
|
appointing
officers and determining the term of office of the officers;
|
|
●
|
authorizing
the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
|
|
●
|
exercising
the borrowing powers of the company and mortgaging the property of the company;
|
|
●
|
executing
checks, promissory notes and other negotiable instruments on behalf of the company; and maintaining or registering a register
of mortgages, charges or other encumbrances of the company.
|
A
director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which
he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact
that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the
board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that
a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested
in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary
to give special notice relating to any particular transaction.
The
directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to
be repaid or prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending
meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection
with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving
the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money
and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities
whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
A
director is not required to hold shares as a qualification to office.
The
following table shows the annual compensation paid by us for the years ended December 31, 2019 and 2018 to our principal executive
officers. No officer had a salary during either of the previous two years of more than $100,000.
Name and principal position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Total Paid
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dandan Liu (1)
|
|
|
2019
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
0
|
|
CEO and director
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feng Zhang (2)
|
|
|
2019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CFO
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cui Rongfeng (3)
|
|
|
2019
|
|
|
|
14,585
|
|
|
|
-
|
|
|
|
13,549
|
|
Chairman, former President and former CEO
|
|
|
2018
|
|
|
|
32,057
|
|
|
|
-
|
|
|
|
20,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cui Rongbing (4)
|
|
|
2019
|
|
|
|
17,768
|
|
|
|
-
|
|
|
|
10,386
|
|
Former CFO and former
director
|
|
|
2018
|
|
|
|
21,898
|
|
|
|
9,071
|
|
|
|
20,648
|
|
(1)
|
Appointed
as the Company’s Chief Executive Officer effective as of August 2, 2019. Ms. Liu didn’t take a salary at the Company
during 2019.
|
(2)
|
Appointed
as the Company’s Chief Financial Officer on February 19, 2020 at an annual base
salary of approximately $30,850.
|
(3)
|
The
Company’s former President and former CEO was removed by the Company’s Board effective
as of August 2, 2019.
|
(4)
|
The
Company’s former CFO; the Company determined not to renew his initial term of employment
expiring on August 31, 2019 for another term.
|
Compensation
Committee Interlocks and Insider Participation
None
of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board
of directors of any other entity that has one or more officers serving as a member of our board of directors.
Director
Compensation
Employee
directors do not receive any compensation for their services. Non-employee directors are entitled to receive compensation for
their actual travel expenses for each Board meeting attended. We paid $10,000 compensation to each of our non-employee directors
during each of the years ended December 31, 2019 and 2018.
Limitation
of Director and Officer Liability
Under
British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly
and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances. Our memorandum and articles of association provide that, to the fullest extent permitted
by British Virgin Islands law or any other applicable laws, our directors will not be personally liable to us or our shareholders
for any acts or omissions in the performance of their duties. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United
States federal securities laws.
We
may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal,
administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with
the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that
his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good
faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct
was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved.
The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself,
create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the
director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful
in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal
fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection
with the proceedings.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing
provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable as a matter of United States law.
Retirement
Benefits
As
of December 31, 2019, we have contributed to the government-mandated employee welfare and retirement benefit plan and provided
pension, retirement or similar benefits to its employees. The PRC regulations require us to pay the local labor administration
bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The
local labor administration bureau, which manages various investment funds, will take care of employee retirement, medical and
other fringe benefits. We have no further commitments beyond our monthly contribution.
Employment
Agreements
The
Company terminated Cui Rongfeng’s (former CEO) employment agreement in accordance with its terms. Cui Rongbing’s (former
CFO) employment agreement with the Company was expired on August 31, 2019, and was not renewed for another term.
Employment
agreement with Dandan Liu, CEO
On
August 2, 2019, TDH Holdings, Inc. entered into an employment agreement with Dandan Liu to serve in the role of Chief
Executive Officer for the initial period of 3 years (commencing as of August 2, 2019 and terminating on July 31, 2022), which
term may be automatically renewed for another 3 years unless either party to the agreement terminates the agreement at least
60 days prior to the expiration of the term. Under the terms of this agreement, Ms. Liu’s salary is USD 1,000 per month
until end of December, 2019. Thereafter Ms. Liu’s annual salary is USD 60,000 payable in 12 equal monthly installments
until July 31, 2022. Ms. Liu may be eligible to receive an annual bonus in the amount of 10% of the growth in book value as
of the last fiscal year end, subject to review of corporate performance goals set forth by the Compensation Committee. The
Compensation Committee will have the sole discretion whether Ms. Liu is entitled to the bonus and the amount of the
payment, if any. The employment agreement may be terminated by either party upon 60 days advance notice to the other party.
The Company will reimburse Ms. Liu for all reasonable out of pocket expenses in connection with travel, entertainment and
other expenses incurred in the performance of her duties. The agreement also contains certain confidentiality, non-disclosure
and other provisions that are customary to the agreements of this nature.
Employment
agreement with Feng Zhang, CFO
On
February 1, 2020, Qingdao Tiandihui entered into an employment agreement with Feng Zhang to serve in the role of Chief Financial
Officer and Corporate Secretary for the initial period of three years, (commencing as of February 1, 2020 and terminating on January
31, 2023). Under the terms of this agreement, Mr. Zhang’s annual salary is RMB 228,000 payable in 12 equal monthly installments.
The employment agreement may be terminated by either party upon 15-day advance notice to the other party. The Company will reimburse
Mr. Zhang for all reasonable out of pocket expenses in connection with travel, entertainment and other expenses incurred in the
performance of his duties. The agreement also contains certain confidentiality, non-disclosure and other provisions that are customary
to the agreements of this nature.
Composition
of Board; Risk Oversight
Our
Board of Directors presently consists of five directors. The Board membership is divided into three classes, Class A, B and C,
respectively, as nearly equal in number as the total number of directors permits. Class A directors will face re-election at our
next annual meeting of shareholders and every three years thereafter. Class B directors will face re-election at our second annual
meeting of shareholders and every three years thereafter. Class C directors will face re-election at our third annual meeting
of shareholders and every three years thereafter.
Except
as noted above, there are no family relationships between any of our executive officers and directors. Officers are elected by,
and serve at the discretion of, the board of directors. Our board of directors shall hold meetings on at least a quarterly basis.
As a smaller reporting company under the NASDAQ rules we are only required to maintain a board of directors comprised of at least
50% independent directors, and an audit committee of at least two members, comprised solely of independent directors who also
meet the requirements of Rule 10A-3 under the Securities Exchange Act of 1934. There are no membership qualifications for directors.
Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other
arrangements or understandings pursuant to which our directors are selected or nominated. Our board plays a significant role in
our risk oversight. The board makes all relevant Company decisions. As such, it is important for us to have our Chief Executive
Officer serve on the board as he plays key roles in the risk oversight or the Company. As a smaller reporting company with a small
board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.
Director
Independence
Our
board has reviewed the independence of our directors, applying the NASDAQ independence standards. Based on this review, the board
determined that each of Caifen Zou, Qiu Li, and Owens Meng are “independent” within the meaning of the NASDAQ rules.
In making this determination, our board considered the relationships that each of these non-employee directors has with us and
all other facts and circumstances our board deemed relevant in determining their independence. As required under applicable NASDAQ
rules, we anticipate that our independent directors will meet on a regular basis as often as necessary to fulfill their responsibilities,
including at least annually in executive session without the presence of non-independent directors and management.
Board
Committees
Currently,
three committees have been established under the board: the Audit Committee, the Compensation Committee and the Nominating Committee.
The
Audit Committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the
financial statements of our company, including the appointment, compensation and oversight of the work of our independent auditors.
The Compensation Committee of the board of directors reviews and makes recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based
plans (but our board retains the authority to interpret those plans). The Nominating Committee of the board is responsible for
the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations
or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience
when nominating directors.
Audit
Committee
The
Audit Committee will be responsible for, among other matters:
|
●
|
appointing,
compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm;
|
|
●
|
discussing
with our independent registered public accounting firm the independence of its members from its management;
|
|
●
|
reviewing
with our independent registered public accounting firm the scope and results of their audit;
|
|
●
|
approving
all audit and permissible non-audit services to be performed by our independent registered public accounting firm;
|
|
●
|
overseeing
the financial reporting process and discussing with management and our independent registered public accounting firm the interim
and annual financial statements that we file with the SEC;
|
|
●
|
reviewing
and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal
and regulatory requirements;
|
|
●
|
coordinating
the oversight by our board of directors of our code of business conduct and our disclosure controls and procedures;
|
|
●
|
establishing
procedures for the confidential and/or anonymous submission of concerns regarding accounting, internal controls or auditing
matters; and
|
|
●
|
reviewing
and approving related-party transactions.
|
Our Audit Committee consists of Caifen Zou
Wang, Qiu Li, and Owens Meng, with Owens Meng serving as chair of the Audit Committee. Our board has affirmatively determined
that each of the members of the Audit Committee meets the definition of “independent director” for purposes of serving
on an Audit Committee under Rule 10A-3 of the Exchange Act and NASDAQ rules. In addition, our board has determined that Lei Wang
qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation
S-K and meets the financial sophistication requirements of the NASDAQ rules.
Compensation
Committee
The
Compensation Committee will be responsible for, among other matters:
|
●
|
reviewing
and approving, or recommending to the board of directors to approve the compensation of our CEO and other executive officers
and directors;
|
|
●
|
reviewing
key employee compensation goals, policies, plans and programs;
|
|
●
|
administering
incentive and equity-based compensation;
|
|
●
|
reviewing
and approving employment agreements and other similar arrangements between us and our executive officers; and
|
|
●
|
appointing
and overseeing any compensation consultants or advisors.
|
Our
Compensation Committee consists of Caifen Zou, Qiu Li, and Owens Meng, with Qiu Li serving as chair of the Compensation Committee.
Our board has affirmatively determined that each of the members of the Compensation Committee meets the definition of “independent
director” for purposes of serving on Compensation Committee under NASDAQ rules.
Nominating
Committee
The
Nominating Committee will be responsible for, among other matters:
|
●
|
selecting
or recommending for selection candidates for directorships;
|
|
●
|
evaluating
the independence of directors and director nominees;
|
|
●
|
reviewing
and making recommendations regarding the structure and composition of our board and the board committees;
|
|
●
|
developing
and recommending to the board corporate governance principles and practices;
|
|
●
|
reviewing
and monitoring the Company’s Code of Business Conduct and Ethics; and
|
|
●
|
overseeing
the evaluation of the Company’s management
|
Our Nominating Committee consists of consists
of Caifen Zou, Qiu Li, and Owens Meng, with Caifen Zou serving as chair of the Nominating Committee. Our board has affirmatively
determined that each of the members of the Nominating Committee meets the definition of “independent director” for
purposes of serving on a Nominating Committee under NASDAQ rules.
Duties
of Directors
Under
British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our
directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of
association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board
of directors include, among others:
|
●
|
appointing
officers and determining the term of office of the officers;
|
|
●
|
authorizing
the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
|
|
●
|
exercising
the borrowing powers of the company and mortgaging the property of the company;
|
|
●
|
executing
checks, promissory notes and other negotiable instruments on behalf of the company; and maintaining or registering a register
of mortgages, charges or other encumbrances of the company.
|
A
director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which
he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact
that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the
board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that
a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested
in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary
to give special notice relating to any particular transaction.
The
directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to
be repaid or prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending
meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection
with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving
the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money
and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities
whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
Limitation
on Liability and Other Indemnification Matters
British
Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for
indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts
to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses,
including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with
civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason
of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly
and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had
no reasonable cause to believe their conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for our directors or officers under the foregoing provisions, we have been informed that in the opinion of
the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a
matter of United States law.
The
table below provides information as to the total number of employees at the end of the last three fiscal years. We have no contracts
or collective bargaining agreements with labor unions and have never experienced work stoppages due to labor dispute. We consider
our relations with our employees to be good.
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Number of Employees
|
|
213
|
|
|
204
|
|
|
50
|
|
See
Item 7 below.
ITEM
7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The
following table sets forth certain information regarding beneficial ownership of our shares by each person who is known by us
to beneficially own more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of
our named executive officers, and all directors and officers as a group. Except as otherwise indicated, the shareholders listed
in the table have sole voting and investment powers with respect to the shares indicated. Our major shareholders do not have different
voting rights than any other holder of our shares.
Shares
which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants
or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
Beneficial
ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and
investment power. Except as otherwise indicated below, each beneficial owner holds voting and investment power directly. The percentage
of ownership is based on 45,849,995 shares issued and outstanding as of June 12, 2020. Unless otherwise indicated, the address
of each beneficial owner listed in the table below is c/o Qingdao Tiandihui Foodstuffs Co. Ltd., Building 10, 1388 Taifa Road,
Huangdao District, Qingdao, Shandong Province, PRC.
Name of Beneficial Owner
|
|
Shares
Owned
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Dandan Liu
|
|
|
27,093,921
|
|
|
|
59.09
|
%
|
Rongfeng Cui (1)
|
|
|
2,287,324
|
|
|
|
4.99
|
%
|
Feng Zhang
|
|
|
-
|
|
|
|
-
|
|
Caifen Zou (1)
|
|
|
-
|
|
|
|
-
|
|
Qiu Li (1)
|
|
|
-
|
|
|
|
-
|
|
Owens Meng (1)
|
|
|
-
|
|
|
|
-
|
|
Directors & executive officers as a group (6 persons)
|
|
|
29,381,245
|
|
|
|
64.08
|
%
|
|
|
|
|
|
|
|
|
|
Easthill Capital Management LLC (2)
|
|
|
4,500,000
|
|
|
|
9.8
|
%
|
(1)
|
Independent
director.
|
(2)
|
Mailing
address of this shareholder is One League, Unit 62317, Irvine CA 92602. Mr. Philip Zou,
the managing member of Easthill Capital Management, LLC, has the sole power to vote or
direct the vote and the sole power to dispose or direct the disposition of the shares.
|
|
B.
|
Related
Party Transactions
|
Due
from related parties, net
Due
from related parties, net consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Tide
|
|
$
|
43
|
|
|
$
|
44
|
|
Rongfeng Cui
|
|
|
41,673
|
|
|
|
43,510
|
|
Less: Allowance for doubtful accounts
|
|
|
(41,716
|
)
|
|
|
-
|
|
Due from related parties, net
|
|
$
|
-
|
|
|
$
|
43,554
|
|
The
balance of due from Tide represents operating expenses paid by the Company on behalf of Tide. The balances of due from Rongfeng
Cui represents overseas trade receivables collected by him on behalf of the Company.
