The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements.
The accompanying
notes are an integral part of the unaudited condensed consolidated financial statements
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements
The accompanying notes are an integral
part of the unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 and July 16, 2020, Tongdow Block
Chain established Shanghai Jianchi Supply Chain Company Limited (“Shanghai Jianchi”) and Tongdow Hainan Digital Technology
Co., Ltd. (“Tondow Hainan”), respectively, as its wholly owned subsidiaries. Both Shanghai Jianchi and Tongdow Hainan
are holding companies incorporated in accordance with the laws and regulations of 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.
On August 28, 2020, the Company closed
the sales of HC High Summit Limited and its subsidiaries and Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing Tianxing”),
the VIE with Vision Loyal Limited (“Vision Loyal”), at a nominal consideration of $1.00 based on a valuation report presented by a third party valuation firm.
On
September 11, 2020, the Company acquired Zhong Hui Dao Ming Investment Management Limited (“ZHDM HK”) and its
wholly owned subsidiary, Tongdow E-trading Limited (“Tongdow HK”). Both entities were holding companies
incorporated in accordance with the laws and regulations of Hong Kong. The consideration was zero because both entities have not commenced
any operations before the date of acquisition.
As
of September 30, 2020, the Company conducts business through Huamucheng, a subsidiary of the Company, which is engaged in the
commodity trading business and providing supply chain management services to customers in the PRC. Supply chain management services
consist of loan recommendation services and commodity product distribution services.
The accompanying consolidated financial
statements reflect the activities of 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
|
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
|
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
|
Tongdow Hainan Digital Technology Co., Ltd.
(“Tondow Hainan”)
|
|
● A
PRC limited liability company
● Incorporated
on July 16, 2020
● 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
|
|
A wholly owned subsidiary of Shanghai Jianchi
|
Zhong Hui Dao Ming Investment Management Limited
(“ZHDM HK”)
|
|
● A
Hong Kong company
● Incorporated
on March 28, 2007
● A
holding company
|
|
100% owned by HC High BVI
|
Tongdow E-trading Limited (“Tongdow HK”)
|
|
● A
Hong Kong company
● Incorporated
on November 25, 2010
● A
holding company
|
|
100% owned by HC High BVI
|
DISPOSITION OF HC High Summit Limited
Historically, one of the Company’s core businesses
had been the used luxurious car leasing business conducted through Beijing Tianxing Kunlun Technology Co. Ltd. (“Beijing
Tianxing”), an entity that the Company controlled via certain contractual arrangements.
On August 28, 2020, the Company entered into
certain share purchase agreement (the “Disposition SPA”) with Vision Loyal, HC High Summit Limited (“HC High
HK”) and HC High BVI. Pursuant to the Disposition SPA, Vision Loyal agreed to purchase HC High HK in exchange for nominal
consideration of $1.00 based on a valuation report presented by an independent third party valuation firm, Beijing North Asia Asset
Assessment Firm. The Company’s board of directors (the “Board”) approved the transaction contemplated by the
Disposition SPA (the “Disposition”). The Disposition closed on August 28, 2020.
HC High HK is the sole shareholder of Hao Limo,
and controls Beijing Tianxing via a series of contractual arrangements. The list of disposed entities are as follows:
Name
|
|
Relationship
|
HC High Summit Limited (“HC High HK”)
|
|
100% owned by HC High BVI before August 28, 2020
|
Hao Limo Technology (Beijing) Co. Ltd.
(“Hao Limo”)
|
|
WOFE, 100% owned by HC High HK
|
Beijing Tianxing Kunlun Technology Co.
Ltd. (“Beijing Tianxing”)*
|
|
VIE of Hao Limo
|
|
*
|
Upon
disposition, Beijing Tianxing’ six wholly owned subsidiaries and one 60% owned subsidiary were also disposed.
|
|
●
|
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.
|
|
●
|
Beijing Blue Light Supercar Technology Co., Ltd. (over which the Company previously held 60% equity interest)
|
Upon closing of the Disposition on August 28,
2020, Vision Loyal became the sole shareholder of HC High HK and as a result, assumed all assets and obligations of all the subsidiaries
and VIE entities owned or controlled by HC High HK. See Note 4 for details of assets and liabilities of discontinued operations.
