UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2020

 

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

 

For the transition period from ____________ to ____________

 

Commission file number: 001-36055

 

TD Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

25th Floor, Block C, Tairan Building

No. 31 Tairan 8th Road, Futian District

Shenzhen, Guangdong, PRC

  518000
(Address of principal executive offices)   (Zip Code)

 

+86 (0755) 88898711

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of August 12, 2020, 68,963,229 shares of the Company’s Common Stock, $0.001 par value per share, were issued and outstanding.

 

 

 

 

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2020 and December 31, 2019

 

    June 30,
2020
    December 31,
2019
 
ASSETS            
Current Assets                
Cash   $ 1,487,594     $ 2,446,683  
Accounts receivable, net     1,919,873       -  
Loans receivable from third parties     83,233,866       1,955,697  
Prepayments     2,828,974       -  
Due from related parties     463,390       3,310,883  
Other current assets     2,099,072       166,617  
Total current assets     92,032,769       7,879,880  
                 
Investments in equity investees     964,711       972,807  
Deposit in investment in equity investee     -       14,351  
Loan receivable from a third party, noncurrent     -       50,230  
Property and equipment, net     2,240       3,835  
Right-of-use lease assets, net     316,128       41,188  
Leasing business assets, net     2,229,819       2,426,109  
Total noncurrent assets     3,512,898       3,508,520  
                 
Total Assets   $ 95,545,667     $ 11,388,400  
                 
LIABILITIES AND EQUITY                
Current Liabilities                
Advances from customers   $ 15,029     $ 15,249  
Third party loans payable     1,886,756       2,367,967  
Due to related parties     2,187,085       1,017,362  
Stock subscription advance     -       1,600,000  
Income tax payable     857,641       14,735  
Lease liabilities     283,680       -  
Other current liabilities     1,400,542       420,101  
Total Current Liabilities     6,630,733       5,435,414  
                 
Related party loan, noncurrent     149,936       152,124  
Total Non-current Liabilities     149,936       152,124  
                 
Total Liabilities     6,780,669       5,587,538  
                 
Commitments and Contingencies (Note 14)                
                 
Equity                
Common stock (par value $0.001 per share, 100,000,000 shares authorized; 68,585,111 and 11,585,111 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)     68,585       11,585  
Additional paid-in capital     126,026,170       38,523,170  
Accumulated deficit     (36,885,197 )     (32,391,040 )
Accumulated other comprehensive loss     (428,915 )     (334,281 )
Total Shareholders’ Equity     88,780,643       5,809,434  
                 
Non-controlling interests     (15,645 )     (8,572 )
Total Equity     88,764,998       5,800,862  
                 
Total Liabilities and Equity   $ 95,545,667     $ 11,388,400  

 

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

 

1

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Three and Six Months Ended June 30, 2020 and 2019

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

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2020     2019     2020     2019  
Revenues                        
Revenue from sales of commodity products   $ 1,563,669     $ -     $ 2,617,301     $ -  
Revenue from supply chain management services     2,145,810       -       2,561,187       -  
Income from operating leases     -       540,895       14,051       940,894  
Total Revenue     3,709,479       540,895       5,192,539       940,894  
                                 
Cost of revenue                                
Cost of revenue - commodity product sales     (1,570,132 )     -       (2,625,275 )     -  
Cost of revenue - supply chain management services     (7,849 )     -       (8,566 )     -  
Cost of operating lease     (224,294 )     (397,538 )     (323,608 )     (635,189 )
Total cost of revenue     (1,802,275 )     (397,538 )     (2,957,449 )     (635,189 )
                                 
Gross profit     1,907,204       143,357       2,235,090       305,705  
                                 
Operating expenses                                
Selling, general, and administrative expenses     (491,671 )     (1,133,957 )     (916,786 )     (3,040,276 )
Impairment on leasing business assets     -       -       -       (96,318 )
Total operating cost and expenses     (491,671 )     (1,133,957 )     (916,786 )     (3,136,594 )
                                 
Other income (expenses), net                                
Interest income     1,586,552       22,018       1,726,564       32,481  
Interest expenses     (104,314 )     (71,743 )     (238,689 )     (71,743 )
Amortization of beneficial conversion feature relating to issuance of convertible notes     (3,400,000 )     -       (3,400,000 )     -  
Amortization of relative fair value of warrants relating to issuance of convertible notes     (3,060,000 )     -       (3,060,000 )     -  
Total other expenses, net     (4,977,762 )     (49,725 )     (4,972,125 )     (39,262 )
                                 
Loss Before Income Taxes     (3,562,229 )     (1,040,325 )     (3,653,821 )     (2,870,151 )
                                 
Income tax expenses     (799,029 )     -       (847,409 )     -  
                                 
Net Loss     (4,361,258 )     (1,040,325 )     (4,501,230 )     (2,870,151 )
                                 
Less: Net loss attributable to non-controlling interests     2,804       491       7,073       491  
Net loss attributable to TD Holdings, Inc.’s Stockholders   $ (4,358,454 )   $ (1,039,834 )   $ (4,494,157 )   $ (2,869,660 )
                                 
Comprehensive Loss                                
Net Loss   $ (4,361,258 )   $ (1,040,325 )   $ (4,501,230 )   $ (2,870,151 )
Foreign currency translation adjustment     (89,058 )     (74,767 )     (94,634 )     (17,024 )
Comprehensive loss     (4,450,316 )     (1,115,092 )     (4,595,864 )     (2,887,175 )
Less: Total comprehensive loss attributable to non-controlling interests     2,804       491       7,073       491  
Comprehensive loss attributable to TD Holdings, Inc.   $ (4,447,512 )   $ (1,114,601 )   $ (4,588,791 )   $ (2,886,684 )
                                 
Loss per share - basic and diluted                                
Loss per share – basic and diluted   $ (0.09 )   $ (0.14 )   $ (0.15 )   $ (0.45 )
                                 
Weighted Average Shares Outstanding-Basic and Diluted     47,486,210       7,530,693       30,579,616       6,348,064  

 

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

 

2

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Six Months Ended June 30, 2020 and 2019

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

 

                            Subscription     Accumulated              
    Common Stock     Additional paid-in     Accumulated     advanced from a     other
comprehensive
    Non-controlling     Total (Deficit)  
    Shares     Amount     capital     Deficit     shareholder     loss     interests     Equity  
                                                 
Balance as at December 31, 2018     5,023,906     $ 5,024     $ 28,765,346     $ (25,457,090 )   $ -     $ (511,057 )   $ -     $ 2,802,223  
Issuance of common stock to service providers     502,391       502       883,706       -       -       -       -       884,208  
Issuance of common stocks pursuant to registered direct offering, net of transaction cost     3,120,000       3,120       4,650,320                                          
Net loss     -       -       -       (2,869,660 )     -       -       (491 )     (2,870,151 )
Foreign currency translation adjustments     -       -       -       -       -       (17,024 )     -       (17,024 )
Balance as at June 30, 2019     8,646,297     $ 5,526     $ 34,299,372     $ (28,326,750 )   $ -     $ (528,081 )   $ (491 )   $ 5,452,696  
                                                                 
Balance as at December 31, 2019     11,585,111     $ 11,585     $ 38,523,170     $ (32,391,040 )   $ -     $ (334,281 )   $ (8,572 )   $ 5,800,862  
Issuance of common stocks in connection with private placements     17,000,000       17,000       15,083,000       -       (13,500,000 )     -       -       1,600,000  
Issuance of common stocks in connection with exercise of convertible notes     20,000,000       20,000       29,980,000       -       -       -       -       30,000,000  
Beneficial conversion feature relating to issuance of convertible notes     -       -       3,400,000       -       -       -       -       3,400,000  
Relative fair value of warrants relating to issuance of convertible notes                     3,060,000                                       3,060,000  
Issuance of common stocks in connection with exercise of warrants     20,000,000       20,000       35,980,000       -       -       -       -       36,000,000  
Collection of subscription fee     -       -       -       -       13,500,000       -       -       13,500,000  
                                                                 
Net loss     -       -       -       (4,494,157 )     -       -       (7,073 )     (4,501,230 )
Foreign currency translation adjustments     -       -       -       -       -       (94,634 )     -       (94,634 )
Balance as at June 30, 2020     68,585,111     $ 68,585     $ 126,026,170     $ (36,885,197 )   $ -     $ (428,915 )   $ (15,645 )   $ 88,764,998  

 

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

 

3

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended June 30, 2020 and 2019

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

 

    Common Stock     Additional paid-in     Accumulated     Subscription
advanced from a
    Accumulated other
comprehensive
    Non-controlling     Total (Deficit)  
    Shares     Amount     capital     Deficit     shareholder     income (loss)     interests     Equity  
                                                 
Balance as at March 31, 2019     5,526,297     $ 5,526     $ 29,649,052     $ (27,286,916 )   $ -     $ (453,314 )   $ -     $ 1,914,348  
Issuance of common stocks pursuant to registered direct offering, net of transaction cost     3,120,000       3,120       4,650,320                                          
Net loss     -       -       -       (1,039,834 )     -       -       (491 )     (1,040,325 )
Foreign currency translation adjustments     -       -       -       -       -       (74,767 )     -       (74,767 )
Balance as at June 30, 2019     8,646,297     $ 5,526     $ 34,299,372     $ (28,326,750 )   $ -     $ (528,081 )   $ (491 )   $ 5,452,696  
                                                                 
