TDH Holdings, Inc 20-F for FY2023
TDH Holdings, Inc. (PETZ)
About this 20-F
TDH Holdings, Inc filed this 20-F on April 29, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.18M
- up 2.5% from $3.1M a year earlier
- Net loss
- $23.63M
- compared with net income of $803.7K a year earlier
- Diluted EPS
- -$2.29
- compared with $0.10 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
OR
For the fiscal year ended
OR
OR
for the transition period from ____________ to ____________
Commission file number
(Exact name of the Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
c/o Beijing Wenxin Co., Ltd.
People’s Republic of
Tel: +86-166-7863-6230
(Address of principal executive offices)
c/o Beijing Wenxin Co., Ltd.
People’s Republic of
Tel:
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None.
As of the close of the period covered by this
annual report the issuer had
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ Large Accelerated filer | ☐ Accelerated filer | ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statement of the registrant included in the filing reflect the correction
of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☒ | ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board | ☐ Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Table of Contents
i
CERTAIN INFORMATION
In this Annual Report on Form 20-F (the “Annual Report”), unless otherwise indicated, numerical figures included in this Annual Report have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
For the sake of clarity, this Annual Report follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English.
Except where the context otherwise requires and for purposes of this Annual Report only:
| ● | Depending on the context, the terms “we,” “us,” “our company,” and “our” refer to TDH Holdings, Inc., a British Virgin Islands company; |
| ● | TDH HK Limited, a Hong Kong company wholly-owned by TDH HOLDINGS, INC.; |
| ● | TDH Foods Limited, a Hong Kong company wholly-owned by TDH HOLDINGS, INC.; |
| ● | TDH Group BVA, a Belgium company wholly-owned by TDH Holdings, Inc; |
| ● | TDH Income Corporation, a Nevada corporation; |
| ● | Ruby21Noland LLC, a Missouri corporation; |
| ● | Far Ling’s Inc., a Missouri corporation; |
| ● | Bo Ling’s Chinese Restaurant, Inc., a Missouri corporation; |
| ● | Qingdao Tiandihui Foodstuffs Co., Ltd. (“Tiandihui”), a Chinese limited liability company, disposed in December 2023 as a result of the completion of bankruptcy proceedings; |
| ● | Qingdao Tiandihui Pet Foodstuffs Co., Ltd., a Chinese limited liability company; |
| ● | Qingdao Tiandihui Foodstuffs Sales Co., Ltd., a Chinese limited liability company; |
| ● | Beijing Chongai Jiujiu Cultural Communication Co., Ltd., a Chinese limited liability company, disposed in December 2023; |
| ● | Beijing Wenxin Company., Ltd., a Chinese limited liability company; |
| ● | Qingdao Chihong Information Consulting Co., Ltd., a Chinese limited liability company; |
| ● | “shares” and “common shares” refer to our shares, $0.02 par value per share; |
| ● | “China” and “PRC” refer to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Macau, Taiwan and Hong Kong; and |
| ● | all references to “RMB,” and “Renminbi” are to the legal currency of China, all references to “USD,” and “U.S. Dollars” are to the legal currency of the United States., and all references to “Euro” and “€” are to the legal currency of Belgium. |
ii
FORWARD-LOOKING STATEMENTS
This Report contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based on the success of our business.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this Annual Report.
This Annual Report should be read in conjunction with our audited financial statements and the accompanying notes thereto, which are included in Item 18 of this Annual Report.
Summary of Risk Factors
Investing in our Common Shares involves significant risks. You should carefully consider all of the information in this annual report before making an investment in our Common Shares. Below please find a summary of the principal risks we face, organized under the relevant headings. These risks are discussed more fully in the section titled “Risk Factors”
Risks related to our business. See “Risk Factors – Risks Related to Our Business”
Risk and uncertainties related to our business include, but are not limited to, the following:
| ● | We may be subject to claims that were not discharged in Tiandihui’s bankruptcy proceedings, which could have a material adverse effect on our operating results and profitability. |
| ● | The report of our independent registered public accounting firm on our financial statements includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. |
| ● | We have historically incurred recurring losses and it is uncertain whether we may continue to incur losses in the future. |
| ● | We discontinued our petfood manufacturing segment and the turnaround of our business currently depends, in part, on our ability to successfully generate revenue in the restaurant segment. |
| ● | We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services. |
| ● | While we are not aware of any data breach in the past, cyber-attacks, computer viruses or any future failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information could result in a data breach which could materially adversely affect our reputation, financial condition and operating results. |
iii
Risks related to our restaurant segment business. See “Risk Factors – Risks Related to the Restaurant Segment”
Risk and uncertainties related to our restaurant segment business include, but are not limited to, the following:
| ● | Our restaurant base is geographically concentrated in Missouri, and we could be negatively affected by conditions specific to this state. |
| ● | Failure to preserve the value and relevance of our brand could have an adverse impact on our financial results. |
| ● | If we do not anticipate and address evolving consumer preferences and effectively execute our pricing, promotional and marketing plans, our business could suffer. |
| ● | We face intense competition in our market, which could hurt our business. |
| ● | Food safety and foodborne illness concerns may have an adverse effect on our reputation and business. |
Risks related to Doing Business in China. See “Risk Factors – Risks Related to Doing Business in China”
Risk and uncertainties related to doing business in China include, but are not limited to, the following:
| ● | Because of our corporate structure, we as well as the investors are subject to unique risks due to uncertainty of the interpretation and the application of the PRC laws and regulations. |
| ● | Uncertainties with respect to the PRC legal system could have a material adverse effect on us. |