The
following diagram illustrates our corporate structure as of the date of this report, reflecting the Disposition and acquisition
of Qianhai Baiyu as discussed further in “Note 14. Subsequent Events” .
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 September 30, 2020 and for the three and nine months ended September 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 nine months ended September
30, 2020 and 2019 are not necessarily indicative of the results for the full years.
(b)
|
Loans receivable due from third parties
|
The Company provided loans to certain third parties for the
purpose of making use of its cash.
The Company accrues interest income
on its loans receivable based on the contractual terms of the respective note. The Company monitors all loans receivable for
delinquency and provides for estimated losses for specific receivables that are not likely to be collected. As of September 30,
2020 and December 31, 2019, the Company did not accrue allowance against loans receivables due from third parties.
(c)
|
Discontinued operation
|
In accordance with ASC 205-20, Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group
of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift
that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity
meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held
for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the
major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets
and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations,
less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss)
of continuing operations in accordance with ASC 205-20-45.
On
August 28, 2020 when the Company closed disposition of HC High Summit Limited, the Company’s used luxurious car leasing business
met all the conditions required in order to be classified as a discontinued
operation (Note 1). Accordingly, the operating results of used luxurious car leasing business are reported as a loss from discontinued
operations in the accompanying consolidated financial statements for all periods presented. In addition, the assets and liabilities
related to our used luxurious car leasing business are reported as assets and liabilities of discontinued operations in the accompanying
consolidated balance sheets at December 31, 2019. For additional information, see Note 4, “Disposition of HC High Summit
Limited”.
The Company has two operating business
lines, including business with metal products trading and supply chain management services business conducted by Huamucheng (“Commodity
Trading and Supply Chain Management Services”) and used luxurious car leasing business (“Used Car Leasing”)
conducted by Beijing Tianxing. However, due to changes in our organizational structure associated with the used luxurious car
leasing business as a discontinued operation (Note 2(c)), management has determined that the Company now operates in one operating
segment with one reporting segment. The accounting policies of our one reportable segment are the same as those described in this
Note 2.
Certain items in the financial statements
of comparative period have been reclassified to conform to the financial statements for the current period, primarily for the
effects of discontinued operations.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
(f)
|
Recent accounting pronouncement
|
In June 2016, the FASB issued ASU
No. 2016-13, “Measurement of Credit Losses on Financial Instruments (Topic 326)”, which significantly changes
the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected
to occur over their remaining life, instead of when incurred. In November 2018, the FASB issued ASU No. 2018-19, “Codification
Improvements to Topic 326, Financial Instruments—Credit Losses”, which amends Subtopic 326-20 (created by ASU No.2016-13)
to explicitly state that operating lease receivables are not in the scope of Subtopic 326-20. Additionally, in April 2019,
the FASB issued ASU No.2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic
815, Derivatives and Hedging, and Topic 825, Financial Instruments”, in May 2019, the FASB issued ASU No. 2019-05,
“Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief”, and in November 2019, the
FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic
815), and Leases (Topic 842): Effective Dates”, and ASU No. 2019-11, “Codification Improvements to Topic 326,
Financial Instruments—Credit Losses”, to provide further clarifications on certain aspects of ASU No. 2016-13
and to extend the nonpublic entity effective date of ASU No. 2016-13. The changes (as amended) are effective for the Company
for annual and interim periods in fiscal years beginning after December 15, 2022, and the Company is in the process of evaluating
the potential effect on its consolidated financial statements.
In August 2020, the FASB issued ASU No.
2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing
the number of accounting models for convertible debt instruments and convertible preferred stock. For public business entities,
the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company are
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company will
adopt ASU 2020-06 effective January 1, 2024. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the
consolidated financial statements. The effect will largely depend on the composition and terms of the financial instruments at
the time of adoption.
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 September 30, 2020, the Company had
a positive working capital of approximately $93.3 million, among which the Company had a loan due from a customer of approximately
$85.6 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
October 1, 2020 to the date of the report, the Company collected approximately RMB 76.1 million, or $10.9 million from
the customer.
Going
forward, the Company plans to fund its operations through revenue generated from its commodity trading business, 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.