Due
to related parties
Due
to related parties consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Saike
|
|
$
|
-
|
|
|
$
|
16,470
|
|
Phillip Zou
|
|
|
-
|
|
|
|
1,000
|
|
Rongbing Cui
|
|
|
10,046
|
|
|
|
-
|
|
Rongfeng Cui
|
|
|
29,341
|
|
|
|
27,676
|
|
Total
|
|
$
|
39,387
|
|
|
$
|
45,146
|
|
The
balance of due to related parties represents expenses paid by related parties on behalf of the Company as well as advances the
Company obtained from related parties for working capital purposes. The amounts owed to the related parties are unsecured, non-interest
bearing and payable on demand.
Short
term loans from related parties
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Rongfeng Cui
|
|
$
|
751,029
|
|
|
$
|
84,831
|
|
Dandan Liu
|
|
|
-
|
|
|
|
440,638
|
|
Yuxiang Qi
|
|
|
112,778
|
|
|
|
436,275
|
|
Rongbing Cui
|
|
|
-
|
|
|
|
31,993
|
|
Wenbin Pang
|
|
|
-
|
|
|
|
29,085
|
|
Yan Fu
|
|
|
28,703
|
|
|
|
29,085
|
|
Rongjie Cui
|
|
|
-
|
|
|
|
4,363
|
|
Jichang Zhang
|
|
|
-
|
|
|
|
2,909
|
|
Fucheng Sun
|
|
|
-
|
|
|
|
2,181
|
|
Total
|
|
$
|
892,510
|
|
|
$
|
1,061,360
|
|
The
Company borrowed unsecured short term loans from related parties in the amount of $4,791,233 and $1,176,690, during the years
ended December 31, 2019 and 2018, respectively. Interest rate for the loans outstanding during the year ended December 31, 2019
ranged from 0% to 25% per annum. The Company made repayment in the amount of $1,080,947 and $60,490, during the years ended December
31, 2019 and 2018, respectively.
Modification
of Loans from related party
In January 2018, the Company entered into a
loan agreement with Dandan Liu. In May 2018, the agreement was amended to, among others, reclassify unpaid interest payable to
the principal of the loan, resulting an increase in principal from RMB3,000,000 (approximately $466,000) to RMB3,030,000 (approximately
$471,000) and increase the interest rate from 3% to 15%. Interest rate will be 24% for the period past due. In March 2019, the
agreement was further amended to, among others, reclassify unpaid interest payable to the principal of the loan, resulting increase
in principal to RMB3,484,500 (approximately $539,000) and extend the maturity date from January 2019 to May 2019. The loan has
been repaid in full during the year ended December 31, 2019.
In June 2018, the Company entered into
a loan agreement with Yuxiang Qi. Interest rate was 15% during the loan period and 24% for the period past due. In March 2019,
the agreement was amended to, among others, reclassify unpaid interest payable to the principal of the loan, resulting in an increased
in principal from RMB3,000,000 (approximately $462,000) to RMB3,405,000 (approximately $522,000) and extend the maturity date
from December 2018 to May 2019. As of December 31, 2019, the Company was in default of this loan, and was subject to 24% annual
interest rate.
The
Company analyzed the amendments under ASC 470-50 and concluded that these amendments did not qualify for debt modification.
Long
term loans from related party
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Rongfeng Cui
|
|
$
|
-
|
|
|
$
|
286,139
|
|
Less: Rongfeng Cui - current portion
|
|
|
-
|
|
|
|
68,673
|
|
Non-current portion
|
|
$
|
-
|
|
|
$
|
217,466
|
|
Long
term loans from related party represent loans assumed by the Company in connection with acquisition of TDH Group BVBA during the
year ended December 31, 2018. In March 2018, TDH Group BVBA borrowed non-interest bearing, unsecured long term loans from Rongfeng
Cui in the aggregate amount of €250,000 (approximately $288,000), of which €60,000 (approximately $69,000), €60,000
(approximately $69,000), €60,000 (approximately $69,000), €60,000 (approximately $69,000), €10,000 (approximately
$11,500) and $0 is due in the year ended December 31, 2019, 2020, 2021, 2022, 2023 and thereafter, respectively. The Company did
not make any repayment to Rongfeng Cui during the year ended December 31, 2019 nor subsequently, such default may lead to callable
of the loan at any time by Rongfeng Cui. As a result, the corresponding loan was classified as current liability and included
in short term loans as of December 31, 2019.
The interest expenses for loans from related
parties amounted to $632,251 and $95,091 for the years ended December 31, 2019 and 2018, respectively.
Sales
to related parties, purchases from related parties and services provided by related parties
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
|
Like
|
|
$
|
-
|
|
|
$
|
1,167,933
|
|
|
$
|
506,495
|
|
Zhenyu
|
|
|
5,778
|
|
|
|
-
|
|
|
|
-
|
|
Quanmin Chongai
|
|
|
187,063
|
|
|
|
-
|
|
|
|
-
|
|
Liujiayi
|
|
|
-
|
|
|
|
25,832
|
|
|
|
-
|
|
TDH Group BVBA
|
|
|
-
|
|
|
|
325,766
|
|
|
|
-
|
|
Total Sales
|
|
$
|
192,841
|
|
|
$
|
1,519,531
|
|
|
$
|
506,495
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
Yinhe Jiutian
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,059
|
|
Kangkang Family Farm
|
|
|
-
|
|
|
|
-
|
|
|
|
30,191
|
|
Zhenyu
|
|
|
-
|
|
|
|
28,872
|
|
|
|
163,127
|
|
TDH Group BVBA
|
|
|
-
|
|
|
|
2,689
|
|
|
|
-
|
|
Total Purchases
|
|
$
|
-
|
|
|
$
|
31,561
|
|
|
$
|
198,377
|
|
SERVICE PROVIDED BY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanyinhe
|
|
$
|
-
|
|
|
$
|
9,373
|
|
|
$
|
-
|
|
TDH Group BVBA
|
|
|
-
|
|
|
|
278,396
|
|
|
|
-
|
|
TDH JAPAN
|
|
|
-
|
|
|
|
134,181
|
|
|
|
-
|
|
Total Services Consumed
|
|
$
|
-
|
|
|
$
|
421,950
|
|
|
$
|
-
|
|
For
the years ended December 31, 2019, 2018 and 2017, the cost of revenue in connection with sales to related parties were $178,636,
$1,448,533 and $399,177, respectively, which were included in cost of revenue-related parties in the accompanying consolidated
statement of operations and comprehensive income (loss).
During
the years ended December 31, 2019, 2018 and 2017, inventories purchased from related parties in the amount of $0, $26,698 and
$44,502, respectively, were used and sold and included in cost of revenue in the accompanying consolidated statement of operations
and comprehensive income (loss).
The
Company purchased financial application software from Yinhe Jiutian in the amount of $0, $0 and $5,059 during the years ended
December 31, 2019, 2018 and 2017, respectively.
Accounts
receivables from related parties, net
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Like
|
|
$
|
96,580
|
|
|
$
|
435,513
|
|
Quanmin Chongai
|
|
|
29,509
|
|
|
|
-
|
|
Less: Allowance for doubtful accounts
|
|
|
(126,089
|
)
|
|
|
-
|
|
Accounts receivables – related parties, net
|
|
$
|
-
|
|
|
$
|
435,513
|
|
Accounts
payable to related parties
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Yinhe Jiutian
|
|
$
|
112,069
|
|
|
$
|
113,562
|
|
Kangkang Family Farm
|
|
|
4,705
|
|
|
|
4,768
|
|
Zhenyu Trading
|
|
|
60
|
|
|
|
6,796
|
|
Total
|
|
$
|
116,834
|
|
|
$
|
125,126
|
|
Leases
from related parties
The
Company has entered into multiple lease agreements for the lease of premises for factory buildings, office spaces and warehouses
including several lease agreements with related parties. The remaining lease term of the Company’s leases ranges from approximately
0.5 to 8 years. The estimated effect of lease renewal and termination options, as applicable, was included in the consolidated
financial statements in current period.
The
components of lease expense were as follows:
|
|
For the year ended
December 31,
|
|
|
|
2019
|
|
|
|
|
|
Operating lease cost
|
|
$
|
107,316
|
|
Short-term lease cost
|
|
|
22,001
|
|
Total lease cost
|
|
$
|
129,317
|
|
Rental
expenses, including expenses incurred from operating leases with related parties, for the years ended December 2018 and 2017 was
$218,414 and $163,497, respectively.
Supplemental
cash flow information related to leases was as follows:
|
|
For
the year ended December 31,
|
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flow from operating leases
|
|
$
|
1,737
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
7.60
years
|
|
Weighted-average discount rate
|
|
|
5.39
|
%
|
Supplemental
balance sheet information related to leases was as follows:
|
|
December 31,
2019
|
|
Operating lease right-of-use assets, related parties
|
|
$
|
286,670
|
|
|
|
|
|
|
Operating lease liability-related parties, current
|
|
|
137,347
|
|
Operating lease liabilities-related party, non-current
|
|
|
286,875
|
|
Total operating lease liabilities
|
|
$
|
424,222
|
|
The
following table summarizes the maturity of our operating lease liabilities as of December 31, 2019:
2020
|
|
$
|
137,347
|
|
2021
|
|
|
44,844
|
|
2022
|
|
|
47,535
|
|
2023
|
|
|
50,387
|
|
2024
|
|
|
53,410
|
|
Thereafter
|
|
|
147,505
|
|
Total
|
|
|
481,028
|
|
Less imputed interest
|
|
|
(56,806
|
)
|
Total lease liabilities
|
|
$
|
424,222
|
|
|
C.
|
Interests
of Experts and Counsel
|
Not
required.
ITEM
8.
|
FINANCIAL
INFORMATION
|
|
A.
|
Consolidated
Statements and Other Financial Information.
|
See
Item 18 for our audited consolidated financial statements.
Legal
Proceedings
Except
as set forth below, we are not involved in any legal proceedings; nor are we aware of any claims that could have a material adverse
effect on our business, financial condition, results of operations or cash flows.
|
●
|
Legal
claims by vendors and lenders. During the months of November 2019 to June 2020, the Company has been a subject of 48 lawsuits
by its raw material supplies, printing and packaging supplies, transportation companies and other vendors. The claims raised in
these lawsuits pertain to the Company’s non-payment of various invoices for supplier and vendor services rendered, with
interest and costs. As of the date of report, 46 of the proceedings have been resolved such that in 30 lawsuits, the creditors
agreed to settle if we paid the settlement amounts; in 16 lawsuits, the Court ruled in favor of the creditors; and 2 proceedings
against the Company remain ongoing. The mediation and judgment aggregate amount of approximately RMB11.8 million (USD1.69 million).
On December 2, 2019, Qingdao Lingang Real Estate Co., Ltd., instituted
a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges that it executed
a one-year loan agreement with the Company in the amount of RMB20.55 million (USD2.94 million) for the Company’s working
capital and general corporate purposes. Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this loan as personal guarantors
subject to joint and several liability in connection with the loan. The plaintiff claims non-payment of the principal of the loan
and a partial payment of the interest thereon. The plaintiff demands the Company to (i) repay the aggregate amount of RMB20.55
million (USD2.94 million), including interest, (ii) assume and pay the interest at the rate of 2% per month for the period from
the date of November 1, 2019 to the date of full discharge of the debt, and (iii) compensate the plaintiff’s legal fees of
RMB120,000 (USD17,143). The plaintiff also demands Rongfeng Cui and Yanjuan Wang to assume joint and several liability for the
Company’s debt. On March 4, 2020, the Court ordered the Company to pay RMB20.55 million (USD2.94 million) of principal and
interest to Qingdao Lingang Real Estate Co., Ltd., and Rongfeng Cui to bear joint and several security liability for the payment,
and the legal cost was RMB77,000(USD$10,050).
On January 15, 2020, China Construction Bank (“CCB”),
instituted a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges
that it executed a loan agreement with the Company in the amount of RMB19.93 million (USD2.86 million) for the purchase of manufacturing
facility and the associated land use right located at Lingang Economic Development Zone, Huangdao District, Qingdao, Shandong Province,
People’s Republic of China. Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this loan as personal guarantors subject
to joint and several liability in connection with the loan. The plaintiff claims non-payment of the principal of the loan and a
partial payment of the interest thereon. The plaintiff demands the Company to (i) repay the aggregate amount of RMB19.93 million
(USD2.86 million), including interest, (ii) apply for execution of collateral of the associated land use right in the name of Tiandihui
located at Lingang Economic Development Zone. The plaintiff also demands Rongfeng Cui and Yanjuan Wang to assume joint and several
liability within the range of RMB22.65 million (USD3.25 million) for the Company’s debt. On April 14, 2020, the Court ordered
the Company to pay RMB19.93 million (USD2.86 million) of principal and interest to CCB, executed the sale of the mortgaged property
and Rongfeng Cui and Yanjuan Wang to bear joint and several security liability for the payment, and the legal cost was RMB70,678(USD$10,143).
|
On November 11, 2019, Shanghai Pudong Development Bank Qingdao Branch(“CPDB”), instituted a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Qingdao Saike Environmental Technology Co., Ltd. (“Saike”), Qingdao Gaochuang Technology Finance Guarantee Co., Ltd. (“Gaochuang”), Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges that it executed the additional bank acceptance deposit of the Company in the amount of RMB4.85 million (USD0.7 million) for acceptance draft at maturity. Saike, Gaochuang, Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this acceptance draft as guarantors subject to joint and several liability in connection with the acceptance draft. The plaintiff claims non-payment of the acceptance draft . The plaintiff demands the Company to (i) repay the aggregate amount of RMB4.85 million (USD0.7 million),, (ii) apply for execution of collateral of the associated land use right and real estate in the name of Saike, Rongfeng Cui and Yanjuan Wang. The plaintiff also demands Gaochuang to assume joint and several liability within the range of RMB1.2 million (USD0.17 million) for the Company’s debt. The court has not ruled as of the reporting date.