Balance as at March 31, 2020     28,585,111     $ 28,585     $ 53,606,170     $ (32,526,743 )   $ (13,500,000 )   $ (339,857 )   $ (12,841 )   $ 7,255,314  
Issuance of common stocks in connection with exercise of convertible notes     20,000,000       20,000       29,980,000       -       -       -       -       30,000,000  
Beneficial conversion feature relating to issuance of convertible notes     -       -       3,400,000       -       -       -       -       3,400,000  
Relative fair value of warrants relating to issuance of convertible notes                     3,060,000                                       3,060,000  
Issuance of common stocks in connection with exercise of warrants     20,000,000       20,000       35,980,000       -       -       -       -       36,000,000  
Collection of subscription fee     -       -       -       -       13,500,000       -       -       13,500,000  
Net loss     -       -       -       (4,358,454 )     -       -       (2,804 )     (4,361,258 )
Foreign currency translation adjustments     -       -       -       -       -       (89,058 )     -       (89,058 )
Balance as at June 30, 2020     68,585,111     $ 68,585     $ 126,026,170     $ (36,885,197 )   $ -     $ (428,915 )   $ (15,645 )   $ 88,764,998  

 

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

 

4

 

 

TD HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2020 and 2019

(Expressed in U.S. dollar)

 

    For the Six Months Ended
June 30,
 
    2020     2019  
Cash Flows from Operating Activities:            
Net loss   $ (4,501,230 )   $ (2,870,151 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation of leasing business assets     162,211       102,179  
Depreciation of property and equipment     1,547       1,155  
Amortization of right of use assets     174,432       -  
Impairment on leasing business assets     -       96,318  
Stock-based compensation to service providers     -       884,208  
Amortization of beneficial conversion feature relating to issuance of convertible notes     3,400,000       -  
Amortization of relative fair value of warrants relating to issuance of convertible notes     3,060,000       -  
Changes in operating assets and liabilities:                
Accounts receivable     (1,927,299 )     -  
Prepayments     (2,843,373 )     -  
Other current assets     (1,807,117 )     (72,394 )
Advances from customers     -       33,497  
Income tax payable     847,409       8,352  
Other current liabilities     991,383       72,590  
Lease liabilities     (166,242 )     -  
Net Cash Used in Operating Activities     (2,608,279 )     (1,744,246 )
                 
Cash Flows from Investing Activities:                
Purchases of leasing business assets     -       (1,902,529 )
Purchases of property and equipment     -       (707 )
Investment in one investment security     -       (200,000 )
Investments in equity investees     -       (884,225 )
Investments in financial products     -       (1,000,000 )
Collection of deposits from an equity investee     14,217       -  
Loans made to third parties     (78,987,027 )     (1,114,225 )
Net Cash Used in Investing Activities     (78,972,810 )     (5,101,686 )
                 
Cash Flows from Financing Activities:                
Proceeds from third party borrowings     -       2,063,193  
Proceeds from borrowings from related parties     740,706       -  
Cash raised in registered direct offering, net of transaction costs     -       4,653,440  
Proceeds from a private placement     13,500,000       -  
Proceeds from issuance of convertible notes     30,000,000       -  
Proceeds from exercise of warrants     36,000,000       -  
Net Cash Provided by Financing Activities     80,240,706       6,716,633  
                 
Effect of exchange rate changes on cash and cash equivalents     381,294       (47,631 )
                 
Net decrease in cash and cash equivalents     (959,089 )     (176,930 )
Cash at beginning of period     2,446,683       1,484,116  
Cash at end of period   $ 1,487,594     $ 1,307,186  
                 
Supplemental Cash Flow Information                
Cash paid for interest expense   $ -     $ -  
Cash paid for income tax   $ -     $ -  
                 
Supplemental disclosure of Non-cash investing and financing activities                
Right-of-use assets obtained in exchange for operating lease obligations   $ 455,635     $ -  
Issuance of common stocks in connection with private placements, net of issuance costs with proceeds collected in advance in November 2019   $ 1,600,000     $ -  
Issuance of common stocks in connection with conversion of convertible notes   $ 30,000,000     $ -  

 

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

 

5

 

 

1. ORGANIZATION AND BUSINESS DESCRIPTION

 

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

 

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

 

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

 

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

 

As of June 30, 2020, the Company conducts business through Huamucheng, a subsidiary of the Company, and one VIE, Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”). Beijing Tianxing is primarily engaged in operating the leasing business of used luxurious cars and Huamucheng is engaged in the commodity trading business and providing supply chain management services to customers in the PRC. Supply chain management services consists of loan recommendation services and commodity product distribution services.

 

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

 

Name   Background   Ownership
HC High Summit Holding Limited (“HC High BVI”)  

●      A BVI company

●      Incorporated on March 22, 2018

●      A holding company

  100% owned by the Company
HC High Summit Limited (“HC High HK”)  

●      A Hong Kong company

●      Incorporated on April 16, 2018

●      A holding company

  100% owned by HC High BVI
Tongdow Block Chain Information Technology Company Limited (“Tongdow Block Chain”)  

●      A Hong Kong company

●      Incorporated on April 2, 2020

●      A holding company

  100% owned by HC High BVI
Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”)  

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

●      Incorporated on April 2, 2020

●      Registered capital of $10 million

●      A holding company

  WFOE, 100% owned by Tongdow Block Chain
Hao Limo Technology (Beijing) Co. Ltd.
(“Hao Limo”)
 

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

●      Incorporated on May 10, 2018

●      Registered capital of $15 million

●      A holding company

  WFOE, 100% owned by HC High HK
Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”)*  

●      A PRC limited liability company

●      Incorporated on April 17, 2018

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

●      Engaged in operating leasing business of used luxurious cars

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

●      A PRC limited liability company

●      Incorporated on December 30, 2013

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

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

  VIE of Hao Limo before June 25, 2020, and a wholly owned subsidiary of Shanghai Jianchi

 

* As of June 30, 2020, Beijing Tianxing has six wholly owned subsidiaries:

 

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

 

6

 

 

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

 

Each of these subsidiaries owns a license to hold cars in Beijing or Zhejiang, and was either inactive or generated minimal revenues for the periods ended June 30, 2020 and 2019.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

 

(a) Basis of Presentation

 

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

 

The unaudited condensed consolidated financial information as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 has been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on May 29, 2020.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are necessary for a fair presentation of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2019. The results of operations for the three and six months ended June 30, 2020 and 2019 are not necessarily indicative of the results for the full years.

 

(b) Consolidation of variable interest entities

 

As a result of reorganization on June 25, 2020 (Note 1), Huamucheng became a wholly owned subsidiary of the Company. As of June 30, 2020, the Company had Beijing Tianxing as its sole VIE. As of December 31, 2019, the Company had two VIEs, Beijing Tianxing and Huamucheng. Beijing Tianxing is engaged in used luxurious car leasing business and Huamucheng is engaged in the commodity trading and supply chain management business.

 

The following financial statement balances reflect the financial positions of the Company’s VIE(s), which was included in the consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively:

 

    As of June 30, 2020     As of December 31, 2019  
    Beijing
Tianxing
    Huamucheng     Total    

Beijing

Tianxing

    Huamucheng     Total  
    (unaudited)     (unaudited)     (unaudited)                    
Cash   $ 55     $                -     $ 55     $ 94,380     $ 1,730,793     $ 1,825,173  
Loans receivable from third parties     680,439       -       680,439       1,364,125       -       1,364,125  
Due from TD and Hao Limo*     807,246       -       807,246       966,882       -       966,882  
Due from related parties     293,653       -       293,653       470,154       2,840,729       3,310,883  
Other current assets     428,723       -       428,723       164,922       2,848       167,770  
Investment in equity investees     554,711       -       554,711       562,807       -       562,807  
Leasing business assets, net     2,229,819       -       2,229,819       2,426,109       -       2,426,109  
Other noncurrent assets     15,434       -       15,434       18,186       -       18,186  
Total Assets   $ 5,010,080     $ -     $ 5,010,080     $ 6,067,565     $ 4,574,370     $ 10,641,935  
                                                 
LIABILITIES                                                
Advances from customers   $ 15,029     $ -     $ 15,029     $ 15,249     $ -     $ 15,249  
Other current liabilities     356,692       -       356,692       218,688       207,834       426,522  
Third parties loans     1,564,253       -       1,564,253       2,080,941       315,729       2,396,670  
Due to related parties     229,530       -       229,530       197,733       166,332       364,065  
Due to TD and Hao Limo **     5,146,671       -       5,146,671       5,197,531       2,577,356       7,774,887  
Total Liabilities   $ 7,312,175     $ -     $ 7,312,175     $ 7,710,142     $ 3,267,251     $ 10,977,393  

 

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

 

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

 

7

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(b) Consolidation of variable interest entities (continued)

 

Because Huamucheng was a VIE of the Company before June 25, 2020, and there were no material transactions for the five days ended June 30, 2020, the following financial statement amounts reflect the financial performances and cash flows of Beijing Tianxing and Huamucheng, which were included in the consolidated financial statements for the six months ended June 30, 2020 and 2019, respectively:

 

   

For the Six Months Ended

June 30, 2020

   