4.
|
DISPOSITION OF HC HIGH SUMMIT LIMITED (CONTINUED)
|
On August 28, 2020, the Company entered into
the Disposition SPA by and among Vision Loyal, HC High HK and HC High BVI. Pursuant to the Disposition SPA, Vision Loyal agreed
to purchase the HC High HK in exchange for nominal consideration of $1.00 based on a valuation report presented by a third party
valuation firm. The Board approved the transaction contemplated by the Disposition SPA. The Disposition closed on August 28, 2020.
Upon completion of the Disposition, the Company
does not bear any contractual commitment or obligation to the used luxurious car leasing business or the employees of HC High HK,
nor to Vision Loyal.
On August 28, 2020, management was authorized
to approve and commit to a plan to sell HC High HK, therefore the major assets and liabilities relevant to the disposal
are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same
time, the results of all discontinued operations, less applicable income taxes, are reported as components of net income (loss)
separate from the net loss of continuing operations in accordance with ASC 205-20-45. The assets relevant to the sale of HC High
Summit Limited with a carrying value of $5.32 million were classified as assets held for sale as of August 28, 2020. The assets
of discontinued operations mainly consisted of loan receivables due from third parties of $1.57 million due from third parties
and leasing business assets (used luxurious cars) of $2.23 million. The liabilities relevant to the sale of HC High Summit Limited
with a carrying value of $2.61 million were classified as liabilities held for sale, which was comprised of loans
of $1.17 million due to third parties and due to related parties of $1.06 million. A net loss of $2.99 million was recognized
as the net loss from disposal of discontinued operation, all attributable to the Company’s shareholders. The following is
a reconciliation of net loss of $2.99 million from disposition in the consolidated statements of operations and comprehensive
income (loss):
|
|
Fair value
|
|
|
|
|
|
Consideration in exchange for the disposal
|
|
$
|
1
|
|
Noncontrolling interest of HC High Summit Limited
|
|
|
(15,645
|
)
|
Less: Net assets (comprised of assets of $5,320,768 and liabilities of
$2,606,257)
|
|
|
(2,714,511
|
)
|
Loss from disposal
|
|
|
(2,730,155
|
)
|
Other comprehensive income
|
|
|
(258,961
|
)
|
Net loss from discontinued operations
|
|
$
|
(2,989,116
|
)
|
The following is a reconciliation of the
carrying amounts of major classes of assets and liabilities held for sale in the in the consolidated balance sheet as of August
28, 2020 and December 31, 2019.
|
|
August 28,
2020
|
|
|
December 31,
2019
|
|
Carrying amounts of major classes of assets held for sale:
|
|
|
|
|
|
|
Cash
|
|
$
|
84
|
|
|
$
|
669,407
|
|
Loans receivable from third parties
|
|
|
1,568,418
|
|
|
|
1,379,050
|
|
Due from related parties
|
|
|
463,391
|
|
|
|
470,154
|
|
Other current assets
|
|
|
488,911
|
|
|
|
167,846
|
|
Investments in equity investees
|
|
|
554,711
|
|
|
|
562,807
|
|
Leasing business assets, net
|
|
|
2,229,819
|
|
|
|
2,426,109
|
|
Other noncurrent assets
|
|
|
15,434
|
|
|
|
68,416
|
|
Total assets of disposal group classified as held for
sale
|
|
$
|
5,320,768
|
|
|
$
|
5,743,789
|
|
Carrying amounts of major classes of liabilities held for sale:
|
|
|
|
|
|
|
|
|
Third party loans payable
|
|
$
|
1,168,660
|
|
|
$
|
2,052,236
|
|
Due to related parties
|
|
|
1,056,249
|
|
|
|
1,003,154
|
|
Other current liabilities
|
|
|
381,348
|
|
|
|
234,750
|
|
Liabilities directly associated with the assets classified
as held for sale
|
|
$
|
2,606,257
|
|
|
$
|
3,290,140
|
|
4.