On December 10, 2019, Qingdao Gaochuang Technology Finance Guarantee Co., Ltd. (“Gaochuang”), instituted a civil claim against Qingdao Tiandihui Foodstuffs Co., Ltd., Qingdao Saike Environmental Technology Co., Ltd. (“Saike”), Rongfeng Cui, and Yanjuan Wang. The plaintiff alleges that it executed the guarantee of additional CPDB bank acceptance deposit of the Company in the amount of RMB1.2 million (USD0.17 million). Saike, Gaochuang, Rongfeng Cui and his wife, Yanjuan Wang, co-signed for this acceptance draft as guarantors subject to joint and several liability in connection with the acceptance draft. . The plaintiff demands the Company to (i) repay the aggregate amount of RMB1.2 million (USD0.17 million), (ii) apply for execution of the collateral of mortgage counter guarantee and the patent pledge in the name of the Company. The court has not ruled as of the reporting date.
The Company entered into two loan agreements with China Postal Savings Bank – Qingdao Weihai Road Sub Branch. (“CPSB”) to borrow RMB9.9 million (USD1.42 million). Both loans are overdue in April 2020. CPSB applied to the court for property preservation in November 2019 and has not sued the Company as of the reporting date.
|
●
|
Labor
arbitration claims by former employees. The Company estimates that its headcount will reduce to around 50 full-time
employees through the end of this adjustment period. As a result of the layoffs, certain of the Company’s former
employees commenced arbitration proceedings against the Company under applicable labor rules and standards, claiming, among
others, lost wages, severance payments and/or social security obligations totaling RMB4.8 million (USD0.69 million). As of
the reporting date, there were 97 labor arbitrations, of which 96 had entered the first phase of trial and 1 had entered the
second phase of trial.
|
Dividend
Policy
The
holders of shares of our common shares are entitled to dividends out of funds legally available when and as declared by our board
of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable
future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiary and other holdings and investments. In addition,
the operating companies may, from time to time, be subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or
other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of
our common shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.
Except
as disclosed elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this Annual Report.
ITEM
9.
|
THE
OFFER AND LISTING
|
|
A.
|
Offer
and Listing Details
|
The
following table sets forth, for the calendar quarters indicated and through June 12, 2020, the quarterly high and low sale prices
for our shares, as reported on NASDAQ Stock Market.
|
|
Shares
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Quarterly and Monthly Highs and Lows
|
|
|
|
|
|
|
1st Quarter 2018
|
|
|
6.5119
|
|
|
|
6.2913
|
|
2nd Quarter 2018
|
|
|
6.5973
|
|
|
|
6.2796
|
|
3rd Quarter 2018
|
|
|
6.9146
|
|
|
|
6.6171
|
|
4th Quarter 2018
|
|
|
6.9568
|
|
|
|
6.8407
|
|
1st Quarter 2019
|
|
|
6.8764
|
|
|
|
6.6840
|
|
|
|
|
|
|
|
|
|
|
2nd Quarter 2019
|
|
|
6.9212
|
|
|
|
6.6691
|
|
3rd Quarter 2019
|
|
|
7.1748
|
|
|
|
6.7845
|
|
4th Quarter 2019
|
|
|
7.1668
|
|
|
|
6.9602
|
|
|
|
|
|
|
|
|
|
|
1st Quarter 2020
|
|
|
7.1011
|
|
|
|
6.8870
|
|
April, 2020
|
|
|
7.1187
|
|
|
|
6.9924
|
|
May, 2020
|
|
|
7.1518
|
|
|
|
7.0270
|
|
Not
Applicable.
Our
shares have been listed on the NASDAQ Stock Market under the symbols PETZ, since September 21, 2017, following the completion
of our initial public offering.
On
January 7, 2019, we received a notification letter from Nasdaq Listing Qualifications advising the Company that based upon the
closing bid price for the Company’s common shares for the past 30 consecutive business days, the Company no longer met the
minimum $1.00 per share Nasdaq continued listing requirement set forth in Nasdaq Listing Rule 5555(a)(2). The notification also
stated that the Company would be provided 180 calendar days, or until July 8, 2019, to regain compliance with the foregoing listing
requirement. To do so, the bid price of the Company’s common stock must close at or above $1.00 per share for a minimum
of 10 consecutive business days prior to that date. The Company regained compliance with this requirement as a result of its common
shares’ closing bid price having been at or above the minimum requirement of $1.00 per share for a minimum of ten consecutive
trading days.
The
Company cannot provide any assurance that its common shares will trade at levels necessary to regain and maintain compliance with
the above-referenced bid price rule before the compliance deadline. The Company intends to continue to monitor the bid price for
its common stock. If the Company’s common shares do not trade at a level that is likely to regain compliance with the Nasdaq
requirements, the Company’s Board of Directors will consider other options that may be available to achieve compliance.
Not
Applicable.
Not
Applicable.
Not
Applicable.
ITEM
10.
|
ADDITIONAL
INFORMATION
|
Not
Applicable.
|
B.
|
Memorandum
and Articles of Association
|
The
information required by Item 10.B of Form 20-F is included in the section titled “Description of Share Capital” in
our Registration Statement on Form F-1 initially filed with the SEC on August 11, 2017 (File No.: 333-219896), which section is
incorporated herein by reference.
None
Under
British Virgin Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange
controls or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
PRC
Enterprise Income Tax
According to the Enterprise Income Tax Law
of PRC (the “EIT Law”), which was promulgated on March 16, 2007, last amended in February 2017 and became effective
as of January 1, 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform rate of 25%. The Regulation
on the Implementation of Enterprise Income Tax Law of the PRC (the “EIT Rules”) was promulgated on December 6, 2007
and became effective on January 1, 2008. On April 14, 2008, the Chinese Ministry of Science and Technology, Ministry of Finance
and State Administration of Taxation enacted the Administrative Measures for Certifying High and New Technology Enterprises (the
“Certifying Measures”), which retroactively became effective on January 1, 2008 and was amended on January 29, 2016.
Under the EIT Law and the Certifying Measures, certain qualified high-tech companies may benefit from a preferential tax rate
of 15% if they own their core intellectual properties and are classified into certain industries strongly supported by the Chinese
government and set forth by certain departments of the Chinese State Council. Tiandihui was granted the high and new technology
enterprise (“HNTE”) qualification valid until the year end of December 2018. The Company was subject to 25% income
tax rate in 2019. There can be no assurance, however, that Tiandihui will continue to meet the qualifications for such a reduced
tax rate. In addition, there can be no guaranty that relevant governmental authorities will not revoke Tiandihui’s “high
and new technology enterprise” status in the future. Uncertainties exist with respect to how the EIT Law applies to the
tax residence status of Tiandihui and our offshore subsidiaries. Under the EIT Law, an enterprise established outside of China
with a “de facto management body” within China is considered a “resident enterprise”, which means that
it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules
of the EIT Law define “de facto management body” as a managing body that exercises substantive and overall management
and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance
for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, at April 22,
2009 which provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident
enterprise” with its “de facto management bodies” located within China if the following criteria are satisfied:
|
●
|
the
place where the senior management and core management departments that are in charge of its daily operations perform their
duties is mainly located in the PRC;
|
|
●
|
its
financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC;
|
|
●
|
its
major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located
or kept in the PRC; and
|
|
●
|
more
than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC.
|
We
do not believe that we meet the conditions outlined in the preceding paragraph since Tiandihui does not have a PRC enterprise
or enterprise group as our primary controlling shareholder. In addition, we are not aware of any offshore holding companies with
a corporate structure similar to the Company that has been deemed a PRC “resident enterprise” by the PRC tax authorities.
If
we are deemed a China resident enterprise, we may be subject to the EIT at the rate of 25% on our global income, except that the
dividends we receive from our Chinese subsidiaries may be exempt from the EIT to the extent such dividends are deemed dividends
among qualified resident enterprises. If we are considered a resident enterprise and earn income other than dividends from our
Chinese subsidiaries, a 25% EIT on our global income could significantly increase our tax burden and materially and adversely
affect our cash flow and profitability.
PRC
Business Tax and VAT
Pursuant
to the Provisional Regulation of China on Business Tax last amended on November 10, 2008 and effective as of January 1, 2009 and
the Detailed Rules for the Implementation of the Provisional Regulation of China on Business Tax last amended on October 28, 2011
and effective as of November 1, 2011, all entities and individuals engaged in providing taxable services, transfer of intangible
assets or the sale of real estate are subject to business tax. Pursuant to the Provisional Regulations on Value-added Tax (VAT)
of the PRC last amended on February 6, 2016 and became effective from January 1, 2009 and the Detailed Rules for the Implementation
of the Provisional Regulation of China on VAT last amended on October 28, 2011 and effective as of November 1, 2011,all entities
or individuals in the PRC engaging in the sale of goods, the provision of processing services, repairs and replacement services,
and the importation of goods are required to pay VAT. The amount of VAT payable is calculated as “output VAT” minus
“input VAT”, and the rates of VAT are 17%, 16%, 11% or 10% for sales of our goods as determined by State Administration
of Taxation.
People’s
Republic of China Taxation
Under
the EIT law and EIT Rules, both of which became effective on January 1, 2008, the income tax for both domestic and foreign-invested
enterprises is at a uniform rate of 25%, unless they qualify for certain exceptions. On April 14, 2008, the Chinese Ministry of
Science and Technology, Ministry of Finance and State Administration of Taxation enacted the Certifying Measures, which retroactively
became effective on January 1, 2008 and was amended on January 29, 2016 provide that certain qualified high-tech companies may
benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified into certain industries
strongly supported by the Chinese government and set forth by certain departments of the Chinese State Council. Tiandihui was
granted the HNTE qualification valid for three years commencing on December 2, 2016. There can be no assurance, however, that
Tiandihui will continue to meet the qualifications for such a reduced tax rate. In addition, there can be no guaranty that relevant
governmental authorities will not revoke Tiandihui’s “high and new technology enterprise” status in the future.
We are a holding company incorporated in the British Virgin Islands and we gain substantial income by way of dividends from our
PRC subsidiaries. The EIT Law and Rules provide that China-sourced income of foreign enterprises, such as dividends paid by a
PRC Subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate
of 10%, unless any such foreign investor’s jurisdiction of incorporation has tax treaty with China that provides for a different
withholding arrangement.
British
Virgin Islands Taxation
Under
the BVI Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from
British Virgin Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not
liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The
British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the
BVI Act. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated
or re-registered under the BVI Act. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject
to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands or between China and the British Virgin Islands.
United
States Federal Income Taxation
The
following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
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financial
institutions;
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regulated
investment companies;
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real
estate investment trusts;
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traders
that elect to mark to market;
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persons
liable for alternative minimum tax;
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persons
holding our common shares as part of a straddle, hedging, conversion or integrated transaction;
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persons
that actually or constructively own 10% or more of our voting shares;
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persons
who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or
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persons
holding our common shares through partnerships or other pass-through entities.
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Prospective
purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances
as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common
shares.
Taxation
of Dividends and Other Distributions on our Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect
to the common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income
as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, to the
extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S.
federal income tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to
the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to
calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution
will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital
gain under the rules described above. The dividends will not be eligible for the dividends-received deduction allowed in respect
of dividends received from other U.S. corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate
applicable to qualified dividend income, provided that (1) the common shares are readily tradable on an established securities
market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States
that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for
either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements
are met. Under U.S. Internal Revenue Service authority, our common shares will be considered for purpose of clause (1) above to
be readily tradable on an established securities market in the United States when they are listed on the NASDAQ Capital Market.
You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our
common shares, including the effects of any change in law after the date of this Annual Report.
Dividends
on our common shares will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed
as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the
foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the
highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our common shares will
constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category
income.”
Taxation
of Dispositions of Shares
Subject
to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange
or other taxable disposition of shares equal to the difference between the amount realized (in U.S. dollars) for the share and
your tax basis (in U.S. dollars) in the shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S.
Holder, including an individual U.S. Holder, who has held the common shares for more than one year, you will be eligible for the
capital gains tax rate of 20% (or lower for individuals in lower tax brackets). The deductibility of capital losses is subject
to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for
foreign tax credit limitation purposes.
Passive
Foreign Investment Company
Based
on our current and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2018. Our actual PFIC
status for the current taxable years ending December 31, 2018 will not be determinable until after the close of such year and,
accordingly, there is no guarantee that we will not be a PFIC for the current year. PFIC status is a factual determination for
each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any
taxable year if either:
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at
least 75% of its gross income is passive income; or
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at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is
attributable to assets that produce or are held for the production of passive income (the “asset test”).
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We
will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. We must make a separate determination
each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets
for purposes of the asset test will generally be determined based on the market price of our common shares, our PFIC status will
depend in large part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares
may cause us to become a PFIC. If we are a PFIC for any year during which you hold common shares, we will continue to be treated
as a PFIC for all succeeding years during which you hold common shares. However, if we cease to be a PFIC, you may avoid some
of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the common shares.
If
we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect
to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including
a pledge) of the common shares, unless you make a “mark-to-market” election as discussed below. Distributions you
receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the
three preceding taxable years or your holding period for the common shares will be treated as an excess distribution. Under these
special tax rules:
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the
excess distribution or gain will be allocated ratably over your holding period for the common shares;
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the
amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC,
will be treated as ordinary income, and
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the
amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. The tax
liability for amounts allocated to such years cannot be offset by any net operating losses for such years, and gains realized
on the sale of the common shares cannot be treated as capital, even if you hold the common shares as capital assets.
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A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to
elect out of the tax treatment discussed above. If you make a mark-to-market election for the common shares, you will include
in income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close of your
taxable year over your adjusted basis in such common shares. You are allowed a deduction for the excess, if any, of the adjusted
basis of the common shares over their fair market value as of the close of the taxable year. However, deductions are allowable
only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable years. Amounts
included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common
shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss
on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent that
the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. Your basis in
the common shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the
tax rules that apply to distributions by corporations that are not PFICs would apply to distributions by us, except that the lower
applicable capital gains rate for qualified dividend income discussed above under “Taxation of Dividends and Other Distributions
on our Shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other
market (as defined in applicable U.S. Treasury regulations), including the NASDAQ Capital Market. If the common shares are regularly
traded on the NASDAQ Capital Market and if you are a holder of common shares, the mark-to-market election would be available to
you were we to be or become a PFIC.
Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect
out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC
will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings
and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S.
Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We
do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election.
If you hold common shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form
8621 regarding distributions received on the common shares and any gain realized on the disposition of the common shares.
You
are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and
the elections discussed above.
Information
Reporting and Backup Withholding
Dividend
payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject
to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup
withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other
required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders
who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form
W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup
withholding rules. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against
your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information.
United
States Federal Income Taxation
The
following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax matters related to an investment
in our common shares. It is directed to U.S. Holders (as defined below) of our common shares and is based on laws and relevant
interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change. This description does
not deal with all possible tax consequences relating to an investment in our common shares, such as the tax consequences under
state, local and other tax laws. The following brief description applies only to U.S. Holders (defined below) that hold common
shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax
laws of the United States in effect as of the date of this Annual Report and on U.S. Treasury regulations in effect or, in some
cases, proposed, as of the date of this Annual Report, as well as judicial and administrative interpretations thereof available
on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could
affect the tax consequences described below. The brief description below of the U.S. federal income tax consequences to “U.S.
Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes:
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an
individual who is a citizen or resident of the United States;
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a
corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the
United States, any state thereof or the District of Columbia;
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an
estate whose income is subject to U.S. federal income taxation regardless of its source; or
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a
trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S.
persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to
be treated as a U.S. person.
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Belgium
taxation
The
current enterprise income tax rate is approximately 34%, which includes 3% additional tax, for Belgium companies. Small and medium-sized
enterprises may enjoy preferential tax rate if they meet the requirements.
Japan
taxation
The
enterprise income tax includes national income tax and local special tax for companies operated in Japan. The current national
enterprise income tax rate is 30%. And the actual income tax burden will be around 35% - 40% given the local special tax was considered.
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F.
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Dividends
and paying agents
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Not
required.
Not
required.
We
file annual reports and other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and
submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section
14 of the Exchange Act and our officers, directors and principal shareholders are exempt from the insider short-swing disclosure
and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission
may be inspected at the public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may
call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request
copies of the documents upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains
a web site that contains reports and other information regarding registrants (including us) that file electronically with the
Commission which can be assessed at http://www.sec.gov.
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I.
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Subsidiary
Information
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Not
required.
ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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Interest
Rate Risk
Our
main interest rate exposure relates to bank borrowings. We manage our interest rate exposure with a focus on reducing our overall
cost of debt and exposure to changes in interest rates. In 2019, we had $4.73 million weighted average outstanding bank loans,
with weighted average effective interest rate of 5.54%. In 2018, we had $1.87 million weighted average outstanding bank loans,
with weighted average effective interest rate of 6.06%. In the year 2017, we had $1.52 million weight average outstanding bank
loans, with weighted average effective interest rate of 6%.
As
of December 31, 2019, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming
the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity
owners of our company would have been $2,620, lower/higher, respectively, mainly as a result of higher/lower interest income
from our cash and cash equivalents and loan receivables.
As
of December 31, 2018, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming
the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity
owners of our company would have been $3,348, lower/higher, respectively, mainly as a result of higher/lower interest income
from our cash and cash equivalents and loan receivables.
Foreign
Currency Risk
Our
functional currency is the RMB, Euro and Yen, and our financial statements are presented in U.S. dollar. We mainly use RMB in
domestic transaction, and the transaction settled with Euro and Yen are immaterial. The RMB depreciated against the U.S. dollar
by 5.6% in 2018 and appreciated by 6.0% in 2017. The change in the value of RMB relative to the U.S. dollar may affect our financial
results reported in the U.S. dollar terms without giving effect to any underlying change in our business or results of operation.
Currently,
our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, our exposure to foreign exchange risk
will primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar
may materially affect our earnings and financial position, and the value of, and any dividends payable on, our common shares in
U.S. dollars in the future.
ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not
required.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – ORGANIZATION
TDH Holdings, Inc. (“TDH Holdings”) was incorporated
on September 30, 2015 under the laws of the British Virgin Islands. On November 4, 2015, TDH Holdings incorporated a wholly owned
subsidiary, TDH HK Limited (“TDH HK”) in Hong Kong for the purpose of being a holding company for the equity interest
in Qingdao Tiandihui Foodstuffs Co., Ltd. (“Tiandihui”). On September 9, 2016, TDH Holdings incorporated TDH Petfood
LLC, a Nevada limited liability company, in which TDH Holdings holds 99% equity interest. TDH Petfood LLC does not own any material
assets or liabilities. Other than cash and equity interest in TDH HK and TDH Petfood LLC, TDH Holdings does not conduct any operations
or own any material assets or liabilities. TDH HK does not conduct any operations or own any material assets or liabilities except
for cash and the 100% of the equity interest of Tiandihui which it acquired on February 21, 2016.
Tiandihui was founded in Qingdao City, Shandong Province,
People’s Republic of China (“PRC”) on April 22, 2002 as a limited liability company. As of December 31,
2019, Tiandihui had one wholly owned subsidiary: Beijing Chongai Jiujiu Cultural Communication Co., Ltd. (“Chongai
Jiujiu”), which was incorporated on March 3, 2011, in Beijing City, PRC. Tiandihui and its wholly owned subsidiary
are engaged in the business of development, manufacturing and sales of high quality pet food products under our own formula
patents. Our products are produced at Tiandihui facility and sold to the pet owners in PRC and to the retailers and
wholesalers throughout worldwide.
On February 21, 2016, TDH HK entered into an equity transfer
agreement with Rongfeng Cui and his wife Yanjuan Wang, the shareholders of Tiandihui at the time, to acquire 100% of the equity
interests in Tiandihui (“reorganization”).
On July 19, 2016, Tiandihui acquired 100% shares of Chongai
Jiujiu from Rongfeng Cui and Yanjuan Wang with a consideration of $87,849 (RMB610,000). The acquisition of Chongai Jiujiu is a
transaction between entities under common control.
Immediately before and after the reorganization, the same shareholders
of Tiandihui controlled Tiandihui and TDH Holdings. Therefore, for accounting purposes, the reorganization is accounted for as
a transaction of entities under common control. Accordingly, the accompanying consolidated financial statements have been prepared
as if the current corporate structure had been in existence throughout the periods presented.
On August 9, 2016, a wholly owned subsidiary of the Company, Qingdao
Kangkang Development Co., Ltd. (“Kangkang Development”) was incorporated in Qingdao City, PRC. Kangkang
Development had no active operation since its incorporation and was dissolved in 2019.
On November 14, 2017, a 55% owned subsidiary of the Company,
Yichong (Qingdao) Technology Co., Ltd. (“Yichong”) was incorporated in Qingdao City, PRC. Yichong had no active operation
since its incorporation. The Company disposed of its entire equity interests in Yichong in September 2019.
On November 29, 2017, a 55% owned subsidiary of the Company,
Qingdao Lingchong Information Technology Co., Ltd. (“Lingchong”) was incorporated in Qingdao City, PRC. Lingchong
had no active operation since its incorporation. The Company disposed of its entire equity interests in Lingchong in July 2019.
On January 3, 2018, a wholly owned subsidiary, Qingdao Lile Pet
Foodstuffs Co., Ltd. (“Lile”) was incorporated in Qingdao City, PRC. Lile had no active operation since its incorporation
and was dissolved in 2019.
In November 2018, the Company completed business acquisitions
of TDH Group BVBA, a Belgium entity and TDH JAPAN, a Japanese entity. TDH Group BVBA and TDH JAPAN had limited operation activities
for the year ended December 31, 2019.
TDH Holdings and its consolidated subsidiaries are collectively
referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an
entity.
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying audited financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
This basis of accounting differs in certain material respects
from that used for the preparation of the books of account of the Company, which are prepared in accordance with the accounting
principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC
GAAP”), the accounting standards used in the places of their domicile. The accompanying consolidated financial statements
reflect necessary adjustments not recorded in the books of account of the Company to present them in conformity with U.S. GAAP.
The consolidated financial statements include the accounts of
the Company, its wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have
been eliminated upon consolidation. The results of subsidiaries acquired or disposed of during the respective periods are included
in the consolidated statements of operations and comprehensive income (loss) from the effective date of acquisition or up to the
effective date of disposal, as appropriate. The portion of the income or loss applicable to noncontrolling interest in subsidiaries
is reflected in the consolidated statements of operations and comprehensive income (loss).
Going Concern
Our consolidated financial statements have been prepared assuming
we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal
course of business. However, for the year ended December 31, 2019, the Company has incurred a net loss of approximately $8.6 million
and working capital deficit of approximately $7.3 million and its cash balance and revenues generated are not currently sufficient
and cannot be projected to cover operating expenses and meet the Company’s obligations as they become due for the next twelve
months after the date that our financial statements are issued. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
Management’s plan to alleviate the substantial doubt about
the Company’s ability to continue as a going concern include attempting to improve its business profitability, its ability
to generate sufficient cash flow from its operations to meet its operating needs on a timely basis, obtain additional working capital
funds through debt and equity financings to eliminate inefficiencies in order to meet its anticipated cash requirements. However,
there can be no assurance that these plans and arrangements will be sufficient to fund the Company’s ongoing capital expenditures,
working capital, and other requirements.
The accompanying consolidated financial statements do not include
any adjustments related to the recoverability or classification of asset-carrying amount or the amounts and classification of liabilities
that may result should the Company be unable to continue as a going concern.
Foreign Currency Translation
The accompanying consolidated financial statements are presented
in United States dollar (“$”), which is the reporting currency of the Company. The functional currency of TDH Holdings,
TDH HK and TDH Petfood LLC is United States dollar. The functional currency of Tiandihui, Chongai Jiujiu, Kangkang Development,
Yichong, Lingchong and Lile is Renminbi (“RMB”). The functional currency of TDH Group BVBA is Euro (“€”).
The functional currency of TDH JAPAN is Yen (“¥”). For the subsidiaries whose functional currencies are RMB, Euro
and Yen, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities
are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. The
resulting translation adjustments are included in determining other comprehensive income or loss. Transaction gains and losses
are reflected in the consolidated statements of operations.
The exchange rates used to translate amounts in RMB into U.S.
Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=RMB):
Period Covered
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|
Balance Sheet Date Rates
|
|
|
Average Rates
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
6.9680
|
|
|
|
6.9088
|
|
Year ended December 31, 2018
|
|
|
6.8764
|
|
|
|
6.6146
|
|
The exchange rates used to translate amounts in Euro into U.S.
Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=€):
Period Covered
|
|
Balance
Sheet Date Rate
|
|
|
Average Rate
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
0.8916
|
|
|
|
0.8934
|
|
Period from acquisition completion date to December 31, 2018
|
|
|
0.8737
|
|
|
|
0.8789
|
|
The exchange rates used to translate amounts in Yen into U.S.
Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=¥):
Period Covered
|
|
Balance
Sheet Date Rate
|
|
|
Average Rate
|
|
|
|
|
|
|
|
|
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Year ended December 31, 2019
|
|
|
108.6384
|
|
|
|
109.0086
|
|
Period from acquisition completion date to December 31, 2018
|
|
|
110.0039
|
|
|
|
112.1693
|
|
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions
and information that are believed to be reasonable under the circumstances, including but not limited to the potential impacts
arising from the recent novel coronavirus (COVID-19). Estimates and assumptions of future events and their effects cannot be perceived
with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. Significant estimates and assumptions by management include,
among others, allowance for doubtful accounts, useful lives and impairment of long-lived assets and goodwill, write-down in value
of inventories, income taxes including the valuation allowance for deferred tax assets, estimate of contingent liabilities and
allowance for sales return. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates
and assumptions may evolve as conditions change. Actual results could differ from those estimates. Estimates and assumptions are
periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined
to be necessary.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in time
deposits and highly liquid investments purchased with original maturities of three months or less.
Restricted Cash
Restricted cash mainly represents bank deposits used to pledge
the bank acceptance notes and bank letters of credit, bank deposits judicially frozen by the court and cash deposit in an escrow
account.
Accounts Receivable
Accounts receivable consists principally of amounts due from
trade customers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not generally
required.
The Company maintains allowances for doubtful accounts for estimated
losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is
doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the
Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness
and current economic trends. Accounts are written off after exhaustive efforts at collection.
Inventories
Inventories, consisting of raw materials, low-valued consumables,
work in progress, good sold in transit and finished goods, are stated at the lower of cost or net realizable value, with cost computed
on a weighted-average basis. The valuation of inventory requires us to estimate excess and slow-moving inventory. We evaluate the
recoverability of our inventory based on assumption about expected demand, market conditions, forecasts prepared by its customers,
sales contracts and orders in hand.
Property, Plant and Equipment
Property, plant and equipment, are stated at cost less depreciation.
Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance,
repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are
capitalized.
Depreciation of property, plant and equipment is calculated
based on cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. Estimated
useful lives are as follows:
Machinery equipment
|
|
|
5 - 20 years
|
Computer software
|
|
|
10 years
|
Electronic equipment
|
|
|
5 - 10 years
|
Office equipment
|
|
|
5 - 10 years
|
Motor vehicles
|
|
|
5 - 10 years
|
Leasehold improvement
|
|
|
Shorter of the lease term or estimated useful life
|
Buildings
|
|
|
20 - 50 years
|
Land Use Rights
According to the law of PRC, the government owns all the land
in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese
government for a specified period of time. Land use rights are being amortized using the straight-line method over the periods
the rights are granted.
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or
at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less
than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. The Company performed an impairment test on December 31, 2019 considering the fact
of decreased revenue and recurring losses, and recorded impairment loss on long-lived assets other than goodwill of $813,344
and $0 for the years ended December 31, 2019 and 2018, respectively.