For the Six Months Ended

June 30, 2019

 
    Beijing Tianxing     Huamucheng     Total    

Beijing

Tianxing

    Huamucheng     Total  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenue   $ 14,051     $ 5,178,488     $ 5,192,539     $ 940,894     $       -     $ 940,894  
Cost of revenue   $ (323,608 )   $ (2,633,840 )   $ (2,957,448 )   $ (635,189 )   $ -     $ (635,189 )
Operating expenses   $ (103,078 )   $ (682,159 )   $ (785,237 )   $ (1,894,015 )   $ -     $ (1,894,015 )
Net (loss) income   $ (495,734 )   $ 2,540,279     $ 2,044,545     $ (993,034 )   $ -     $ (993,034 )

 

   

For the Six Months Ended

June 30, 2020

   

For the Six  Months Ended

June 30, 2019

 
    Beijing Tianxing     Huamucheng     Total    

Beijing

Tianxing

    Huamucheng     Total  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Net Cash (Used in) Provided by Operating Activities   $ (320,687 )   $ 77,363,926     $ 77,043,239     $ 655,481     $              -     $ 655,481  
Net Cash Provided by (Used in) by Investing Activities     681,659       (78,672,099 )     (77,990,440 )     (3,671,685 )     -       (3,671,685 )
Net Cash (Used in) Provided by Financing Activities     (454,413 )     1,071,786       617,373       2,063,193       -       2,063,193  
Effect of Exchange Rate Changes on Cash     (884 )     (23,699 )     (24,583 )     12,826       -       12,826  
Net Decrease in Cash     (94,325 )     (260,086 )     (354,411 )     (940,185 )     -       (940,185 )
Cash at Beginning of Period     94,380       1,730,793       1,825,173       991,385       -       991,385  
Cash at End of Period   $ 55     $ 1,470,707     $ 1,470,762     $ 51,200     $ -     $ 51,200  

 

8

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(c) Foreign currency translation

 

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

 

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

 

    June 30,
2020
    December 31,
2019
 
             
Balance sheet items, except for equity accounts     7.0697       6.9680  

 

    For the Six Months Ended
June 30,
 
    2020     2019  
             
Items in the statements of operations, comprehensive loss and statements of cash flows     7.0339       6.7856  

 

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

 

9

 

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(d) Accounts receivable, net

 

Accounts receivable are recorded at the gross amount less an allowance for any uncollectible accounts and do not bear interest. The Company provides commodity trading business customers with credit term ranging between one week to one month, depending on credit assessment of customers. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2020, the Company determined no allowances for doubtful accounts were necessary for accounts receivable.

 

(e) Prepayments

 

Prepayments represent amounts advanced to suppliers for supply of commodity products to the Company. The suppliers of commodity trading business usually require advance payments when the Company orders service and the prepayments will be utilized to offset the Company’s future payments. These amounts are unsecured, non-interest bearing and generally short-term in nature. 

 

(f) Income taxes

 

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

 

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

 

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

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company did not have unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of June 30, 2020 and December 31, 2019. As of June 30, 2020, all of the Company’s income tax returns for the tax years ended December 31, 2015 through December 31, 2019 remain open for statutory examination by relevant tax authorities.

 

(g) Recent accounting pronouncement

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Its mandatory effective dates are as follows: 1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; 2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years; and 3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. On November 15, 2019, FASB issued ASU 2019-10 which provides a framework to stagger effective dates for future major accounting standards (including ASC 326 Financial instrument-credit losses) and amends the effective dates to give implementation relief to certain type of entities: 1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies, or SRC, as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; and 2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an “emerging growth company,” or EGC, the Company has elected to take advantage of the extended transition period provided in the Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards applicable to private companies. The Company will adopt ASU 2016-13 and its related amendments effective January 1, 2023, and the Company is in the process of evaluating the potential effect on its consolidated financial statements.

 

10

 

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.”  ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital.  ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions.   For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company  are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023.  The Company will adopt ASU 2020-06 effective January 1, 2024.  Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements.  The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

 

(h) Risks and uncertainties

 

1) Credit risk

 

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As of June 30, 2020, approximately $16,803 was deposited with a bank in the United States which was insured by the government up to $250,000. As of June 30, 2020 and December 31, 2019, approximately $1,470,791 and $2,399,300, respectively, were primarily deposited in financial institutions located in Mainland China, which were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

 

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

 

2) Liquidity risk

 

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

 

3) Foreign currency risk

 

Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, except for the cash deposit of approximately $16,803 which was in U.S. dollars as of June 30, 2020, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts.

 

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

 

4) VIE risk

 

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

 

11

 

 

3. LIQUIDITY

 

For the six months ended June 30, 2020, the Company incurred a net loss of $4.50 million, and reported cash outflows of approximately $2.61 million from operating activities. As of June 30, 2020, the Company had cash balance of $1.5 million. These factors caused concern as to the Company’s liquidity as of June 30, 2020. The accompanying unaudited condensed financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

In assessing the Company’s liquidity, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.

 

As of June 30, 2020, the Company had a positive working capital of approximately $85.4 million, among which the Company had a loan due from a customer of approximately $79.4 million for the purpose of developing supply chain financing business. Pursuant to the loan agreement, the loan term for each individual loan was twelve months from disbursement, but in practice the loans are revolving every 3 – 4 months. From July 1, 2020 to the date of the report, the Company collected approximately RMB 507.63 million, or $71.80 million from the customer.

 

Going forward, the Company plans to fund its operations through revenue generated from its commodity trading business, operating lease income, funds from its private placements as well as financial support commitments from the Company’s Chief Executive Officer and major shareholders.

 

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

  

12

 

  

4. LOANS RECEIVABLE FROM THIRD PARTIES  

 

   

June 30,

2020

    December 31,
2019
 
             
Loans receivable from Shenzhen Xinsuniao Technology Co., Ltd. (“Shenzhen Xinsuniao”)   $ 79,372,505     $ -  
Loans receivable from Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (“Qianhai Baiyu”)     1,562,662       -  
Loans receivable from other third parties     2,298,699       1,955,697  
Loan receivable from other third parties, current   $ 83,233,866     $ 1,955,697  
Loan receivable from a third party, noncurrent   $ -     $ 50,230  

 

Loans receivable from Shenzhen Xinsuniao

 

On March 25, 2020 , the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao, to which the Company also provided loan recommendations services during the six months ended June 30, 2020. The Company selected Shenzhen Xinsuniao as its customer, because Shenzhen Xinsuniao and its wholly-owned subsidiary Qianhai Baiyu, were reputable for their extensive experiences in supply chain services for commodities trading.

 

Pursuant to the loan agreement, the proceeds should solely be used for the operations of the commodity trading business including sales and purchase of commodity products, and supply chain management services. Each loan was repayable in twelve months from disbursement, with a per annum interest rate of 10%. However in practice, the loans are generally revolving every three months,   which matches the transaction turnover of Shenzhen Xinsuniao and Qianhai Baiyu. From July 1, 2020 to the date of this report, the Company has collected RMB 507.63 million, or US$ 71.80 million from Shenzhen Xinsuniao.

 

The revolving credit facility lasts for a period of two years. Shenzhen Xinsuniao pledged 100% of its equity interest in Qianhai  Baiyu, which enterprise value was estimated at approximately $106 million. For the six months ended June 30, 2020, the Company made loans aggregating $79.8 million to Shenzhen Xinsuniao and recognized interest income of $1.4 million with corresponding account of “other current assets.”  

 

Loans receivable from Qianhai Baiyu

 

The Company had a balance of $1,562,662 due from Qianhai Baiyu, which was recorded as a balance due from a related party because Qianhai Biayu was controlled by Mr. Zhiping Chen, the legal representative of Huamucheng before March 31, 2020. On March 31, 2020, Mr. Zhiping Cheng transferred its equity interest in Qianhai Baiyu to unrelated third parties, and Qianhai Baiyu became a third party to the Company. As of June 30, 2020, the Company classified the balance due from Qianhai Baiyu to the account of “loans receivable due from third parties.” The Company charged an interest rates of 10% per annum. Principal and interest are repaid on maturity of the loan. For the six months ended June 30, 2020, the Company made loans of $1,570,615 to and collected $2,789,031 from Qianhai Baiyu. 

 

Loans receivable from other third parties

 

In addition, during the six months ended June 30, 2020 and 2019, the Company entered into loan agreements with three and three third parties and advanced an aggregate of $1,818,037 and $1,114,225 to these third parties as interest-bearing loans, respectively.   The interest rate ranges between 9% and 16% per annum. During the six months ended June 30, 2020 and 2019, the third parties paid back $1,503,109 and $nil, respectively. As of June 30, 2020, the balances of loan principal and interest payment were due in September 2020 through December 2020. The Company classified loan receivables as current assets.

 

Management periodically assesses the collectability of these third-party loans receivable. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. As of June 30, 2020 and December 31, 2019, there was no allowance recorded as the Company considers all of the loans receivable fully collectible. 

 

Interest income of $1,558,166 and $18,817 was recognized for the three months ended June 30, 2020 and 2019, respectively. Interest income of $1,643,440 and $31,246 was accrued for the six months ended June 30, 2020 and 2019. As of June 30, 2020 and December 31, 2019, the Company recorded an interest receivable of $1,741,205 and $133,742 as reflected under “other current assets” in the unaudited condensed consolidated balance sheets.