|
DISPOSITION OF HC HIGH SUMMIT LIMITED (CONTINUED)
|
The following is a reconciliation of the
amounts of major classes of income from operations classified as discontinued operations in the consolidated statements of operations
and comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operating leases
|
|
$
|
-
|
|
|
$
|
564,614
|
|
|
$
|
13,946
|
|
|
$
|
1,505,508
|
|
Cost of operating lease
|
|
|
-
|
|
|
|
(372,632
|
)
|
|
|
(323,608
|
)
|
|
|
(1,063,305
|
)
|
Total operating cost and expenses
|
|
|
-
|
|
|
|
(351,969
|
)
|
|
|
(175,959
|
)
|
|
|
(1,569,833
|
)
|
Total other income (expenses), net
|
|
|
-
|
|
|
|
27,089
|
|
|
|
(67,070
|
)
|
|
|
(12,809
|
)
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss from disposal of discontinued
operations
|
|
|
(2,989,116
|
)
|
|
|
-
|
|
|
|
(2,989,116
|
)
|
|
|
-
|
|
Net Loss
from Discontinued Operations
|
|
$
|
(2,989,116
|
)
|
|
$
|
(132,898
|
)
|
|
$
|
(3,541,807
|
)
|
|
$
|
(1,140,439
|
)
|
|
5.
|
LOANS
RECEIVABLE FROM THIRD PARTIES
|
|
|
September
30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Loans receivable from Shenzhen Xinsuniao Technology
Co., Ltd. (“Shenzhen Xinsuniao”)
|
|
$
|
85,641,601
|
|
|
$
|
-
|
|
Loans receivable from Shenzhen Qianhai Baiyu Supply Chain
Co., Ltd. (“Qianhai Baiyu”)
|
|
|
1,669,342
|
|
|
|
-
|
|
Loans receivable from others
|
|
|
-
|
|
|
|
576,647
|
|
Loan receivable from other third parties
|
|
$
|
87,310,943
|
|
|
$
|
576,647
|
|
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 nine months ended September
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 October 1, 2020 to the date of this report, the Company
has collected RMB 76.1 million, or $10.9 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 nine months ended September 30, 2020, the Company made loans aggregating
$155.9 million to Shenzhen Xinsuniao and recognized interest income of $3.8 million with corresponding account of “other
current assets.” For the nine months ended September 30, 2020, the Company also collected loans principal and
interest of $72.6 million and $1.8 million, respectively, from Shenzhen Xinsuniao.
|
5.
|
LOANS
RECEIVABLE FROM THIRD PARTIES (CONTINUED)
|
Management periodically assesses the collectability
of these loans receivable. Delinquent account balances are written-off against the allowance for doubtful accounts after management
has determined that the likelihood of collection is not probable. As of September 30, 2020, there was no allowance recorded as
the Company considers all of the loans receivable fully collectible.
Loans receivable from Qianhai Baiyu
The
Company had a balance of $1,669,342 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 September 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 rate of
10% per annum. Principal and interest are repaid on maturity of the loan. For the nine months ended September 30, 2020, the Company
made loans of $1,665,495 to and collected $2,846,325 from Qianhai Baiyu. For the three and nine months ended September 30,
2020, the Company recognized interest income of $2,102 and $116,135, respectively, from Qianhai Baiyu.
Management periodically assesses the collectability
of these loans receivable. Delinquent account balances are written-off against the allowance for doubtful accounts after management
has determined that the likelihood of collection is not probable. As of September 30, 2020, there was no allowance recorded as
the Company considers all of the loans receivable fully collectible.
Loans receivable from other third
parties
As of December 31, 2019, the Company had
balance of $576,647 due from three third party individuals who were engaged in used luxurious car leasing business. Pursuant to
the loan agreements, these loans matured before December 2020, and the Company charged the third parties interest rates ranging
between 11% and 13% per annum. Principal and interest are repaid on maturity of the loan. Upon disposition of the used luxurious
car leasing busines, the management assessed the collectability of these third-party loans receivable was remoted and wrote off
the balance of $576,647 into “net loss from discontinued operations”.
Interest
income of $2,411,164 and $nil was recognized for the three months ended September 30, 2020 and 2019, respectively. Interest
income of $3,963,717 and $nil was accrued for the nine months ended September 30, 2020 and 2019. As of September 30, 2020 and
December 31, 2019, the Company recorded an interest receivable of $2,110,366 and $nil as reflected under “other current
assets” in the unaudited condensed consolidated balance sheets.