The Company’s goodwill is tested for impairment on an
annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
In testing for goodwill impairment, the Company compares the fair value of its reporting unit to its carrying value including the
goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will
recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss
recognized cannot exceed the total amount of goodwill allocated to that reporting unit. The Company recorded impairment loss on
goodwill of $0 and $1,599,591 for the years ended December 31, 2019 and 2018, respectively.
Long-term Investments
The Company’s long-term investments consist of equity
investments without readily determinable fair value and equity method investment.
In accordance with ASC 323, Investments-Equity Method and Joint
Ventures, the Company applies the equity method of accounting to equity investments, over which it has significant influence but
does not own a majority equity interests or otherwise control. Significant influence is generally considered to exist when the
Company has an ownership interest in the voting stock of the investee between 20% and 50%. Under the equity method, the Company
initially records its investment at cost and subsequently adjusts the carrying amount of the investment to recognize the Company’s
proportionate share of each equity investee’s net income or loss into earnings after the date of investment.
The Company continually reviews its investment under equity
method to determine whether a decline in fair value to below the carrying value is other-than-temporary. The primary factors in
its determination are the duration and severity of the decline in fair value, the financial condition, operating performance and
the prospects of the equity investee, and other company specific information such as recent financing rounds. If the decline in
fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.
For equity securities without readily determinable fair value
and do not qualify for the existing practical expedient in ASC 820, Fair Value Measurements and Disclosures to estimate fair value
using the net asset value per share (or its equivalent) of the investment, the Company elected to use the measurement alternative
to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly
transactions for identical or similar investments of the same issuer, if any. The Company makes assessment of whether an investment
is impaired at each reporting date, and recognizes an impairment loss equal to the difference between the carrying value and fair
value in the consolidated statements of operations and comprehensive income (loss) if there is any. The Company makes a qualitative
assessment of whether the investments are impaired at each reporting date.
Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurement for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
The Company measures certain financial assets, including the
investment under the measurement alternative method and equity method on other-than-temporary basis, intangible assets, goodwill
and fixed assets at fair value when an impairment charge is recognized.
Accounting guidance establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly
observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little
or no market activity.
Accounting guidance also describes three main approaches to
measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
For certain of the Company’s financial instruments,
including cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, inventories, prepayments
and other current assets, accounts payable, notes payables, advances from customers, taxes payable, bank overdrafts, short
term loans and other current liabilities, the carrying amounts approximate their fair values due to the short maturities.
Lease Commitments
Recent adoption of accounting pronouncement ASU 2016-02
On January 1, 2019, the Company adopted Accounting Standards
Update (ASU) 2016-02, Leases (together with all amendments subsequently issued thereto, “ASC Topic 842”), using the
modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements
by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result
of electing this transition method, previously reported financial information has not been restated to reflect the application
of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under
the transition guidance within ASC Topic 842, which among others, allows the Company to carry forward certain historical conclusions
reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs.
The Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements
with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease
term. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing
or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
The initial lease liability is equal to the future fixed minimum
lease payments discounted using the Company’s incremental borrowing rate, on a secured basis. The lease term includes option
renewal periods and early termination payments when it is reasonably certain that the Company will exercise those rights. The initial
measurement of the right-of-use asset is equal to the initial lease liability plus any initial direct costs and prepayments, less
any lease incentives.
The primary impact of applying ASC Topic 842 is the initial
recognition of approximately $0.4 million of operating lease liabilities, and approximately $0.4 million of corresponding right-of-use
assets, on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under
ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained
earnings or other components of equity recognized as of January 1, 2019. The Company does not have finance lease arrangements as
of December 31, 2019. See Note 14 for further discussion.
Payments made under operating leases are charged to the consolidated
statements of operations and comprehensive income (loss) on a straight-line basis over the lease period.
Earnings (loss) per Share
Basic earnings (loss) per common share is computed by dividing
net earnings (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the
sum of the weighted average number of common shares outstanding and dilutive potential common shares during the period. Potentially
dilutive common shares consist of common shares warrants using the treasury stock method. Common equivalent shares are not included
in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive.
Revenue Recognition
On January 1, 2018, the Company adopted ASC Topic 606, Revenue
from Contracts with Customers, using the modified retrospective method applied to those contracts that were not completed as of
January 1, 2018. Results for the reporting period beginning after January 1, 2018 are presented under ASC Topic 606, while prior
period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting under
ASC Topic 605.
Revenue for sale of products is derived from contracts with
customers, which primarily include the sale of pet food products. The Company recognizes revenue upon transfer of control of promised
goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for
those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment
or once delivery and risk of loss has transferred to the customer.
Revenue is recognized net of any taxes collected from customers
that are subsequently remitted to governmental authorities, including value-added tax (“VAT”), business tax, applicable
local government levies. At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for
estimated sales returns based upon historical experience and related terms of customer arrangements.
The allowance for sales returns recorded by the Company was
$0.06 million, $0.89 million and $0 for the years ended December 31, 2019, 2018 and 2017, respectively. The Company does not provide
rebate, pricing protection or any other concessions to its customers.
The Company elected to account for shipping and handling fees that
occur after the customer has obtained control of goods, for instance, free onboard shipping point arrangements, as a fulfilment
cost and accrues for such costs.
Management has concluded that the disaggregation level is the
same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard is measured
on the same basis as under the revenue standard. See Note 13 for information regarding revenue disaggregation by product lines,
marketing channels and countries.
Contract liabilities are recorded when consideration is received
from a customer prior to transferring the control of goods to the customer or other conditions under the terms of a sales contract.
As of December 31, 2019 and 2018, the Company recorded contract liabilities of $116,155 and $160,828, respectively, which were
presented as advances from customers on the accompanying consolidated balance sheets. During the years ended December 31,
2019 and 2018, the Company recognized $158,274 and $238,750 of contract liabilities as revenue, respectively.
Adoption Impact of ASC Topic 606 on the Opening Balance
Sheet as of January 1, 2018
The Company adopted ASC Topic 606 using the modified retrospective
method. Under the new standard the Company recognized revenue generated from products sold to certain E-commerce platforms when
the control has been transferred, generally at the time products are delivered and accepted by the E-commerce platforms rather
than when the price is determined and mutually agreed upon between the Company and the E-commerce platforms, usually at a later
time after products delivery, under ASC Topic 605. The cumulative impact of applying the new guidance to all contracts with customers
that were not completed as of January 1, 2018 was recorded as an adjustment to the opening retained earnings at the date of adoption.
The following table summarizes the adjustments made to accounts on the consolidated balance sheet as of January 1, 2018:
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
December 31,
2017
|
|
|
Revenue Recognition
|
|
|
January 1,
2018
|
|
Accounts receivable
|
|
$
|
1,932,924
|
|
|
$
|
245,788
|
|
|
$
|
2,178,712
|
|
Prepayments and other current assets
|
|
|
371,796
|
|
|
|
(24,357
|
)
|
|
|
347,439
|
|
Inventories
|
|
|
9,135,332
|
|
|
|
(174,912
|
)
|
|
|
8,960,420
|
|
Retained earnings
|
|
$
|
823,474
|
|
|
$
|
46,519
|
|
|
$
|
869,993
|
|
Impact of ASC Topic 606 on Consolidated Financial Statement
Line Items
The impact of adoption of ASC Topic 606 on our consolidated
balance sheet as of December 31, 2018 and our consolidated statement of operations and comprehensive loss and cash flows for the
year ended December 31, 2018 was as follows:
|
|
December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances without Adoption of ASC Topic 606
|
|
|
Effect of Change Higher (Lower)
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
845,800
|
|
|
$
|
765,098
|
|
|
$
|
80,702
|
|
Prepayments and other current assets
|
|
|
680,606
|
|
|
|
688,139
|
|
|
|
(7,533
|
)
|
Inventories, net
|
|
|
3,019,804
|
|
|
|
3,111,334
|
|
|
|
(91,530
|
)
|
Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
243,470
|
|
|
|
244,196
|
|
|
|
(726
|
)
|
Accumulated deficit
|
|
$
|
(13,349,232
|
)
|
|
$
|
(13,330,145
|
)
|
|
$
|
19,087
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances without Adoption of ASC Topic 606
|
|
|
Effect of Change Higher (Lower)
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
22,154,506
|
|
|
$
|
22,299,871
|
|
|
$
|
(145,365
|
)
|
Cost of revenue
|
|
|
26,278,300
|
|
|
|
26,358,059
|
|
|
|
(79,759
|
)
|
Net loss
|
|
$
|
14,219,265
|
|
|
$
|
14,153,659
|
|
|
$
|
65,606
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances without Adoption of ASC Topic 606
|
|
|
Effect of Change
|
|
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,219,265
|
)
|
|
$
|
(14,153,659
|
)
|
|
$
|
(65,606
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,302,573
|
|
|
$
|
1,140,682
|
|
|
$
|
161,891
|
|
Prepayments and other current assets
|
|
|
(291,336
|
)
|
|
|
(274,810
|
)
|
|
|
(16,526
|
)
|
Inventories, net
|
|
|
4,203,927
|
|
|
|
4,283,686
|
|
|
|
(79,759
|
)
|
Net cash used in operating activities
|
|
$
|
(2,173,742
|
)
|
|
$
|
(2,173,742
|
)
|
|
$
|
-
|
|
Government Grants
Government grants include cash subsidies as well as other subsidies
received from the PRC government by the subsidiaries of the Company. Such subsidies are generally provided as incentives from the
local government to encourage the expansion of local business. The government grant is recognized in the consolidated statements
of operations and comprehensive income (loss) when cash is received and the relevant performance criteria specified in the grant
are met.
Research and Development
Research and development costs are expensed as incurred. The
costs primarily consist of raw materials used and salaries paid for the development and improvement of the Company’s products.
Selling Expenses
Selling expenses consist primarily of advertising, salaries
and shipping and handling costs incurred during the selling activities. Advertising and transportation expenses are charged to
expense as incurred.
Shipping and handling expenses amounted to $287,385, $741,816
and $1,162,827 for the years ended December 31, 2019, 2018 and 2017, respectively.
Advertising costs amounted to $22,221, $150,154 and $215,399
for the years ended December 31, 2019, 2018 and 2017, respectively.
Income Taxes
The Company accounts for income taxes under the provision of
FASB ASC 740-10, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Comprehensive Income/Loss
ASC 220 “Comprehensive Income” established standards
for reporting and display of comprehensive income/loss, its components and accumulated balances. Components of comprehensive income/loss
include net income/loss and foreign currency translation adjustment. As of December 31, 2019, 2018 and 2017, the only component
of accumulated other comprehensive income/loss was foreign currency translation adjustment.
Loss Contingencies
The Company records accruals for certain of its outstanding
legal proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.
When a loss contingency is not both probable and estimable, the Company does not record an accrued liability but discloses the
nature and the amount of possible loss, if material, in the notes to the consolidated financial statements.
The Company reviews the developments in contingencies that could
affect the amount of the provisions that has been previously recorded, and the matters and related possible losses disclosed. The
Company makes adjustments to provisions and changes to its disclosures accordingly to reflect the impact of negotiations, settlements,
rulings, advice of legal counsel, and updated information. The assessment of whether a loss is probable or reasonably possible,
and whether the loss or a range of loss is estimable, often involves complex judgments about future events. Management is often
unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the proceedings
are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the industry-specific
complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution
of such matters, including eventual loss, fine, penalty or business impact, if any.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash, restricted cash, and accounts receivable arising from its normal business activities. The
Company places its cash in what it believes to be credit-worthy financial institutions. The Company establishes an allowance for
doubtful accounts primarily based upon the age of receivables and factors surrounding the credit risk of specific customers.
Related Parties Transactions
A related party is generally defined as (i) any person that
holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone
that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly
influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when
there is a transfer of resources or obligations between related parties. Related parties may be individuals or corporate entities.
Transactions involving related parties cannot be presumed to
be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist.
Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated
on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
Segment Reporting
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. The Company’s chief operating decision maker has been identified as the chief executive officer of the
Company who reviews financial information based on U.S. GAAP. The chief operating decision maker now reviews results analyzed by
marketing channel. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently,
the Company has determined that it has only one operating segment.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable recognition
threshold for credit impairments. The new guidance broadens the information that an entity must consider in developing its expected
credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past
events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to
apply methods that reasonably reflect its expectations of the credit loss estimate. ASU 2016-13 is effective for the Company beginning
on January 1, 2020. The Company does not expect any material impact on net assets and the consolidated statement of comprehensive
income (loss) as a result of adopting the new standard.
On December 18, 2019, the FASB issued ASU
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its overall
simplification initiative to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions
from Topic 740, Income Taxes, including (i) the exception to the incremental approach for intra period tax allocation; (ii) the
exception to accounting for basis differences when there are ownership changes in foreign investments; and (iii) the exception
in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also simplifies GAAP
in several other areas of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) transactions with
a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject
to tax; and (iv) enacted changes in tax laws in interim periods. ASU 2019-12 is effective for public entities for annual reporting
periods and interim periods within those years beginning after December 15, 2020, and early adoption is permitted. The Company
is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements and related disclosures.
Note 3 – RESTRICTED CASH
Restricted cash consisted of the followings:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Bank deposits used to pledge the bank acceptance notes and letters of credit issued by the Company (A)
|
|
$
|
695,548
|
|
|
$
|
1,307,485
|
|
Bank deposits judicially frozen by the court as a result of legal proceedings (including $695,548 of bank deposits used to pledge the bank acceptance notes)
|
|
$
|
890,403
|
|
|
$
|
-
|
|
Deposit in an escrow account (B)
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
(A)
|
The cash is restricted for use over the terms of the bank acceptance notes and letters of credit and was used directly to settle
the liabilities when the bank acceptance notes or letters of credit became due. As of December 31, 2019 and 2018, the Company had
notes payable of $908,008 and $2,462,044, and non-cancellable letters of credit of $0 and $63,000, respectively.
|
The notes payable issued during the years ended December
31, 2019 and 2018 were secured by the land use right and real property of Qingdao Saike Environmental Technology Co., Ltd., a
related party, real property of Rongfeng Cui, Chairman of the Board and former Chief Executive Officer (“CEO”) of
the Company, and Yanjuan Wang, Rongfeng Cui’s wife, restricted cash of RMB300,000 (approximately $43,000) from Qingdao Gaochuang
Technology Finance Guarantee Co., Ltd. (“Gaochuang”), a third party guarantee company, and guaranteed by Rongfeng
Cui and Gaochuang. Effective August 2, 2019, Rongfeng Cui ceased to be Company’s CEO and Dandan Liu was appointed as the
CEO in his stead.