 

13

 

 

5. INVESTMENTS IN EQUITY INVESTEES

 

As of June 30, 2020, the Company’s investments in equity investees were comprised of the following:

 

    Investment     % of ownership     Investment
dates
                 
Chengdu Jianluo Technology Co., Ltd. (“Chengdu Jianluo”) (a)   $ 282,897       40 %   June 28, 2019
Shanghai Huxin Technology Co., Ltd. (“Shanghai Huxin”) (a)     282,897       40 %   July 4, 2019
Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou Yihe”) (b)     410,000       20 %   December 17, 2019
      975,794              
Less: Share of results of equity investees     (11,083 )            
    $ 964,711              

 

(a) On June 28, 2019 and July 4, 2019, the Company made investments of $282,897 (RMB 2,000,000) and $282,897 (RMB 2,000,000), for 40% of the ownership interest in each of these two investees, respectively. The purpose of such investment is to establish a cooperative business partnership with these investees and utilize their marketing strength and customer network to bring in more customers for the Company’s car leasing services in Chengdu and Shanghai markets.
(b) October 14, 2019, the Company entered into an agreement with Hangzhou Yihe and agreed to issue 1,253,814 shares of the Company’s common stock to acquire 20% equity interest in Hangzhou Yihe. Hangzhou Yihe was engaged in car leasing business, and the acquisition was for the purpose of producing synergy between the Company and Hangzhou Yihe so as to promote car leasing business in Zhejiang province.

 

For the three and six months ended June 30, 2020, the three equity investees were closed as affected by COVID-19. As a result, the Company had no share of results of equity investees for the period. As of June 30, 2020 and December 31, 2019, the balance of share of results of equity investees was $11,083 and $11,245, respectively. Because these equity investees gradually resumed work since April, the Company expected the closure was temporary, and the decline in fair value below the carrying value is not other-than-temporary. As of June 30, 2020, the Company did not provide impairment against the investments in equity investees.

 

6. LEASING BUSINESS ASSETS, NET

 

As of June 30, 2020 and December 31, 2019, the Company had investments in eleven and eleven used luxury cars, respectively. 

 

As of June 30, 2020 and December 31, 2019, the Company, by reference to the market price, determined the fair value of nil and four used luxurious car were below the original carrying amount of the leased asset and had accumulated impairment of $317,575 and $322,210, respectively. For the six months ended June 30, 2020 and 2019, the Company recorded impairment of $nil and $96,318, respectively, for these leasing business assets. For the three months ended June 30, 2020 and 2019, the Company did not provide impairment for these leasing business assets.  

 

As of the June 30, 2020 and December 31, 2019, the balance of the used luxurious cars is comprised of the following: 

 

    June 30,
2020
    December 31,
2019
 
             
Used luxury cars   $ 2,754,927     $ 2,795,136  
Less: accumulated depreciation     (525,108 )     (369,027 )
    $ 2,229,819     $ 2,426,109  

 

For the three months ended June 30, 2020 and 2019, the Company charged depreciation expenses of $82,633 and $55,321 on used luxurious cars, respectively. For the six months ended June 30, 2020 and 2019, the Company charged depreciation expenses of $162,211 and $102,179 on used luxurious cars, respectively.

 

14

 

 

7. THIRD PARTIES LOANS PAYABLE

 

    June 30,
2020
    December 31,
2019
 
                 
Third parties loans payable   $ 1,886,756     $ 2,367,967  

 

The borrowings are due through December 2020. The purpose of such borrowings was to use the funds to purchase used luxurious cars. The interest rate charged on the borrowings ranged between 7% and 11.5%. For the three months ended June 30, 2020 and 2019, the Company recognized interest expenses of $60,426 and $30,675 on the borrowings, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized interest expenses of $158,541 and $37,544 on the borrowings, respectively.

 

As of June 30, 2020 and December 31, 2019, eight used luxurious cars with an aggregated carrying amount of $1,889,182 were pledged for borrowings from third parties (see Note 4).

 

8. OTHER CURRENT LIABILITIES

 

    June 30,
2020
    December 31,
2019
 
Other payable (1)   $ 792,113     $ 128,301  
Accrued interest expenses     273,604       117,554  
Deposit payable     57,164       64,342  
Accrued payroll and benefit     36,281       49,690  
Other tax payable     207,342       39,692  
Others     34,038       20,522  
    $ 1,400,542     $ 420,101  

 

(1) As of June 30, 2020, the balance of other payable represented advances from one customer for commodities trading business. However since the Company cannot deliver the products in due time, the transaction was cancelled in early July 2020, and the Company returned the amount to the customer.

 

9. STOCK SUBSCRIPTION ADVANCE FROM SHAREHOLDERS

 

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

 

10. CAPITAL TRANSACTIONS

 

Common Stock

 

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

 

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

 

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

 

The 2020 Warrants are exercisable immediately upon the date of issuance at the exercise price of $1.80 for cash (the “Warrant Shares”). The 2020 Warrants may also be exercised cashless if at any time after the six-month anniversary of the issuance date. There is no effective registration statement registering, or no current prospectus available for the resale of the Warrant Shares, if exercised, The 2020 Warrants will expire five years from date of issuance. The 2020 Warrants are subject to anti-dilution provisions to reflect stock dividends and splits or other similar transactions. The 2020 Warrants contain a mandatory exercise right for the Company to force exercise of the 2020 Warrants if the Company’s common stock trades at or above $3.00 for 20 consecutive trading days, provided, among other things, that the shares issuable upon exercise of the are registered or may be sold pursuant to Rule 144 and the daily trading volume exceeds 300,000 shares of Common stock per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date.

 

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

 

15

 

 

10. CAPITAL TRANSACIONS (CONTINUED)

 

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

 

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

 

In April 2020, the Holders elected to convert the Notes at a conversion price of $1.50 per share and also exercise the Warrants at an exercise price of $1.80 per share, and paid cash consideration of $36,000,000 for the exercise of the Warrants by April 15, 2020. As a result, an aggregate of 40,000,000 shares of the Company’s Common Stock were issued on May 18, 2020. The Company received proceeds aggregating $66,000,000 from the transaction, and upon settlement of the Note and the 2020 Warrants, the Company immediately expensed the Note discount of $6.46 million For the six months ended June 30, 2020, the Company recognized amortization of beneficial conversion feature   relating to issuance of convertible notes of $3.4 million and amortization of relative fair value of warrants relating to issuance of conversion notes of $3.06 million.

 

Warrants

 

A summary of warrants activity for the six months ended June 30, 2020 was as follows:

 

    Number of
shares
    Weighted
average life
    Weighted average exercise price  
                   
Balance of warrants outstanding as of December 31, 2019     3,033,370       4.38 years       1.58  
Granted     20,000,000               1.80  
Exercised     (20,000,000 )             1.80  
Balance of warrants outstanding as of June 30, 2020     3,033,370       3.88 years       1.58  

  

As of June 30, 2020 and December 31, 2019, the Company had 3,033,370 shares of warrants, among which 273,370 shares of warrants were issued to two individuals in private placements, and 2,760,000 shares of warrants   were issued in two direct offerings closed on May 20, 2019 (“May Offering”) and April 11, 2019 (“April Offering”)

 

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

 

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

 

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

 

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

 

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

 

The key assumption used in estimates are as follows:

 

    April 11,     August 30,     May 20,  
    2019     2019     2019  
          (Replacement Warrants)        
Price of underlying stock     1.71       1.71       1.32  
Terms of warrants (in months)     60.0       55.3       66.0  
Exercise price   $ 1.32     $ 2.20     $ 1.32  
Risk free rate of interest     2.77 %     2.77 %     2.77 %
Dividend yield     0.00 %     0.00 %     0.00 %
Annualized volatility of underlying stock     55.6 %     63.45 %     57.04 %

 

16

 

  

11. INCOME TAXES

 

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

 

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the three and six months ended June 30, 2020, the Company had no unrecognized tax benefits. Due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future income to realize the deferred tax assets for certain subsidiaries and a VIE. As of June 30, 2020 and December 31, 2019, the Company had deferred tax assets of $5,908,788 and $3,574,333, respectively. The Company maintains a full valuation allowance on its net deferred tax assets as of June 30, 2020.

 

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

 

For the three months ended June 30, 2020 and 2019, the Company had current income tax expenses of $847,409 generated by Huamucheng and $nil, respectively, and deferred income tax expenses of $nil and $nil, respectively. For the six months ended June 30, 2020 and 2019, the Company had current income tax expenses of $799,029 generated by Huamucheng and $nil, respectively, and deferred income tax expenses of $nil and $nil, respectively.

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Company is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. There were no uncertain tax positions as of June 30, 2020 and December 31, 2019 and the Company does not believe that its unrecognized tax benefits will change over the next twelve months.

 

17

 

 

12. RELATED PARTY TRANSACTIONS AND BALANCES

 

1) Nature of relationships with related parties

 

Name   Relationship with the Company

Chengdu Jianluo Technology Co., Ltd.

(“Chengdu Jianluo”)

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

Shanghai Huxin Technology Co., Ltd.

(“Shanghai Huxin”)

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

Shenzhen Qianhai Baiyu Supply Chain Co., Ltd.