6.
|
INVESTMENTS IN EQUITY INVESTEES
|
As of September 30, 2020, the Company’s
investments in equity investees were comprised of the following:
|
|
Investment
|
|
|
% of ownership
|
|
|
Investment
dates
|
|
|
|
|
|
|
|
|
|
Hangzhou Yihe Network Technology Co., Ltd. (“Hangzhou
Yihe”)
|
|
|
410,000
|
|
|
|
20
|
%
|
|
December 17, 2019
|
|
|
|
410,000
|
|
|
|
|
|
|
|
Less: Share of results of equity investees
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
410,000
|
|
|
|
|
|
|
|
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. On December 17, 2019, the Company closed the
acquisition.
For the three and nine months ended September
30, 2020, Hangzhou Yihe did not resume operations as affected by COVID-19. As a result, the Company had no share of results of
equity investees for the period. Because the closure of business was temporary, the management determined the decline in fair
value below the carrying value is not other-than-temporary. As of September 30, 2020, the Company did not provide impairment against
the investments in equity investees.
7.
|
OTHER CURRENT LIABILITIES
|
|
|
September
30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Other payable
|
|
$
|
-
|
|
|
$
|
128,301
|
|
Accrued interest expenses
|
|
|
-
|
|
|
|
163
|
|
Accrued payroll and benefit
|
|
|
30,867
|
|
|
|
29,466
|
|
Other tax payable
|
|
|
651,964
|
|
|
|
35,169
|
|
Others
|
|
|
14,992
|
|
|
|
7,503
|
|
|
|
$
|
697,823
|
|
|
$
|
200,602
|
|
8.
|
STOCK SUBSCRIPTION ADVANCE FROM SHAREHOLDERS/STOCK SUBSCRIPTION
RECEIVABLE
|
On November 21, 2019, the Company entered
into a securities purchase agreement with certain investors (the “Purchasers”), 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 the Purchasers 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”.
On
September 1, 2020, 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 $2.50. As of September 30, 2020, the Company issued the shares but has not received the proceeds of
$5,000,000. The Company recorded the amount in the account of “stock subscription receivable”.
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%.
9.
|
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 nine months ended September 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.
During July 2020 through August 2020,
the holders of warrants issued in direct offering closed on April 11, 2019 (“April Offer”) elected to exercise 167,978
shares of warrants at an exercise price of $2.2, and exercise 1,502,022 shares of warrants at cashless exercise. The Company received
proceeds of $369,522 through escrow account and issued 545,401 shares of common stocks.
Warrants
A summary of warrants activity for the
nine months ended September 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
|
|
|
(21,670,000
|
)
|
|
|
|
|
1.68
|
|
Balance of warrants outstanding as of September 30,
2020
|
|
|
1,363,370
|
|
|
3.63 years
|
|
|
1.90
|
|
9.
|
CAPITAL TRANSACIONS (CONTINUED)
|
As of September 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 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 assumptions 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
|
%
|
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 nine months ended September 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. As of September 30, 2020 and
December 31, 2019, the Company had deferred tax assets of $5,305,479 and $2,933,705, respectively. The Company maintains a full
valuation allowance on its net deferred tax assets as of September 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 September 30,
2020 and 2019, the Company had current income tax expenses of $1,376,282 generated by Huamucheng and $nil, respectively, and deferred
income tax expenses of $nil and $nil, respectively. For the nine months ended September 30, 2020 and 2019, the Company had current
income tax expenses of $2,223,691 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 September 30, 2020 and December 31, 2019 and the Company
does not believe that its unrecognized tax benefits will change over the next twelve months.
11.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
1)
|
Nature of relationships with related parties
|
Name
|
|
Relationship
with the Company
|
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.
|
Guotao Deng
|
|
Legal representative of an entity over which the Company exercised
significant influence
|
2)
|
Balances with related parties
|
As of September 30, 2020 and December
31, 2019, the balances with related parties were as follows:
-
|
Due from related parties
|
|
|
September,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Qianhai Baiyu (i)
|
|
$
|
-
|
|
|
$
|
2,840,728
|
|
Total Due from related parties
|
|
$
|
-
|
|
|
$
|
2,840,728
|
|
|
(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 September 30, 2020, the Company classified
the balance due from Qianhai Baiyu to “Loans receivable from third parties”
(Note 5).
|
11.
|
RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
|
2)
|
Balances with related parties (continued)
|
-
|
Due to related parties, current
|
|
|
September
30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Guangzhou Chengji (1)
|
|
$
|
1,771,574
|
|
|
$
|
164,897
|
|
Guotao Deng (2)
|
|
|
509
|
|
|
|
1,435
|
|
Total
|
|
$
|
1,772,083
|
|
|
$
|
166,332
|
|
(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)
|
The balances due to Guotao Deng represent the operating expenses
paid by the related parties on behalf of the Company. The balance is payable on demand and interest free.
|
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 nine months ended September 30,
2020, the Company borrowed a loan of $1,441,461 from Guangzhou Chengji. The Loan has an annual interest rate of 8% and a maturity
date of December 4, 2020. For the three and nine months ended September 30, 2020, the Company accrued interest expenses of $29,949
and $67,106, respectively.