(B)
|
In connection with its initial public offering, the Company agreed to deposit $500,000 in a non-interest bearing escrow account
to satisfy the potential indemnification obligation for two years following September 25, 2017. At the request of the Company,
the deposit remained in the escrow account as of December 31, 2019. The Company received the deposit in full during the subsequent
period.
|
Note
4 – ACCOUNTS RECEIVABLE, NET AND ACCOUNTS RECEIVABLE-RELATED PARTIES, NET
Accounts
receivable, net and accounts receivable - related parties, net, consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accounts receivable
|
|
$
|
507,817
|
|
|
$
|
845,800
|
|
Less: Allowance for doubtful accounts
|
|
|
(486,160
|
)
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
21,657
|
|
|
$
|
845,800
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable - related parties
|
|
$
|
126,089
|
|
|
$
|
435,513
|
|
Less: Allowance for doubtful accounts
|
|
|
(126,089
|
)
|
|
|
-
|
|
Accounts receivable - related parties, net
|
|
$
|
-
|
|
|
$
|
435,513
|
|
The
changes in allowance for doubtful accounts consisted of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of the year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Provision for doubtful accounts
|
|
|
617,496
|
|
|
|
-
|
|
|
|
-
|
|
Translation adjustment
|
|
|
(5,247
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance, end of the year
|
|
$
|
612,249
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note
5 - INVENTORIES
As
of December 31, 2019 and 2018, inventories consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
645,002
|
|
|
$
|
857,462
|
|
Work in process
|
|
|
146,345
|
|
|
|
2,313,763
|
|
Finished goods
|
|
|
195,586
|
|
|
|
1,448,854
|
|
Total
|
|
|
986,933
|
|
|
|
4,620,079
|
|
Inventory write-down
|
|
|
(518,119
|
)
|
|
|
(1,668,508)
|
|
Translation adjustments
|
|
|
4,402
|
|
|
|
68,233
|
|
Inventories, net
|
|
$
|
473,216
|
|
|
$
|
3,019,804
|
|
The
work in process and finished goods held by third parties were $919,390 and $0, respectively, as of December 31, 2018. There was
no inventory held by third party as of December 31, 2019.
The
Company recorded write-down of potentially obsolete or slow-moving inventories of $518,119 and $1,501,510, and lower of cost or
market adjustment of $0 and $166,998 for the years ended December 31, 2019 and 2018, respectively.
Note
6 – PROPERTY, PLANT AND EQUIPMENT, NET
As
of December 31, 2019 and 2018, property, plant and equipment consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Machinery equipment
|
|
$
|
2,689,763
|
|
|
$
|
3,257,452
|
|
Electronic equipment
|
|
|
29,132
|
|
|
|
66,632
|
|
Office equipment
|
|
|
236,008
|
|
|
|
237,264
|
|
Vehicles
|
|
|
40,947
|
|
|
|
75,114
|
|
Buildings
|
|
|
5,917,815
|
|
|
|
6,234,238
|
|
Leasehold Improvement
|
|
|
307,786
|
|
|
|
289,186
|
|
Total property, plant and equipment
|
|
|
9,221,451
|
|
|
|
10,159,886
|
|
Less: accumulated depreciation
|
|
|
(1,852,348
|
)
|
|
|
(1,749,361
|
)
|
Less: impairment loss
|
|
|
(813,344
|
)
|
|
|
-
|
|
Translation adjustments
|
|
|
6,910
|
|
|
|
-
|
|
Property, plant and equipment, net
|
|
$
|
6,562,669
|
|
|
$
|
8,410,525
|
|
Depreciation
expense for the years ended December 31, 2019, 2018 and 2017 was $543,311, $388,256 and $349,887, respectively.
As of December 31, 2019 and 2018, certain property, plant and
equipment with net book value of $5,758,784 and $6,652,037 was pledged as collateral under certain loan arrangements, respectively
(also see Note 8).
As
of December 31, 2019, certain buildings with net book value of $5,446,348 was judicially seized by the court.
Note
7 – LAND USE RIGHTS
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Land use rights
|
|
$
|
1,028,041
|
|
|
$
|
1,041,736
|
|
Accumulated amortization
|
|
|
(54,817
|
)
|
|
|
(27,198
|
)
|
Land use rights, net
|
|
$
|
973,224
|
|
|
$
|
1,014,538
|
|
During
the years ended December 31, 2019, 2018 and 2017, amortization expense amounted to $28,217, $7,099 and $14,283, respectively.
As of December 31, 2019 and 2018, land use right with net book
value of $793,503 and $820,343, respectively, was pledged as collateral under certain loan arrangements (also see Note 8).
Estimated
future amortization expense for land use rights is as follows:
Years ended December 31,
|
|
Amortization expense
|
|
|
|
|
|
2020
|
|
$
|
21,043
|
|
2021
|
|
|
21,043
|
|
2022
|
|
|
21,043
|
|
2023
|
|
|
21,043
|
|
2024
|
|
|
21,043
|
|
Thereafter
|
|
|
868,009
|
|
|
|
$
|
973,224
|
|
Note
8 – SHORT TERM LOANS
The
Company’s loans consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Short term loans
|
|
$
|
7,624,061
|
|
|
$
|
8,263,038
|
|
Total
|
|
$
|
7,624,061
|
|
|
$
|
8,263,038
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Secured
|
|
$
|
7,624,061
|
|
|
$
|
8,021,447
|
|
Unsecured
|
|
|
-
|
|
|
|
241,591
|
|
Total
|
|
$
|
7,624,061
|
|
|
$
|
8,263,038
|
|
For
the years ended December 31, 2019 and 2018, the Company entered into various loans agreements with various Chinese banks, other
entities and individuals for an aggregated amount of $1,046,275 and $8,400,090, respectively, to facilitate its business operations.
Interest rate for the loans outstanding during the years ended December 31, 2019 and 2018 ranged from 2.46% to 25% and from 2.46%
to 25% per annum, respectively.
During the year ended December 31, 2019, the Company did not make
repayment on certain notes payables as scheduled, and the bank who issued such notes payables repaid on behalf of the Company
to the holders according to the terms of the agreement. As a result, the unpaid notes payables were reclassified to loan payable
to the bank and the amount was included in short term loans on the consolidated balance sheet as of December 31, 2019. The bank
has commenced legal proceedings against the Company. See further discussions in Note 15.
As
of December 31, 2019, corporate or personal guarantees provided for those loans were as follows:
$
|
311,728
|
|
|
Pledged by real property and land use right of Rongfeng Cui; Guaranteed by Rongfeng Cui, Yanjuan Wang and Gaochuang
|
|
|
|
|
|
$
|
1,420,757
|
|
|
Pledged by real property of the Company and real property of Rongfeng Cui; Guaranteed by Rongfeng Cui and Yanjuan Wang
|
|
|
|
|
|
$
|
2,848,737
|
|
|
Pledged by real property and land use right of the Company; Guaranteed by Rongfeng Cui and Yanjuan Wang
|
|
|
|
|
|
$
|
2,870,264
|
|
|
Guaranteed by Rongfeng Cui and Yanjuan Wang
|
|
|
|
|
|
$
|
172,575
|
|
|
Pledged by restricted cash of RMB300,000 (approximately $43,000), four patents and certain equipment of the Company; Guaranteed by Rongfeng Cui, Yanjuan Wang and Qingdao Saike Environmental Technology Co., Ltd.
|
On
December 20, 2018, the Company entered into a loan agreement with China Construction Bank (“CCB”) to borrow RMB21,450,000
(approximately $3,119,000). The loan bears an annual interest rate of 5.39% and is due in 84 months. Pursuant to the loan agreement,
the proceeds of the loan can only be used in the purchase of manufacturing facility and the associated land use right located
at Lingang Economic Development Zone, Huangdao District, Qingdao, Shandong Province, PRC.
The
loan agreement between the Company and CCB contains a number of covenants and restrictions. Such covenants and restrictions include,
but are not limited to, financial ratios. Unless a breach is remediated or a waiver is obtained, a breach of such covenants and
restrictions generally permits lender to demand accelerated repayment of principal and interest.
As of December 31, 2018, the Company did not meet the financial
ratios set forth in the debt covenants. Starting December 2019, the Company did not make repayment as scheduled, and was in default
on the loan as of December 31, 2019. In January 2020, CCB filed litigation against the Company. In April 2020, the court has ruled
that, among others, the Company repay CCB the principal and interests in full within 10 days from the date of ruling. As a result,
the corresponding loan was reclassified as current liability and included in short term loans on the consolidated balance sheets
as of December 31, 2019 and 2018. As of the date of this filing, the Company has not fulfilled the court order.
The interest expenses for the above loans were $746,504, $138,010
and $82,234 for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company’s repayments of substantially all its outstanding
short term loans were delinquent on or around November 2019, and the Company is involved in a number of lawsuits filed by various
lenders. See further discussions in Note 15.
Note
9 – RELATED PARTY TRANSACTIONS
The
related parties had transactions for the years ended December 31, 2019, 2018 and 2017 consist of the following:
Name of Related Party
|
|
Nature of Relationship at December 31, 2019
|
Dandan Liu
|
|
Principal shareholder, Chief Executive Officer (“CEO”)
|
|
|
|
Rongfeng Cui
|
|
Chairman of the Board and Former CEO. Rongfeng Cui ceased to be
the CEO of the Company effective August 2, 2019.
|
|
|
|
Rongbing Cui
|
|
Former Chief Financial Officer (“CFO”), Rongfeng Cui’s brother
|
|
|
|
Rongjie Cui
|
|
Rongfeng Cui’s brother
|
|
|
|
Yanjuan Wang
|
|
Rongfeng Cui’s wife
|
|
|
|
Runrang Cui
|
|
Father of Rongfeng Cui, and owner of Huangdao Dinggezhuang Kangkang Family Farm
|
|
|
|
Xiaomei Wang
|
|
Rongbing Cui’s wife
|
|
|
|
Wenbin Pang
|
|
Former Financial Director of the Company
|
|
|
|
Yan Fu
|
|
Former Sales Vice President
|
|
|
|
Jichang Zhang
|
|
Vice President of Public Affairs
|
|
|
|
Fucheng Sun
|
|
Former Chief R&D Officer
|
|
|
|
Yuxiang Qi
|
|
Dandan Liu’s mother
|
|
|
|
Tide (Shanghai) Industrial Co. Ltd. (“Tide”)
|
|
Owned by Rongfeng Cui and Yanjuan Wang
|
|
|
|
Qingdao Like Pet Supplies Co., Ltd. (“Like”)
|
|
Rongfeng Cui served as CEO, and Shuhua Cui, sister of Rongfeng Cui, served as the legal person. On May 26, 2016, both Rongfeng Cui and Shuhua Cui resigned from their positions, but still have significant influence on Like.
|
|
|
|
Qingdao Saike Environmental Technology Co., Ltd. (“Saike”)
|
|
Owned by Rongfeng Cui and Yanjuan Wang
|
|
|
|
Huangdao Ding Ge Zhuang Kangkang Family Farm (“Kangkang Family Farm”)
|
|
Controlled by Rongfeng Cui’s father
|
|
|
|
TDH Group BVBA
|
|
A Belgium company solely owned by Rongfeng Cui prior to November 30, 2018; a wholly owned subsidiary of the Company since November 30, 2018
|
|
|
|
TDH JAPAN
|
|
A Japanese company solely owned by Rongfeng Cui prior to November 30, 2018; a wholly owned subsidiary of the Company since November 30, 2018
|
|
|
|
Qingdao Yinhe Jiutian Information Technology
Co., Ltd. (“Yinhe Jiutian”)
|
|
Solely owned by Rongbing Cui
|
|
|
|
Huangdao Hanyinhe Software Development Center Co., Ltd. (“Hanyinhe”)
|
|
Solely owned by Xiaomei Wang
|
|
|
|
Zhenyu Trading (Qingdao) Co., Ltd. (“Zhenyu”)
|
|
Noncontrolling shareholder of Yichong prior to September 27, 2019; Sole shareholder of Yichong after September 27, 2019
|
|
|
|
Beijing Quanmin Chongai Information Technology Co., Ltd. (“Quanmin Chongai”)
|
|
Rongbing Cui serves as supervisor of Quanmin Chongai
|
Due
from related parties, net
Due
from related parties, net consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Tide
|
|
$
|
43
|
|
|
$
|
44
|
|
Rongfeng Cui
|
|
|
41,673
|
|
|
|
43,510
|
|
Less: Allowance for doubtful accounts
|
|
|
(41,716
|
)
|
|
|
-
|
|
Due from related parties, net
|
|
$
|
-
|
|
|
$
|
43,554
|
|
The balance of due from Tide represents operating expenses paid
by the Company on behalf of Tide. The balances of due from Rongfeng Cui represent overseas trade receivables collected by him on
behalf of the Company.
Due
to related parties
Due
to related parties consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Saike
|
|
$
|
-
|
|
|
$
|
16,470
|
|
Phillip Zou
|
|
|
-
|
|
|
|
1,000
|
|
Rongbing Cui
|
|
|
10,046
|
|
|
|
-
|
|
Rongfeng Cui
|
|
|
29,341
|
|
|
|
27,676
|
|
Total
|
|
$
|
39,387
|
|
|
$
|
45,146
|
|
The
balance of due to related parties represents expenses paid by related parties on behalf of the Company as well as advances the
Company obtained from related parties for working capital purposes. The amounts owed to the related parties are unsecured, non-interest
bearing and payable on demand.