(“Qianhai Baiyu”)

  Controlled by Mr. Zhiping Chen, the legal representative of Huamucheng, prior to March 31, 2020
Guangzhou Chengji Investment Development Co., Ltd.
(“Guangzhou Chengji”)
  Controlled by Mr. Weicheng Pan, who is an independent director of the Company.
Jiaxi Gao   Chief Executive Office of the Company prior to January 9, 2020
Guotao Deng   Legal representative of an entity over which the Company exercised significant influence
Tao Sun   Senior Management of the Company
Shun Li   Legal representative of Beijing Tianxing
Lu Zhao   Senior Management of Beijing Tianxing

 

18

 

  

12. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

2) Balances with related parties

 

As of June 30, 2020 and December 31, 2019, the balances with related parties were as follows:

 

- Due from related parties

 

    June 30,
2020
    December 31,
2019
 
             
Qianhai Baiyu (i)   $ -     $ 2,840,728  
Chengdu Jianluo (ii)     445,838       452,346  
Shanghai Huxin (iii)     17,552       17,809  
Total Due from related parties   $ 463,390     $ 3,310,883  

 

(i) The balance due from Qianhai Baiyu represented a loan principal and interest due from the related party. The Company charged the related party interest rates 10% per annum. Principal and interest are repaid on maturity of the loan. On March 31, 2020, Mr. Zhiping Chen transferred his controlling equity interest to an unrelated third party and Qianhai Baiyu was not a related party of the Company. As of June 30, 2020, the Company classified the balance due from Qianhai Baiyu to “Loans receivable from third parties” (Note 4).

 

(i) As of June 30, 2020, the balance due from Chengdu Jianluo consisted of receivables for transfers of two used luxurious cars at consideration aggregating $462,600, netting off against car-related fees due to the related party of $16,762.

 

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

 

(iii) The balance due from Shanghai Huxin represented a loan due from the related party. The balance is collected on demand, and no interest income is charged to the associate.

  

19

 

 

12. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

2) Balances with related parties (continued)

 

- Due to related parties, current

 

    June 30,
2020
    December 31,
2019
 
             
Guangzhou Chengji (1)   $ 2,107,002     $ 970,318  
Lu Zhao (2)     62,243       33,269  
Jiaxi Gao (3)     8,017       8,134  
Tao Sun (3)     9,335       4,206  
Guotao Deng (3)     488       1,435  
Total   $ 2,187,085     $ 1,017,362  

 

(1) The balance due to Guangzhou Chengji represents loan principal and interest due to the related parties. The loan has an interest rate of 8% per annum with a maturity date of September 4, 2020.
(2) As of June 30, 2020 and December 31, 2019, the balance due to Lu Zhao consisted of the operating expenses of $2,829 and $2,870, respectively, which was paid by the related party on behalf the Company and is payable on demand and interest free, and loan principal and interest aggregating $59,414 and $  30,399   due to the related party. The loans have an interest rate of 10% per annum with a maturity date of December 30, 2020
(3) The balances due to Jiaxi Gao, Guotao Deng and Tao Sun represents the operating expenses paid by the related parties on behalf of the Company. The balance is payable on demand and interest free.

 

- Due to related parties, noncurrent

 

    June 30,
2020
    December 31,
2019
 
                 
Tao Sun   $ 149,936     $ 152,124  

 

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

 

For the above mentioned related party borrowings, interest expense amounted to $43,888 and $nil for the three months ended June 30, 2020 and 2019, respectively. Interest expense amounted to $80,148 and $nil for the six months ended June 30, 2020 and 2019, respectively.

 

20

 

  

12. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

 

3) Transactions with related parties

 

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

 

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

 

From April 1, 2020, Qianhai Baiyu was no longer a related party of the Company.

  

- Lending to a related party

 

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

 

From April 1, 2020, Qianhai Baiyu was not a related party of the Company.

 

- Borrowings from related parties  

 

For the six months ended June 30, 2020, the Company borrowed loans aggregating $36,344 from and collected $9,745 to Mr. Lu Zhao, a member of the senior management team of Beijing Tianxing. The loan will expire on December 24, 2020. The interest rate charged on the borrowing was 10%. For the three and six months ended June 30, 2020, the Company accrued interest expenses of $1,429 and $3,003, respectively.

 

For the six months ended June 30, 2020, the Company borrowed a loan of $1,035,560 from Guangzhou Chengji. The Loan has an annual interest rate of 8% and a maturity date of December 4, 2020. For the three and six months ended June 30, 2020, the Company accrued interest expenses of $39,659 and $71,929, respectively.

 

21

 

 

13. SEGMENT REPORTING

 

In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different services. For the six months ended June 30, 2020, the Company has two operating business lines, including business with metal products trading and supply chain management services business conducted by Huamucheng (“Commodity Trading and Supply Chain Management Services” or “Huamucheng Business”) and used luxurious car leasing business conducted by Beijing Tianxing (“Used Car Leasing” or “Tianxing Business”). Based on management’s assessment, the Company has determined that the two operating business lines are two operating segments as defined by ASC 280. For the six months ended June 30, 2019, the Company had one operating business line and one reporting unit.

 

The following table presents summary information by segment for the three months ended June 30, 2020 and 2019:

 

    For the Three Months Ended June 30, 2020  
    Tianxing
Business
    Huamucheng
Business
    Unallocated     Total  
Revenue   $ -     $ 3,709,479     $ -     $ 3,709,479  
Cost of revenue and related tax     (224,295 )     (1,577,980 )     -       (1,802,275 )
Gross profit   $ (224,295 )   $ 2,131,499     $ -     $ 1,907,204  
Total other income (expenses), net   $ (25,532 )   $ 1,481,133     $ (6,433,363 )   $ (4,977,762 )
Income tax expense   $ -     $ (799,029 )   $ -     $ (799,029 )
Segment (loss) profit   $ (282,290 )   $ 2,396,349     $ (6,475,317 )   $ (4,361,258 )
Segment assets as of June 30, 2020   $ 4,202,834     $ 88,976,877     $ 2,365,956     $ 95,545,667  

 

    For the Three Months Ended June 30, 2019  
    Tianxing
Business
    Huamucheng
Business
    Unallocated     Total  
Revenue   $ 549,895     $             -     $           -     $ 549,895  
Cost of revenue and related tax     (387,538 )     -       -       (387,538 )
Gross profit   $ 143,357     $ -     $ -     $ 143,357  
Interest expense, net   $ (49,725 )   $ -     $ -     $ (49,725 )
Income tax expense   $ -     $ -     $ -     $ -  
Segment loss   $ (1,040,325 )   $ -     $ -     $ (1,040,325 )
Segment assets as of June 30, 2019   $ 8,034,039     $ -     $ -     $ 8,034,039  

  

The following table presents summary information by segment for the six months ended June 30, 2020 and 2019:

 

    For the Six Months Ended June 30, 2020  
    Tianxing
Business
    Huamucheng
Business
    Unallocated     Total  
Revenue   $ 14,051     $ 5,178,488     $ -     $ 5,192,539  
Cost of revenue and related tax     (323,609 )     (2,633,840 )     -       (2,957,449 )
Gross profit   $ (309,558 )   $ 2,544,648     $ -     $ 2,235,090  
Total other income (expenses), net   $ (82,957 )   $ 1,525,194     $ (6,414,362 )   $ (4,972,125 )
Income tax expense   $ -     $ (847,409 )   $ -     $ (847,409 )
Segment (loss) profit   $ (495,734 )   $ 2,540,279     $ (6,545,775 )   $ (4,501,230 )
Segment assets as of June 30, 2020   $ 4,202,834     $ 88,976,877     $ 2,365,956     $ 95,545,667  

 

    For the Six Months Ended June 30, 2019  
    Tianxing
Business
    Huamucheng
Business
    Unallocated     Total  
Revenue   $ 940,894     $             -     $           -     $ 940,894  
Cost of revenue and related tax     (635,189 )     -       -       (635,189 )
Gross profit   $ 305,705     $ -     $ -     $ 305,705  
Interest expense, net   $ (39,262 )   $ -     $ -     $ (39,262 )
Income tax expense   $ -     $ -     $ -     $ -  
Segment loss   $ (2,870,151 )   $ -     $ -     $ (2,870,151 )
Segment assets as of June 30, 2019   $ 8,034,039     $ -     $ -     $ 8,034,039  

22

 

  

14. COMMITMENTS AND CONTINGENCIES

 

1 Lease Commitments

 

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

 

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

 

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

 

As of June 30, 2020, the Company had two lease contracts with lease expiration in June 2021 and September 2020, respectively. The lease contract does not contain any material residual value guarantees or material restrictive covenants. The table below presents the operating lease related assets and liabilities recorded on the balance sheet. 

 

    June 30,
2020
    December 31,
2019
 
             
Rights of use lease assets   $ 316,128     $ 41,188  
                 
Operating lease liabilities, current   $ 283,680     $ -  
Operating lease liabilities, noncurrent     -       -  
Total operating lease liabilities   $ 283,680     $ -  

 

As of June 30, 2020 and December 31, 2019, the weighted average remaining lease term was 0.84 years and 0.71 years, respectively, and discount rates were 4.75% for all of the operating leases.

 

Lease expenses for the three months ended June 30, 2020 and 2019 were $92,414 and $28,125, respectively. Lease expenses for the six months ended June 30, 2020 and 2019 were $187,538 and $44,749, respectively.

 

The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2020:

 

Twelve months ended June 30, 2021   $ 290,462  
         
Total lease payments     290,462  
Less: imputed interest     (6,782 )
Present value of lease liabilities   $ 283,680  

 

23

 

  

14. COMMITMENTS AND CONTINGENCIES (CONTINUED) 

 

2 Contingencies

 

a 2015 Derivative Action

 

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

 

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

 

b 2017 Arbitration with Sorghum

 

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

 

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

 

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

 

24

 

 

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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

 

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

 

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

 

d 2020 Court Matter with Harrison Fund

 

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

 

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

 

15. SUBSEQUENT EVENTS 

 

From July 1, 2020 to the date of this report, the Company collected RMB 507.63 million, or $71.80 million from Shenzhen Xinsuniao.