12.
|
COMMITMENTS AND CONTINGENCIES
|
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 September 30, 2020, the Company
had one lease contract with lease expiration in June 2021. 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.
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Rights of use lease assets
|
|
$
|
237,524
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities, current
|
|
$
|
215,658
|
|
|
$
|
-
|
|
Operating lease liabilities, noncurrent
|
|
|
-
|
|
|
|
-
|
|
Total operating lease liabilities
|
|
$
|
215,658
|
|
|
$
|
-
|
|
The Company did not enter into lease agreements
until January 1, 2020. As of September 30, 2020, the weighted average remaining lease term was 0.75 years and discount rates were
4.75%.
Lease expenses for the three and nine
months ended September 30, 2020 were $79,098 and $234,744, respectively. Lease expenses for the three and nine months ended September
30, 2019 were $nil.
The following is a schedule, by years,
of maturities of lease liabilities as of September 30, 2020:
Twelve months ended September 30, 2021
|
|
$
|
219,517
|
|
|
|
|
|
|
Total lease payments
|
|
|
219,517
|
|
Less: imputed interest
|
|
|
(3,859
|
)
|
Present value of lease liabilities
|
|
$
|
215,658
|
|
12.
|
COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
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.
12.
|
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.
13.
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RISKS AND UNCERTAINTIES
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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 September 30, 2020, approximately $2.97 million was
primarily deposited in financial institutions located in Mainland China, which were uninsured by the government authority. To
limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions
in China which management believes are of high credit quality.
The Company’s operations are carried
out in Mainland China. Accordingly, the Company’s business, financial condition and results of operations may be influenced
by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. In addition,
the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among
other factors.
The Company is also exposed to liquidity
risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business
needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary,
the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
Substantially all of the Company’s
operating activities and the Company’s major assets and liabilities are denominated in RMB, which is not freely convertible
into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”)
or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC
or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed
contracts.
The value of RMB is subject to changes
in central government policies and to international economic and political developments affecting supply and demand in the China
Foreign Exchange Trading System market. Where there is a significant change in value of RMB, the gains and losses resulting from
translation of financial statements of a foreign subsidiary will be significant affected.
Translation of amounts from RMB into US$
has been made at the following exchange rates for the respective periods:
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September 30,
2020
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December 31,
2019
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Balance sheet items, except for equity accounts
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6.8033
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6.9680
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For the Nine Months Ended
September 30,
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2020
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2019
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Items in the statements of operations,
comprehensive loss and statements of cash flows
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6.9957
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6.8634
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On
October 26, 2020, Huamucheng, a wholly owned subsidiary of the Company, entered into certain share purchase agreements (the
“SPA”) with Shenzhen Xinsuniao Technology Co., Ltd. (the “Seller”), a limited liability company
organized under the laws of the PRC, and Shenzhen Qianhai Baiyu Supply Chain Co., Ltd. (the “Target”), a limited
liability company organized under the laws of the PRC. The Seller is the record holder and beneficial owner of all registered
paid-up capital of the Target. Pursuant to the SPA, Huamucheng agreed to pay to the Seller an aggregate cash consideration of
RMB670 million (approximately US$99.3 million) (the “Total Consideration”), of which 85% will be paid to the
Seller in installments on or before December 25, 2020 and the remaining 15% will be paid to the Seller in installments on or
before December 25, 2021, and the Seller agreed to transfer to Huamucheng, within 7 business days of the execution of the
SPA, all of its registered paid-up capital of the Target (the “Acquisition”).
The
Company evaluated all events and transactions that occurred after September 30, 2020 up through the date the Company issued these
unaudited condensed consolidated financial statements on November 12, 2020.