Short
term loans from related parties
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Rongfeng Cui
|
|
$
|
751,029
|
|
|
$
|
84,831
|
|
Dandan Liu
|
|
|
-
|
|
|
|
440,638
|
|
Yuxiang Qi
|
|
|
112,778
|
|
|
|
436,275
|
|
Rongbing Cui
|
|
|
-
|
|
|
|
31,993
|
|
Wenbin Pang
|
|
|
-
|
|
|
|
29,085
|
|
Yan Fu
|
|
|
28,703
|
|
|
|
29,085
|
|
Rongjie Cui
|
|
|
-
|
|
|
|
4,363
|
|
Jichang Zhang
|
|
|
-
|
|
|
|
2,909
|
|
Fucheng Sun
|
|
|
-
|
|
|
|
2,181
|
|
Total
|
|
$
|
892,510
|
|
|
$
|
1,061,360
|
|
The
Company borrowed unsecured short term loans from related parties in the amount of $4,791,403 and $1,176,690, during the years
ended December 31, 2019 and 2018, respectively. Interest rate for the loans outstanding during the year ended December 31, 2019
ranged from 0% to 25% per annum. The Company made repayment in the amount of $1,080,947 and $60,490, during the years ended December
31, 2019 and 2018, respectively.
Modification
of Loans from related party
In January 2018, the Company entered into a loan agreement with
Dandan Liu. In May 2018, the agreement was amended to, among others, reclassify unpaid interest payable to the principal of the
loan, resulting in an increase of principal from RMB3,000,000 (approximately $466,000) to RMB3,030,000 (approximately $471,000)
and increase the interest rate from 3% to 15%. Interest rate will be 24% for the period past due. In March 2019, the agreement
was further amended to, among others, reclassify unpaid interest payable to the principal of the loan, resulting in an increase
of principal to RMB3,484,500 (approximately $539,000) and extend the maturity date from January 2019 to May 2019. The loan has
been repaid in full during the year ended December 31, 2019.
In June 2018, the Company entered into a loan agreement with Yuxiang
Qi. Interest rate was 15% during the loan period and 24% for the period past due. In March 2019, the agreement was amended to,
among others, reclassify unpaid interest payable to the principal of the loan, resulting in an increase of principal from RMB3,000,000
(approximately $462,000) to RMB3,405,000 (approximately $522,000) and extend the maturity date from December 2018 to May 2019.
As of December 31, 2019, the Company was in default of this loan, and was subject to 24% annual interest rate.
The
Company analyzed the amendments under ASC 470-50 and concluded that these amendments did not qualify for debt modification.
Long
term loans from related party
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Rongfeng Cui
|
|
$
|
-
|
|
|
$
|
286,139
|
|
Less: Rongfeng Cui - current portion
|
|
|
-
|
|
|
|
68,673
|
|
Non-current portion
|
|
$
|
-
|
|
|
$
|
217,466
|
|
Long term loans from related party represent loans assumed by the
Company in connection with acquisition of TDH Group BVBA during the year ended December 31, 2018. In March 2018, TDH Group BVBA
borrowed non-interest bearing, unsecured long term loans from Rongfeng Cui in the aggregate amount of €250,000 (approximately
$288,000), of which €60,000 (approximately $69,000), €60,000 (approximately $69,000), €60,000 (approximately $69,000),
€60,000 (approximately $69,000), €10,000 (approximately $11,500) and $0 is due in the years ended December 31, 2019,
2020, 2021, 2022, 2023 and thereafter, respectively. The Company did not make any repayment to Rongfeng Cui during the year ended
December 31, 2019 nor subsequently, such default may lead to callable of the loan at any time by Rongfeng Cui. As a result, the
corresponding loan was classified as current liability and included in short term loans – related parties as of December
31, 2019. The Company is aware of the possible penalty and/or other consequence due to the default, however, no reasonable estimate
can be made at this time.
The interest expenses for loans from related parties amounted to
$632,251, $95,091 and $0 for the years ended December 31, 2019,2018 and 2017, respectively.
Sales
to related parties, purchases from related parties and services provided by related parties
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
|
Like
|
|
$
|
-
|
|
|
$
|
1,167,933
|
|
|
$
|
506,495
|
|
Zhenyu
|
|
|
5,778
|
|
|
|
-
|
|
|
|
-
|
|
Quanmin Chongai
|
|
|
187,063
|
|
|
|
-
|
|
|
|
-
|
|
Liujiayi
|
|
|
-
|
|
|
|
25,832
|
|
|
|
-
|
|
TDH Group BVBA
|
|
|
-
|
|
|
|
325,766
|
|
|
|
-
|
|
Total Sales
|
|
$
|
192,841
|
|
|
$
|
1,519,531
|
|
|
$
|
506,495
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
Yinhe Jiutian
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,059
|
|
Kangkang Family Farm
|
|
|
-
|
|
|
|
-
|
|
|
|
30,191
|
|
Zhenyu
|
|
|
-
|
|
|
|
28,872
|
|
|
|
163,127
|
|
TDH Group BVBA
|
|
|
-
|
|
|
|
2,689
|
|
|
|
-
|
|
Total Purchases
|
|
$
|
-
|
|
|
$
|
31,561
|
|
|
$
|
198,377
|
|
SERVICE PROVIDED BY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanyinhe
|
|
$
|
-
|
|
|
$
|
9,373
|
|
|
$
|
-
|
|
TDH Group BVBA
|
|
|
-
|
|
|
|
278,396
|
|
|
|
-
|
|
TDH JAPAN
|
|
|
-
|
|
|
|
134,181
|
|
|
|
-
|
|
Total Services Consumed
|
|
$
|
-
|
|
|
$
|
421,950
|
|
|
$
|
-
|
|
For the years ended December 31, 2019, 2018 and 2017, the cost of
revenue in connection with sales to related parties were $178,636, $1,448,533 and $399,177, respectively, which were included in
cost of revenue-related parties in the accompanying consolidated statements of operations and comprehensive income (loss).
During the years ended December 31, 2019, 2018 and 2017, inventories
purchased from related parties in the amount of $0, $26,698 and $44,502, respectively, were used and sold and included in cost
of revenue in the accompanying consolidated statements of operations and comprehensive income (loss).
The
Company purchased financial application software from Yinhe Jiutian in the amount of $0, $0 and $5,059 during the years ended
December 31, 2019, 2018 and 2017, respectively.
Accounts
receivables from related parties, net
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Like
|
|
$
|
96,580
|
|
|
$
|
435,513
|
|
Quanmin Chongai
|
|
|
29,509
|
|
|
|
-
|
|
Less: Allowance for doubtful accounts
|
|
|
(126,089
|
)
|
|
|
-
|
|
Accounts receivables – related parties, net
|
|
$
|
-
|
|
|
$
|
435,513
|
|
Accounts
payable to related parties
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Yinhe Jiutian
|
|
$
|
112,069
|
|
|
$
|
113,562
|
|
Kangkang Family Farm
|
|
|
4,705
|
|
|
|
4,768
|
|
Zhenyu Trading
|
|
|
60
|
|
|
|
6,796
|
|
Total
|
|
$
|
116,834
|
|
|
$
|
125,126
|
|
Leases
from related parties
The
Company entered into various operating lease agreements for certain premises with its related parties. See Note 14.
Note
10 – INCOME TAXES
British
Virgin Islands (“BVI”)
Under
the current laws of BVI, TDH Holdings is not subject to tax on income or capital gain. In addition, payments of dividends by the
Company to their shareholders are not subject to withholding tax in the BVI.
Hong
Kong
The
Company’s subsidiary, TDH HK, is incorporated in Hong Kong and has no operating profit or tax liabilities during the period.
TDH HK is subject to tax at 16.5% on the assessable profits arising in or derived from Hong Kong.
United
State
The
Company’s subsidiary, TDH Petfood LLC, is incorporated in the State of Nevada and is subject to the United States Federal
income tax at a statutory rate of 21%. No provision for the U.S. Federal income tax has been made as TDH Petfood LLC had no taxable
income in this jurisdiction for the reporting periods.
Japan
The
Company’s subsidiary, TDH JAPAN, is incorporated in Japan and has no operating profit or tax liabilities during the reporting
period. TDH JAPAN is subject to tax at 21.421% on the assessable profits arising in or derived from Japan.
Belgium
The
Company’s subsidiary, TDH Group BVBA, is incorporated in Belgium and has no operating profit or tax liabilities during the
reporting period. TDH Group BVBA is subject to tax at 29.58% on the assessable profits arising in or derived from Belgium.
PRC
The
Company’s subsidiaries incorporated in the PRC are subject to PRC Enterprise Income Tax (“EIT”) on the taxable
income in accordance with the relevant PRC income tax laws. On March 16, 2007, the National People’s Congress enacted a
new enterprise income tax law, which took effect as of January 1, 2008. The law applies a uniform 25% enterprise income tax rate
to both foreign invested enterprises and domestic enterprises. According to the tax law, entities that qualify as high and new
technology enterprises (“HNTE”) supported by the PRC government are allowed a 15% preferential tax rate instead of
the uniform tax rate of 25%.
On December 2, 2016, Tiandihui was granted the HNTE designation
jointly by Qingdao science and Technology Bureau, Qingdao Municipal Finance Bureau, Qingdao Municipal State Taxation Bureau, Qingdao
Local Taxation Bureau, and is qualified for a preferential tax rate of 15% for the years ended December 31, 2017 and 2018. Tiandihui
is subject to the 25% EIT rate for the year ended December 31, 2019.
The
provision for income taxes consists of the following:
|
|
For
the Years Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(46,521
|
)
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,581
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(55,102
|
)
|
The
reconciliations of the statutory income tax rate and the Company’s effective income tax rate are as follows:
|
|
For the Years Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
HK statutory income tax rate
|
|
|
16.5
|
%
|
|
|
16.50
|
%
|
|
|
16.50
|
%
|
PRC statutory income tax rate difference
|
|
|
8.50
|
%
|
|
|
-1.50
|
%
|
|
|
-1.50
|
%
|
Effect of additional deduction on R&D expense and salary for disabled workers
|
|
|
0.08
|
%
|
|
|
0.87
|
%
|
|
|
-127.75
|
%
|
Effect of expenses not deductible for tax purposes
|
|
|
-0.48
|
%
|
|
|
-0.05
|
%
|
|
|
1.10
|
%
|
Valuation allowance recognized with respect to the loss in subsidiaries
|
|
|
-24.60
|
%
|
|
|
-15.82
|
%
|
|
|
19.83
|
%
|
Total
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-91.82
|
%
|
Accounting
for Uncertainty in Income Taxes
The
tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC
after those enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results
are subject to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s
PRC entities’ tax filings, which may lead to additional tax liabilities.
ASC
740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach.
The management evaluated the Company’s tax positions and concluded that no provision for uncertainty in income taxes was
necessary as of December 31, 2019 and 2018.
Deferred
tax assets and liabilities as of December 31, 2019 and 2018 are composed of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets, non-current
|
|
|
|
|
|
|
Net operating loss carrying forward
|
|
$
|
5,269,546
|
|
|
$
|
2,115,514
|
|
Total deferred tax assets
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(5,269,546
|
)
|
|
|
(2,115,514
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
1,036
|
|
|
$
|
4,929
|
|
Total
|
|
$
|
1,036
|
|
|
$
|
4,929
|
|
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible or are utilized.
Note
11 – STOCKHOLDERS’ EQUITY
Common
shares
On
December 31, 2016, a total of 371,092 common shares were issued at $2.5 per share to Fulcan Capital Partners, LLC, Xiumei
Lan and Zhonghua Liu with cash proceeds of $827,730 received during the year ended December 31, 2017, and the remaining proceeds
of $100,000 received during the year ended December 31, 2018.
On
September 25, 2017, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “PETZ”.
The Company offered 1,523,750 common shares at $4.25 per share. Net proceeds raised by the Company from the initial public offering
amounted to $5,542,047 after deducting underwriting discounts and commissions and other offering expenses.
In
November 2018, the Company issued 156,130 and 936,782 common shares to acquire 100% equity interest in TDH Japan and TDH Group
BVBA, respectively.
On
January 31, 2019, a total of 2,000,000 common shares were issued at $0.5 per share to Zuhua Zou with cash proceeds of $1,000,000
received during the year ended December 31, 2019.
The Company entered into stock subscription agreements in August
2019, pursuant to which the Company agreed to sell 33,333,333 shares to a group of investors for an aggregate purchase price of
$10,000,000, or $0.3 per share. A total of 8,300,000 common shares were issued to three investors with cash proceeds of $2,490,000
received during the year ended December 31, 2019, and 25,033,333 common shares were issued to Dandan Liu, CEO with $3,270,000
collected in cash and the remaining subscription receivable of $4,240,000 settled with the outstanding loan payable to the CEO.
Statutory
reserve
As
of December 31, 2019 and 2018, the Company had statutory reserve in the amount of $160,014. In accordance with the relevant laws
and regulations of the PRC, the Company’s PRC subsidiaries are required to set aside at least 10% of their respective after-tax
net profits each year determined in accordance with PRC GAAP and if any, to fund the statutory reserve until the balance of the
reserve reaches 50% of their respective registered capital. The statutory reserve is not distributable in the form of cash dividends
and can be used to make up cumulative prior year losses.
Restricted
net assets
As
a result of the PRC laws and regulations, the PRC entities are restricted from transferring a portion of their net assets to the
Company. Amounts restricted included additional paid-in capital and statutory reserves of the Company’s PRC subsidiaries.
As
of December 31, 2019 and 2018, total restricted net assets were $10,628,933 and $6,575,128, respectively.
Note
12 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Customers
For
the years ended December 31, 2019, 2018 and 2017, customers accounting for 10% or more of the Company’s net revenue were
as follows:
|
|
For
the Years Ended December
31,
|
|
Customer
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
12.35
|
%
|
|
|
*
|
%
|
|
|
*
|
%
|
Customer B
|
|
|
*
|
%
|
|
|
*
|
%
|
|
|
10.89
|
%
|
Customer G
|
|
|
12.02
|
%
|
|
|
*
|
%
|
|
|
*
|
%
|
*
Less than 10%
As of December 31, 2019, Customer H, Customer I, Customer J
and Customer K accounted for 36.88%, 26.51%, 25.61% and 11.00% of the Company’s total current outstanding accounts receivable,
respectively.
As of December 31, 2018, Customer E, and Customer F accounted
for 21.69% and 33.92% of the Company’s total current outstanding accounts receivable, respectively.