 

The Company evaluated all events and transactions that occurred after June 30, 2020 up through the date the Company issued these unaudited condensed consolidated financial statements on August 14, 2020.

 

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

 

Overview

 

As of June 30, 2020, the Company had two business lines, used luxury car leasing business and commodities trading business.

 

Used luxury car leasing business

 

Currently the Company has eleven used luxurious cars with net book value of approximately US$2.23 million. In addition, the Company also leased used luxurious cars from peer companies and individuals to provide more varieties of luxurious cars to our customers. To determine the model of vehicles to be purchased, we collect data related to customers’ demands and preferences through sales and online promotions. Our professional procurement personnel will then compare models of vehicles offered by different sellers. The decision to purchase a specific vehicle is based on a number of considerations including time of delivery, vehicle condition, vehicle safety features, mileage, repair and maintenance history, accident history, market scarcity, etc. Due to the effects of COVID-19, we had closed our luxury car rental facilities from the end of January 2020 and have resumed our operations since April 2020. For the six months ended June 30, 2020 and 2019, the Company earned income from operating lease of $14,051 and $940,894, respectively. For the three months ended June 30, 2020 and 2019, the Company earned income from operating lease of $nil and $540,895, respectively.

 

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

 

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

 

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

 

Competition

 

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

 

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Commodities trading business

 

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

 

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

 

For the six months ended June 30, 2020, the Company recorded revenue of $2,617,301 from commodities trading business and $2,561,187 from supply chain management services (all from loan recommendation services), respectively, from Huamucheng’s operations. For the three months ended June 30, 2020, the Company recorded revenue of $1,563,669 from commodities trading business and $2,145,810 from supply chain management services (all from loan recommendation services), respectively, from Huamucheng’s operations.

 

For the six and three months ended June 30, 2020, the Company generated net income of $2.54 million and $2.40 million from commodities trading business.

 

In addition, the Company commenced supply chain financing services and for the six months ended June 30, 2020, the Company provided such services to one customer. On March 25, 2020, the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao, to which the Company also provided loan recommendations services during the six months ended June 30, 2020. The Company selected Shenzhen Xinsuniao as its customer because Shenzhen Xinsuniao and its wholly-owned subsidiary Qianhai Baiyu were reputable for their extensive experience in supply chain services for commodities trading.

 

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

  

Competition

 

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

 

Applicable Government Regulations

 

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

 

Recent developments

 

Revolving Credit Facility

 

On March 25, 2020, the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao, to which the Company also provided loan recommendations services during the six months ended June 30, 2020.

 

From July 1, 2020 to the date of this report, the Company collected RMB 507.63 million, or $71.80 million from Shenzhen Xinsuniao.

 

Termination of VIE Agreement

 

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

 

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

 

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

 

The Company has commenced its supply chain financing services and the Company provided such services to one customer for the six months ended June 30, 2020.

 

Key Factors Affecting Our Results of Operation

 

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

 

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

 

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

 

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

 

  preservation of our competitive position in both of the luxurious car leasing and car service industry and commodities trading industry in China;

 

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

 

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

 

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

 

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Results of Operations

 

Three Months Ended June 30, 2020 as Compared to Three Months Ended June 30, 2019

 

    For the Three Months Ended
June 30,
    Change  
    2020     2019     Amount     %  
Revenues                        
Revenue from sales of commodity products   $ 1,563,669     $ -     $ 1,563,669       100 %
Revenue from supply chain management services     2,145,810       -       2,145,810       100 %
Income from operating leases     -       540,895       (540,895 )     (100 )%
Total Revenue     3,709,479       540,895       3,168,584       586 %
                                 
Cost of revenue                                
Cost of revenue - commodity product sales - related party     (1,570,132 )     -       (1,570,132 )     100 %
Cost of revenue - supply chain management services     (7,849 )     -       (7,849 )     100 %
Cost of operating lease     (224,294 )     (397,538 )     173,244       (44 )%
Total cost of revenue     (1,802,275 )     (397,538 )     (1,404,737 )     353 %
                                 
Gross profit     1,907,204       143,357       1,763,847       1,230 %
                                 
Operating expenses                                
Selling, general, and administrative expenses     (491,671 )     (1,133,957 )     642,286       (57 )%
                                 
Total operating cost and expenses     (491,671 )     (1,133,957 )     642,286       (57 )%
                                 
Other income (expenses), net                                
Interest income     1,586,552       22,018       1,564,534       7,106 %
Interest expenses     (104,314 )     (71,743 )     (32,571 )     45 %
Amortization of beneficial conversion feature relating to issuance of convertible notes     (6,460,000 )     -       (6,460,000 )     100 %
Total other expenses, net     (4,977,762 )     (49,725 )     (4,928,037 )     9,911 %
                                 
Loss Before Income Taxes     (3,562,229 )     (1,040,325 )     (2,521,904 )     242 %
                                 
Income tax expenses     (799,029 )     -       (799,029 )     100 %
                                 
Net Loss   $ (4,361,258 )   $ (1,040,325 )   $ (3,320,933 )     319 %

   

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Revenue

 

We generate revenue from the following three sources, including (1) revenue from sales of commodity products, (2) revenue from supply chain management services, and (3) income from operating lease. Both revenue from sales of commodity and revenue from supply chain management services were newly incorporated into our operations as a result of the consolidation of Huamucheng through VIE contractual agreements in November 2019, and Huamucheng subsequently became a wholly owned subsidiary of the Company on June 25, 2020. Total revenue increased by $3,168,584 or 586%, from $540,895 for the three months ended June 30, 2019 to $3,709,479 for the three months ended June 30, 2020, among which revenue from commodity trading, supply chain management and car leasing accounted for 42.2%, 57.8% and 0%, respectively, of our total revenue for the three months ended June 30, 2020. For the three months ended June 30, 2019, 100% of our revenue was generated from the used luxurious car leasing business.

 

(1) Revenue from sales of commodity products

 

For the three months ended June 30, 2020, the Company sold non-ferrous metals to two customers at fixed prices, and earned revenues when the product ownership was transferred to its customers. The Company earned revenues of $1,563,669 from sales of commodity products. There was no such revenue for the three months ended June 30, 2019.

 

(2) Revenue from supply chain management services

 

In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help upstream metal and mineral suppliers sell their metal products, the Company launched its supply chain management service business in December 2019, which primarily consisted of loan recommendation services and distribution services. For the three months ended June 30, 2020, the Company provided loan recommendation services to customers.

 

Loan recommendation service fees

 

The Company refers customers who have financing needs for metal product trading to various financial institutions and assists these customers in obtain loans from the financial institutions. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by the customer. The referral service fee is set at 2.5% of the amount of loans obtained by the customers from the financial institutions. For the three months ended June 30, 2020, the Company earned $2,145,810 from loan recommendation services from the facilitation of a loan volume of approximately $86.0 million (RMB 604.6 million) with eight customers.

 

(3) Income from operating lease

 

The Company commenced its business of lease services of used luxurious cars in May 2018. As of June 30, 2020 and 2019, the Company had eleven and thirteen used luxurious cars, respectively. The lease term is generally within one month. The operating lease income is recognized on a straight-line basis over the scheduled lease term.

 

As affected by COVID-19, we closed our car rental facilities from the end of January to March 2020, and gradually resumed business in April 2020. However due to cautious attitude on transportation, we did not generate operating lease income for the three months ended June 30, 2020. The extent to which COVID-19 impacts our income from operating lease for the fiscal year 2020 will depend on certain future developments, including the duration and spread of the outbreak, emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses in attempting to contain the spread of COVID-19, all of which is uncertain at this point.

 

For the three months ended June 30, 2019, the Company generated operating lease income from used luxurious cars which are either owned by the Company or leased from third party vendors. The Company generated operating lease income of $540,895 for the three months ended June 30, 2019.

 

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Cost of revenue

 

Our cost of revenue primarily include cost of revenue associated with commodity product sales, cost of revenue associated with management services of supply chain and cost of operating lease. Total cost of revenue increased by $1,404,737 or 353% from $397,538 for the three months ended June 30, 2019 to $1,802,275 for the three months ended June 30, 2020, primarily due to an increase of $1,570,132 in cost of revenue associated with commodity product sales which was just launched in December 2019, against a decrease of $173,244 in cost of operating lease as affected by COVID-19.

 

Cost of revenue associated with commodity trading

 

Cost of revenue primarily consists of purchase costs of non-ferrous metal products. For the three months ended June 30, 2020, the Company purchased non-ferrous metal products of $1,570,132 from two third party suppliers, and sold non-ferrous metal products to two customers. The Company recorded cost of revenue of $1,570,132. There was no such cost for the three months ended June 30, 2019 because this was a new business launched in December 2019.

 

Costs associated with Operating lease

 

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

 

The depreciation expenses on leasing business assets increased from $55,321 for the three months ended June 30, 2019 to $82,633 for the three months ended June 30, 2020, representing an increase of $27,312, or 49%. The Company purchased five used luxurious cars in April through June 2019, leading to an increase of depreciated months for these new cars for the three months ended June 30, 2020 as compared with the same period ended June 30, 2019. As of June 30, 2020, the Company had eleven used luxurious cars, as compared with thirteen cars as of June 30, 2019. 

 

In January 2019, the Company officially launched sub-lease of luxurious car business through leasing cars from both third party peer companies and individuals. The Company recorded car leasing expenses of $141,661 and $342,217 for the three months ended June 30, 2020 and 2019, respectively. The decrease was mainly caused by the Company’s closure of car rental facilities from the end of January 2020 and the Company slowed down the business since we resumed business in April 2020, as affected by COVID-19.

 

Selling, general, and administrative expenses

 

Selling, general and administrative expenses decreased from $1,133,957 for the three months ended June 30, 2019 to $491,671 for the three months ended June 30, 2020, representing a decrease of $642,286, or 57%. Selling, general and administrative expenses primarily consisted of salary and employee benefits, office rental expense, business tax and surcharge, professional service fees, office supplies. The decrease was mainly attributable to combined effects of a decrease of other operating expenses of $368,344 as a result of we slowed down our car rental business for the three months ended June 30, 2020, and a decrease of legal and consulting expenses of $261,477, primarily as a result of a decrease in expenses incurred for the registered direct offerings in April and May 2019, including a decrease of audit related fees of $139,694, and an decrease of commission of $100,000 to a third party vendor for referral of underwriters. 

 

Interest income

 

Interest income was primarily generated from loans made to third parties and related parties. For the three months ended June 30, 2020, interest income was $1,586,552, representing an increase of $1,564,534, or 7,106% from $22,018 for the three months ended June 30, 2019. The increase was primarily due to 1) loans aggregating $79.8 million made to a customer, to whom the Company also provided loan recommendations services. For the three months ended June 30, 2020, the Company recognized interest income of $1,355,107, and 2) an increase of loans receivable from others third parties by $1.5 million, leading to an increase of interest income.

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

 

For the six months ended June 30, 2020, the item represented the full amortization of beneficial conversion feature of $3.4 million and amortization of relative fair value of warrants of $3.06 million relating to the convertible notes which was exercised in May 2020.

 

For the three months ended June 30, 2020, no such expenses incurred.

 

Net loss

 

As a result of the foregoing, net loss for the three months ended June 30, 2020 was $4,361,258, representing an increase of $3,320,033 from net loss of $1,040,325 for the three months ended June 30, 2019.

 

For the three months ended June 30, 2020, our net loss was by segment was as follows, which consisted of a net profit of $2.40 million in our commodities trading business, and an amortization expenses of beneficial conversion feature and relative fair value of warrants relating to issuance of convertible notes of $6.46 million.

 

    For the Three Months Ended June 30, 2020  
    Used luxury car leasing business     Commodities trading business     Unallocated     Total  
Segment (loss) profit   $ (282,290 )   $ 2,396,349     $ (6,475,317 )   $ (4,361,258 )

 

Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019

 

    For the Six Months Ended
June 30,
    Change  
    2020     2019     Amount     %  
Revenues                        
Revenue from sales of commodity products   $ 2,617,301     $ -     $ 2,617,301       100 %
Revenue from supply chain management services     2,561,187       -       2,561,187       100 %
Income from operating leases     14,051       940,894       (926,843 )     (99 )%
Total Revenue     5,192,539       940,894       4,251,645       452 %
                                 
Cost of revenue                                
Cost of revenue - commodity product sales - related party     (2,625,275 )     -       (2,625,275 )     100 %
Cost of revenue - supply chain management services     (8,566 )     -       (8,566 )     100 %
Cost of operating lease     (323,608 )     (635,189 )     311,581       (49 )%
Total cost of revenue     (2,957,449 )     (635,189 )     (2,322,260 )     366 %
                                 
Gross profit     2,235,090       305,705       1,929,385       631 %
                                 
Operating expenses                                
Selling, general, and administrative expenses     (916,786 )     (3,040,276 )     2,123,490       (70 )%
      -       (96,318 )     96,318       (100 )%
Total operating cost and expenses     (916,786 )     (3,136,594 )     2,219,808       (71 )%
                                 
Other expenses, net                                
Interest income     1,726,564       32,481       1,694,083       5,216 %
Interest expenses     (238,689 )     (71,743 )     (166,946 )     233 %
Amortization of beneficial conversion feature and relative fair value of warrants relating to issuance of convertible notes     (6,460,000 )     -       (6,460,000 )     100 %
Total other expenses, net     (4,972,125 )     (39,262 )     (4,932,863 )     12,564 %
                                 
Loss Before Income Taxes     (3,653,821 )     (2,870,151 )     (783,670 )     27 %
                                 
Income tax expenses     (847,409 )     -       (847,409 )     100 %
                                 
Net Loss   $ (4,501,230 )   $ (2,870,151 )   $ (1,631,079 )     57 %

   

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Revenue

 

For the six months ended June 30, 2020, we generate revenue from the following three sources, including (1) revenue from sales of commodity products, (2) revenue from supply chain management services, and (3) income from operating lease. Total revenue increased by $4,251,645 or 452%, from $940,894 for the six months ended June 30, 2019 to $5,192,539 for the six months ended June 30, 2020, among which revenue from commodity trading, supply chain management and car leasing accounted for 50.4%, 49.3% and 0.3%, respectively, of our total revenue for the six months ended June 30, 2020. For the six months ended June 30, 2019, 100% of our revenue was generated from the used luxurious car leasing business.

 

(1) Revenue from sales of commodity products

 

For the six months ended June 30, 2020, the Company sold non-ferrous metals to two customers at fixed prices, and earned revenues when the product ownership was transferred to its customers. The Company earned revenues of $2,617,301 from sales of commodity products. There was no such revenue for the six months ended June 30, 2019.

 

(2) Revenue from supply chain management services

 

In connection with the Company’s commodity sales, in order to help customers to obtain sufficient funds to purchase various metal products and also help upstream metal and mineral suppliers sell their metal products, the Company launched its supply chain management service business in December 2019, which primarily consisted of loan recommendation services and distribution services. For the six months ended June 30, 2020, the Company provided loan recommendation services to customers.

 

Loan recommendation service fees

 

The Company refers customers who have financing needs for metal product trading to various financial institutions and assists these customers in obtain loans from the financial institutions. The Company receives a referral fee from the customers if funding is secured. Such revenue is recognized at the point when referral services are performed and the related funds are drawdown by the customer. The referral service fee is set at 2.5% of the amount of loans obtained by the customers from the financial institutions. For the six months ended June 30, 2020, the Company earned $2,561,187 from loan recommendation services from the facilitation of a loan volume of approximately $102.4 million (RMB 720.6 million) with eight customers.

 

(3) Income from operating lease

 

The operating lease income is recognized on a straight-line basis over the scheduled lease term.

 

As affected by COVID-19, we closed our car rental facilities from the end of January to March 2020, and gradually resumed business in April 2020. However due to cautious attitude on transportation, we did not generate operating lease income for the six months ended June 30, 2020. The extent to which COVID-19 impacts our income from operating lease for the fiscal year 2020 will depend on certain future developments, including the duration and spread of the outbreak, emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses in attempting to contain the spread of COVID-19, all of which is uncertain at this point.

 

For the six months ended June 30, 2019, the Company generated operating lease income from used luxurious cars which are either owned by the Company or leased from third party vendors. The Company generated operating lease income of $940,894 for the six months ended June 30, 2019.

 

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Cost of revenue

 

Our cost of revenue primarily include cost of revenue associated with commodity product sales, cost of revenue associated with management services of supply chain and cost of operating lease. Total cost of revenue increased by $2,322,260 or 366% from $635,189 for the six months ended June 30, 2019 to $2,957,449 for the six months ended June 30, 2020, primarily due to an increase of $2,625,275 in cost of revenue associated with commodity product sales which was just launched in December 2019, against a decrease of $311,581 in cost of operating lease as affected by COVID-19.

 

Cost of revenue associated with commodity trading

 

Cost of revenue primarily consists of purchase costs of non-ferrous metal products. For the six months ended June 30, 2020, the Company purchased non-ferrous metal products of $2,625,275 from two third party suppliers, and sold non-ferrous metal products to two customers. The Company recorded cost of revenue of $2,625,275. There was no such cost for the six months ended June 30, 2019 because this was a new business launched in December 2019.

 

Costs associated with Operating lease

 

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

 

The depreciation expenses on leasing business assets increased from $102,179 for the six months ended June 30, 2019 to $162,211 for the six months ended June 30, 2020, representing an increase of $60,032, or 59%. The Company purchased five used luxurious cars in April through June 2019, leading to an increase of depreciated months for these new cars for the six months ended June 30, 2020 as compared with the same period ended June 30, 2019. As of June 30, 2020, the Company had eleven used luxurious cars, as compared with thirteen cars as of June 30, 2019.

 

In January 2019, the Company officially launched sub-lease of luxurious car business through leasing cars from both third party peer companies and individuals. The Company recorded car leasing expenses of $161,397 and $533,010 for the six months ended June 30, 2020 and 2019, respectively. The decrease was mainly caused by the Company’s closure of car rental facilities from the end of January 2020 and the Company slowed down the business since we resumed business in April 2020, as affected by COVID-19.