Suppliers
For
the years ended December 31, 2019, 2018 and 2017, suppliers accounting for 10% or more of the Company’s purchase were as
follows:
|
|
For
the Years Ended December 31,
|
|
Supplier
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Supplier
A
|
|
|
14.16
|
%
|
|
|
*
|
%
|
|
|
10.65
|
%
|
Supplier
B
|
|
|
11.99
|
%
|
|
|
*
|
%
|
|
|
13.23
|
%
|
Supplier
C
|
|
|
12.76
|
%
|
|
|
*
|
%
|
|
|
*
|
%
|
*
Less than 10%
As
of December 31, 2019, Supplier B’s balance accounted for 30.30% of the Company’s total accounts payable and notes
payable.
As
of December 31, 2018, no supplier’s balance accounted for over 10% of the Company’s total accounts payable and notes
payable.
Note
13 – SEGMENTAL AND REVENUE ANALYSIS
The
Company is solely engaged in the business of manufacturing and selling of pet food. Since the nature, the production processes
and the marketing channel of the products are substantially similar, the Company is considered as operating in a single reportable
segment with revenues derived from multiple product lines, marketing channels and countries. Certain entity-wide disclosures relating
to revenues for the years ended December 31, 2019, 2018 and 2017 are as follows:
The
net revenue generated from different marketing channels consists of the following:
|
|
For the Years Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Overseas sales
|
|
$
|
9,995,136
|
|
|
$
|
15,832,362
|
|
|
$
|
21,190,063
|
|
Domestic sales
|
|
|
2,711,445
|
|
|
|
4,102,457
|
|
|
|
2,086,462
|
|
Electronic commerce
|
|
|
83,779
|
|
|
|
3,800,668
|
|
|
|
5,734,121
|
|
Less: Sale tax and addition
|
|
|
(142,105
|
)
|
|
|
(61,450
|
)
|
|
|
(31,135
|
)
|
Total net revenue
|
|
$
|
12,648,255
|
|
|
$
|
23,674,037
|
|
|
$
|
28,979,511
|
|
The
net revenue generated from different product lines is set forth as following:
|
|
For the Years Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Pet chews
|
|
$
|
6,469,755
|
|
|
$
|
6,271,777
|
|
|
$
|
9,614,426
|
|
Dried pet snacks
|
|
|
4,617,742
|
|
|
|
13,611,010
|
|
|
|
14,851,868
|
|
Wet canned pet food
|
|
|
1,310,001
|
|
|
|
2,782,382
|
|
|
|
3,035,196
|
|
Dental health snacks
|
|
|
305,452
|
|
|
|
495,581
|
|
|
|
856,875
|
|
Baked pet biscuits
|
|
|
87,410
|
|
|
|
95,169
|
|
|
|
8,226
|
|
Others
|
|
|
-
|
|
|
|
479,568
|
|
|
|
644,055
|
|
Less: Sales tax and addition
|
|
|
(142,105
|
)
|
|
|
(61,450
|
)
|
|
|
(31,135
|
)
|
Total net revenue
|
|
$
|
12,648,255
|
|
|
$
|
23,674,037
|
|
|
$
|
28,979,511
|
|
The
net revenue generated from different countries is set forth as following:
|
|
For the Years Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
South Korea
|
|
$
|
1,335,791
|
|
|
$
|
2,870,998
|
|
|
$
|
5,397,982
|
|
China
|
|
|
2,662,247
|
|
|
|
6,569,382
|
|
|
|
6,553,715
|
|
United Kingdom
|
|
|
1,573,546
|
|
|
|
2,415,043
|
|
|
|
3,213,303
|
|
Germany
|
|
|
2,062,110
|
|
|
|
2,522,149
|
|
|
|
3,585,535
|
|
Other countries
|
|
|
5,156,666
|
|
|
|
9,357,915
|
|
|
|
10,260,111
|
|
Less: Sales tax and addition
|
|
|
(142,105
|
)
|
|
|
(61,450
|
)
|
|
|
(31,135
|
)
|
Total net revenue
|
|
$
|
12,648,255
|
|
|
$
|
23,674,037
|
|
|
$
|
28,979,511
|
|
“Other
countries” are comprised of all countries whose revenue, individually, was less than 10% of the Company’s total revenue.
Substantially
all of the Company’s long-lived assets are located in the PRC.
Note
14 – OPERATING LEASES
The
Company has entered into multiple lease agreements for the lease of premises for factory buildings, office spaces and warehouses
including several lease agreements with related parties. The remaining lease term of the Company’s leases ranges from approximately
0.5 to 8 years. The estimated effect of lease renewal and termination options, as applicable, was included in the consolidated
financial statements in current period.
The
components of lease expense were as follows:
|
|
For the year ended
December 31,
|
|
|
|
2019
|
|
|
|
|
|
Operating lease cost
|
|
$
|
107,316
|
|
Short-term lease cost
|
|
|
22,001
|
|
Total lease cost
|
|
$
|
129,317
|
|
Rental
expense, including expenses incurred from operating leases with related parties, for the years ended December 2018 and 2017 was
$218,414 and $163,497, respectively.
Supplemental
cash flow information related to leases was as follows:
|
|
For
the year ended December 31,
|
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flow from operating leases
|
|
$
|
1,737
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
7.60
years
|
|
Weighted-average discount rate
|
|
|
5.39
|
%
|
Supplemental
balance sheet information related to leases was as follows:
|
|
December 31,
2019
|
|
Operating lease right-of-use assets, related parties
|
|
$
|
286,670
|
|
Operating lease liability-related parties, current
|
|
|
137,347
|
|
Operating lease liabilities-related party, non-current
|
|
|
286,875
|
|
Total operating lease liabilities
|
|
$
|
424,222
|
|
The
following table summarizes the maturity of our operating lease liabilities as of December 31, 2019:
2020
|
|
$
|
137,347
|
|
2021
|
|
|
44,844
|
|
2022
|
|
|
47,535
|
|
2023
|
|
|
50,387
|
|
2024
|
|
|
53,410
|
|
Thereafter
|
|
|
147,505
|
|
Total
|
|
|
481,028
|
|
Less imputed interest
|
|
|
(56,806
|
)
|
Total operating lease liabilities
|
|
$
|
424,222
|
|
NOTE
15 – COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The
Company provides counter guarantee to Gaochuang including a cash deposit of RMB300,000 (approximately $43,000) and asset pledge
of four invention patents and certain property, plant and equipment with net book value of $312,436 and $850,541 as of December
31, 2019 and 2018, respectively, in consideration of the guarantees provided by Gaochuang for certain notes payables financed
by the Company during the years ended December 31, 2019 and 2018 (the “Counter Guarantee”). The Counter Guarantee
arrangement further includes an unlimited joint liability guarantee provided by Rongfeng Cui and Yanjuan Wang, and a third party
guarantee provided by Saike.
During the year ended December 31, 2019, the Company did not
make repayment on certain notes payables as scheduled, and Gaochuang, as one of the guarantors, repaid on behalf of the Company
to the holders of such notes payables. As a result, the unpaid notes payables were reclassified to loan payable to Gaochuang and
the amount was included in short term loans on the consolidated balance sheet as of December 31, 2019. The loan payable to Gaochuang
was pledged and guaranteed by the aforementioned assets and guarantors, respectively, under the counter guarantee.
Upon
the adoption of ASC 842 on January 1, 2019, future minimum lease payments for operating lease commitments as of December 31, 2019
are disclosed in Note 14.
CONTINGENCIES
The Company is involved in a number of claims pending in various
courts, in arbitration, or otherwise unresolved as of December 31, 2019 or at the date of this filing. These claims are substantially
related to non-payment of wage payables, non-payment of vendor payables and non-payment of loans and notes payables. Adverse results
in these claims may include awards of damages and may also result in, or even compel, a change in the Company’s business
practices, which could impact the Company’s future financial results.
|
I)
|
Labor
arbitration claims by former employees
|
During the year ended December 31, 2019, certain former employees
of the Company commenced arbitration proceedings against the Company under applicable labor rules and standards, claiming, among
others, lost wages and/or severance payments. The Company is currently litigating, mediating and/or settling the claims. The Company
has accrued approximately $0.4 million contingent liabilities in other current liabilities on the consolidated balance sheet as
of December 31, 2019 and recognized contingent losses of approximately $0.4 million for the year ended December 31, 2019 upon the
estimate of the management of the Company together with the trail counsel of these cases.
|
II)
|
Legal
claims by vendors
|
During the year ended December 31, 2019, the Company has been
the subject of multiple lawsuits by its raw material suppliers, printing and packaging suppliers, transportation companies and
other vendors due to its non-payment of various invoices for vendor services rendered. The claims pertained to liabilities arose
before December 31, 2019 and the Company has included substantially all such claims in accounts payable on the consolidated balance
sheet as of December 31, 2019. The Company is currently seeking to settle the outstanding payable through mediation.
|
III)
|
Legal
claims by lenders
|
During the year ended December 31, 2019, the Company defaulted
on multiple loans and notes payable from various lenders. As a result, the Company has been subjected to multiple lawsuits by various
Chinese banks and other lenders. The claims raised in these lawsuits pertain to the Company’s non-payment of principals and
interests as scheduled in the loan agreements and note payable agreements. The claims pertained to liabilities arose before December
31, 2019 and the Company has included substantially all such claims in short term loans and notes payable on the consolidated balance
sheet as of December 31, 2019. The court has ruled on certain litigations and among others, request the Company to repay the outstanding
loans and interests to the lender within a short period, normally 10 days, from the date of the rulings and grant the lender with
right to auction the pledged real estate in case of non-performance by the Company. As of the date of this filing, the Company
has not repaid any principal or interest of the defaulted loans.
The above legal proceedings led to, among others, the Company’s
certain bank accounts and property, plant and equipment judicially frozen by the court as of December 31, 2019.
Note
16 – BUSINESS COMBINATION
In
September 2018, the Company’s board of directors approved the acquisitions by the Company of TDH Group BVBA and TDH JAPAN
by issuance of 936,782 and 156,130 of the Company’s common shares, respectively, to Rongfeng Cui, the sole owner of the
two entities. The Company completed the acquisitions in November 2018. The fair value of the total consideration transferred was
measured based on the stock price and the acquired net assets were recorded at their fair values on the acquisition date.
The
purchase price was allocated as follows:
Purchase consideration
|
|
$
|
1,053,020
|
|
Net assets acquired, excluding property, plant and equipment and long-term loans from related party
|
|
|
(333,464
|
)
|
Property, plant and equipment
|
|
|
2,704
|
|
Long-term loans-related party
|
|
|
(215,811
|
)
|
Goodwill
|
|
|
1,599,591
|
|
|
|
|
|
|
Total
|
|
$
|
1,053,020
|
|
The
acquisitions had been accounted for as business acquisitions and the results of operations of TDH Group BVBA and TDH Japan from
the acquisition date have been included in the Company’s consolidated financial statements.
Neither
the results of operations since the acquisition date nor the pro forma results of operations of the acquirees were presented because
the effects of these business combinations, individually and in the aggregate, were not significant to the Company’s consolidated
results of operations.
The
Company performed an impairment test for goodwill on December 31, 2018 and identified an impairment loss of $1,599,591 as the
fair value of the reporting unit is less than its carrying value based on the management’s specific analysis of future production
plan and sales forecasts.
Note
17 – LONG-TERM INVESTMENTS
In
February 2018, the Company acquired 5% equity interests in Liujiayi Pet Technology (Beijing) Co., Ltd. (“Liujiayi”)
for a cash consideration of RMB500,000 (approximately $79,400). The investment was accounted for at cost, less impairment, plus
or minus changes resulting from observable price changes in orderly transaction for identical or similar investments of the same
issuer, if any, using the measurement alternative due to lack of readily determinable fair values, pursuant to ASC 321.
In
March 2018, the Company invested RMB1,000,000 (approximately $156,200) in Shandong Tide Food Co., Ltd. (“Shandong Tide”),
a pet food production company that was newly established in 2018, representing 37% equity interest in Shandong Tide. The investment
was accounted for as equity method in accordance with ASC 323. The Company recognized its proportionate share of Shandong Tide’s
net loss in the amount of $4,903 and $17,524, respectively, into the consolidation statements of operations and comprehensive
income (loss) for the years ended December 31, 2019 and 2018, respectively.
For the year ended December 31, 2019, the Company identified
and recognized impairment loss of $123,062 on its equity method investment.
Note
18 – DISPOSAL OF SUBSIDIARIES
During the year ended December 31, 2019, Kangkang Development,
Yichong, Lingchong and Lile were deconsolidated from the Company’s consolidated financial statements (also see Note 1). The
Company recognized losses of $5,018 in connection with the disposals on the consolidated statement of operations and comprehensive
income (loss) for the year ended December 31, 2019.
The disposals mentioned above did not constitute a strategic
shift that would have a major effect on the Company’s operations or financial results and as such, the disposals were not
classified as discontinued operations in the accompanying consolidated financial statements.
Note
19 – SUBSEQUENT EVENTS
During the subsequent period, the Company borrowed approximately
$0.05 million and $0.1 million from Yuxiang Qi and an individual, respectively. As of the date of this filing, the Company was
in default on the loan from the individual.
In May 2020, the Company prepaid $0.6 million to a related party
for service. As of the date of this filing, the Company had balance of prepaid expense to this related party in the amount of $0.37
million.
In March 2020, in relation to a legal proceeding with a vendor,
the Company received a notice from the court, pursuant to which certain premises including factory buildings and warehouses would
be judicially frozen for a period of three years starting April 2020.
As a result of the COVID-19 outbreak in the first quarter of 2020,
the Company has experienced suspension of operations, interruption of supply chain and decline in demand by the Company’s
customers. The Company’s businesses, results of operations, financial position and cash flows were adversely affected in
the first quarter of 2020 with continuing impacts on subsequent periods, including but not limited to material negative impact
to the Company’s total revenues, slower collection of account receivables and significant impairment to the Company’s
long-lived assets. Because of the risks and uncertainties posed by COVID-19, which are still evolving, the extent of the business
disruption and the related financial impact on subsequent periods cannot be reasonably estimated at this time.
F-33