 

Selling, general, and administrative expenses

 

Selling, general and administrative expenses decreased from $3,040,276 for the six months ended June 30, 2019 to $916,786 for the six months ended June 30, 2020, representing a decrease of $2,123,490, or 70%. Selling, general and administrative expenses primarily consisted of salary and employee benefits, office rental expense, business tax and surcharge, professional service fees, office supplies. The decrease was mainly attributable to combined effects of a decrease of other operating expenses of $726,862 as a result of we slowed down our car rental business for the six months ended June 30, 2020, and a decrease of legal and consulting expenses of $1,482,400, primarily as a result of 1) issuance of 502,391 restricted shares as compensation of $884,208 to certain service providers for the three months ended March 31, 2019, while no such issuance for the three months ended March 31, 2020, and 2) a decrease in expenses incurred for the registered direct offerings in April and May 2019, including an increase of audit related fees of $296,353, an increase of commission of $100,000 to a third party vendor for referral of underwriters. 

 

Interest income

 

Interest income was primarily generated from loans made to third parties and related parties. For the six months ended June 30, 2020, interest income was $1,726,564, representing an increase of $1,694,083, or 5,216% from $32,486 for the six months ended June 30, 2019. The increase was primarily due to 1) loans aggregating $79.8 million made to a customer, to whom the Company also provided loan recommendations services. For the three months ended June 30, 2020, the Company recognized interest income of $1,355,107, and 2) an increase of loans receivable from others third parties by $1.5 million, leading to an increase of interest income.

 

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

 

For the six months ended June 30, 2020, the item represented the full amortization of beneficial conversion feature of $3.4 million and amortization of relative fair value of warrants of $3.06 million relating to the convertible notes which was exercised in May 2020.

 

For the six months ended June 30, 2020, no such expenses incurred.

 

Net loss

 

As a result of the foregoing, net loss for the six months ended June 30, 2020 was $4,501,230, representing an increase of $1,631,079 from net loss of $2,870,151 for the six months ended June 30, 2019.

 

For the six months ended June 30, 2020, our net loss was by segment was as follows, which consisted of a net profit of $2.54 million in our commodities trading business, and an amortization expenses of beneficial conversion feature and relative fair value of warrants relating to issuance of convertible notes of $6.46 million.

 

    For the Six Months Ended June 30, 2020  
    Used luxury car leasing business     Commodities trading business     Unallocated     Total  
Segment (loss) profit   $ (495,734 )   $ 2,540,279     $ (6,545,775 )   $ (4,501,230 )

 

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Cash Flows and Capital Resources

 

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

 

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

 

Liquidity

 

For the six months ended June 30, 2020, the Company incurred a net loss of $4.50 million, and reported cash outflows of approximately $2.61 million from operating activities. As of June 30, 2020, the Company had cash balance of $1,487,594. These factors caused concern as to the Company’s liquidity as of June 30, 2020.

 

In assessing the Company’s liquidity, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements and operating expenses obligations.

 

As of June 30, 2020, the Company had a positive working capital of approximately $85.4 million, among which the Company had a loan due from a customer of approximately $79.4 million for the purpose of developing supply chain financing business. Pursuant to the loan agreement, the loan term for each individual loan was twelve months from disbursement, but in practice the loans are revolving every 3 – 4 months. As of the date of the report, the Company collected RMB 507.63 million, or $71.80 million from the customer.

  

Going forward, the Company plans to fund its operations through revenue generated from its commodity trading business, operating lease income, funds from its private placements as well as financial support commitments from the Company’s Chief Executive Officer and major shareholders.

 

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

 

Statement of Cash Flows

 

The following table sets forth a summary of our cash flows. For the six months ended June 30, 2020 and 2019, respectively:

 

    For the Six Months Ended
June 30,
 
    2020     2019  
Net Cash Used in Operating Activities   $ (2,608,279 )   $ (1,744,246 )
Net Cash Used in Investing Activities     (78,972,810 )     (5,101,686 )
Net Cash Provided by Financing Activities     80,240,706       6,716,633  
Effect of exchange rate changes on cash and cash equivalents     381,294       (47,631 )
Net decrease in cash and cash equivalents     (959,089 )     (176,930 )
Cash at beginning of period     2,446,683       1,484,116  
Cash at end of period   $ 1,487,594     $ 1,307,186  

 

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Net Cash Used in Operating Activities

 

During the six months ended June 30, 2020, we had a cash outflow from operating activities of $2,608,279, an increase of $864,033 from a cash outflow of $1,744,246 for the six months ended June 30, 2019. We incurred a net loss for the six months ended June 30, 2020 of $4,501,230, an increase of $1,631,079 from the six months ended June 30,, 2019, during which we recorded a net loss of $1,829,826. In addition to the change in profitability, the decrease in net cash used in operating activities was the result of several factors, including:

 

  An increase of $1,927,299 in changes of accounts receivable for the six months ended June 30, 2020 because we granted credit term to our customers in commodity trading business;

 

  An increase of $2,843,373 in changes of prepayments for the six months ended June 30, 2020 because the suppliers of trading commodities required us to make repayments;

  

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

 

  Amortization of $6,460,000 in beneficial conversion feature relating to convertible notes.

 

 

Net Cash Used in Investing Activities 

 

Net cash used in investing activities for the six months ended June 30, 2020 was $78,972,810, which was primarily made on loans of $78,987,027 to third parties.

 

Net cash used in investing activities for the six months ended June 30, 2019 was $5,101,686. The cash used in investing activities for the six months ended June 30, 2019 was combined effects of purchase of used luxurious cars of $1,902,529, investments in investment security and equity investees of $1,084,225, investments in financial products of $1,000,000 and loans disbursed to third parties of $1,114,225.

 

Net Cash Provided by Financing Activities

 

During the six months ended June 30, 2020, the cash provided by financing activities was mainly attributable to borrowings from third parties of $740,706, and cash raised of $13,500,000 from a private placements by issuance of 15,000,000 shares of common stocks, cash raised of $66,000,000 from issuance of unsecured senior convertible promissory notes in the aggregate principal amount of $30,000,000, and exercise of accompanied warrants to purchase 20,000,000 shares of common stock at an exercise price of $1.80.

 

During the six months ended June 30, 2019, the cash provided by financing activities was mainly attributable to borrowings from third parties of $2,063,193 and cash raised in registered direct offerings of $4,653,440.

 

Off-balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of June 30, 2020.

 

Contractual Obligations

 

As of June 30, 2020, the annual amounts of future minimum payments under certain of our contractual obligations were:

 

          Less than              
    Total     1 year     1-2 years     Thereafter  
Contractual obligations:                                
Operating lease (1)   $ 290,462     $ 290,462     $    -     $        -  
Total   $ 290,462     $ 290,462     $ -     $ -  

 

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

 

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

 

Critical Accounting Policies

 

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

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of March 31, 2020 (please refer to Item 9A. Controls and Procedures enclosed in Form 10-K filed on May 29, 2020).

 

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

  

Changes in Internal Control over Financial Reporting

 

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

 

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PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

a) 2015 Derivative Action

 

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

 

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

 

b) 2017 Arbitration with Sorghum

 

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

 

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

 

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

 

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

 

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

 

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

 

d) 2020 Court Matter with Harrison Fund

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

If our supply chain financing service customers experience financial difficulties, we may not be able to collect our loan receivables, which would materially and adversely affect our profitability and cash flows from operations.

 

On March 25, 2020, the Company entered into a revolving credit facility with Shenzhen Xinsuniao to provide a credit line of RMB 568 million or approximately $80 million to Shenzhen Xinsuniao. As of the date of this report, the Company has collected RMB 507.63 million, or US$ 71.80 million from Shenzhen Xinsuniao.

 

Over the course of a contract term, a customer's financial condition may decline and limit its ability to pay its obligations. This could cause our cash collections to decrease and bad debt expense to increase. While we may resort to alternative methods to pursue claims or collect receivables, these methods are expensive and time consuming and successful collection is not guaranteed. Failure to collect our receivables or prevail on claims would have an adverse effect on our profitability and cash flows.

  

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

 

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

 

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

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None. 

 

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ITEM 6. EXHIBITS

 

Exhibit No.   Description
     
3.1*   Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the draft registration statement on Form DRS filed on February 14, 2013)
3.2*   Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of the draft registration statement on Form DRS filed on February 14, 2013)
3.3*   Articles of Association of Wujiang Luxiang Rural Microcredit Co. Ltd. (incorporated by reference to Exhibit 3.3 of the registration statement on Form S-1/A filed on June 27, 2013)
3.4*   Certificate of Approval of Wujiang Luxiang Rural Microcredit Co. Ltd. (incorporated by reference to Exhibit 3.4 of the registration statement on Form S-1 filed on June 7, 2013)
3.5*   Certificate of Amendment of the Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.5 of the registration statement on Form S-1/A filed on July 16, 2013)
3.6*   Certificate of Amendment to the Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on January 16, 2019)
3.7*   Certificate of Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on June 7, 2019)
3.8*   Certificate of Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on March 12, 2020)
10.1*   Unofficial English Translation of the VIE Termination Agreement dated June 25, 2020 (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 30, 2020)
10.2*   Unofficial English Translation of the Acquisition Agreement dated June 25, 2020 (incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on June 30, 2020)
10.3*   Employment Agreement, dated July 28, 2020 by and between the Company and Wei Sun (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on July 28, 2020)
31.1**   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2**   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Previously filed
** Filed herewith

  

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SIGNATURES

 

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

 

TD HOLDINGS, INC.  

 

Date: August 14, 2020 By: /s/ Renmei Ouyang
  Name:   Renmei Ouyang
  Title:

Chief Executive Officer

(Principal Executive Officer)

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

 

 

41