| ● | The Chinese government exerts substantial influence over the manner in which we must conduct our business activities and may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Common Shares. |
| ● | Draft rules for China-based companies seeking for securities offerings in foreign stock markets was released by the CSRC for public consultation. While such rules have not yet come into effect, the Chinese government may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit or completely hinder our ability to offer or continue to offer our Common Shares to investors and could cause the value of our Common Shares to significantly decline or become worthless. |
| ● | CSRC and other Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers. Additional compliance procedures may be required in connection offerings, and, if required, we cannot predict whether we will be able to obtain such approval. As a result, we face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or be worthless. |
| ● | We may be liable for improper use or appropriation of personal information provided by our customers. |
| ● | Since our operations and some of our assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers. |
| ● | We hold certain of our cash balances in RMB in uninsured bank accounts in China. |
iv
| ● | We may be subject to PRC regulatory limitations on merger and acquisition (M&A) activities. |
| ● | Fluctuation of the Renminbi may indirectly affect our financial condition by affecting the volume of cross-border money flow. |
| ● | We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors. |
| ● | Introduction of new laws or changes to existing laws by the PRC government may adversely affect our business. |
| ● | Governmental control of currency conversion may affect the value of your investment. |
| ● | PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production costs. |
| ● | Changes in PRC’s political and economic policies could harm our business. |
| ● | If relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital markets. |
| ● | Because our operations are located in the PRC, information about our operations is not readily available from independent third-party sources. | |
| ● | Failure to comply with PRC laws and regulations related to labor and employee benefits may subject us to penalties or additional cost. | |
| ● | We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law. | |
| ● | Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements. |
Risks related to the Ownership of our Common Shares. See “Risk Factors – Risks Related to the Ownership of our Common Shares”
Risk and uncertainties related to ownership of our Commons Shares include, but are not limited to, the following:
| ● | We are a holding company incorporated in the British Virgin Islands. As a holding company with no material operations of our own, we conduct a substantial majority of our operations through our subsidiaries established in the PRC. |
| ● | Recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our listing. |
| ● | The Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our continued listing. |
| ● | If our financial condition deteriorates as a NASDAQ listed company, we may not meet continued listing standards on the NASDAQ Capital Market. |
| ● | We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects. |
| ● | The market price of shares may be volatile, which could cause the value of your investment to decline. |
| ● | As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder. |
v
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
ITEM 3. KEY INFORMATION
| A. | [Reserved] |
| B. | Capitalization and Indebtedness |
Not required.
| C. | Reasons for the Offer and Use of Proceeds |
Not required.
| D. | Risk factors |
You should carefully consider the following risk factors, together with all of the other information included in this Annual Report.
Risks Related to Our Business
We may be subject to claims that were not discharged in Tiandihui’s bankruptcy proceedings, which could have a material adverse effect on our operating results and profitability.
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Since November 2019, the Company has been a subject of 57 lawsuits by its raw material supplies, printing and packaging supplies, transportation companies and other vendors. The claims raised in these lawsuits pertain to the Company’s non-payment of various invoices for supplier and vendor services rendered, with related interest and costs. In 44 cases, the creditors have reached civil conciliation letters with our company, and in 9 cases, the court has issued civil judgments. With respect to the remaining 4 cases, the plaintiffs withdrew the lawsuits because of lack of evidence. The settlement and judgments involved total claims of RMB13.86 million (USD $2.12 million). Such liabilities have been accrued and reflected in the consolidated financial statements for the year ended December 31, 2020. On March 13, 2021, a land use right and a factory building on the land owned by Tiandihui were auctioned by the court for $5,098,461 (RMB33.14 million). On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui, and it entered into bankruptcy proceedings. On November 3, 2023, another land use right and a factory building on the land owned by Tiandihui were auctioned by the court for $875,321 (RMB 6.28 million). On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui had been implemented and the bankruptcy proceedings were complete. As a result, Tiandihui has been fully disposed as of December 31, 2023, and substantially all the material claims against Tiandihui that arose prior to the date of the bankruptcy completion were addressed. However, we may be subject to claims that were not discharged in the bankruptcy proceedings, if any. To the extent any pre-bankruptcy liability still remains, the ultimate resolution of such claims and other obligations may have a material adverse effect on our future operating results, profitability and financial condition.
1
The report of our independent registered public accounting firm on our financial statements includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern, and if our business is unable to continue it is likely investors will lose all of their investment.
As discussed in Note 2 to the consolidated financial statements to this Annual Report, the Company fully discontinued its petfood business during 2023 because the Tiandihui bankruptcy process was concluded and all claims against Tiandihui were processed by December 27, 2023. Currently the Company’s revenue is substantially generated from the restaurant business segment. The Company’s business turnaround currently depends, in part, on its ability to successfully introduce, manage and acquire new restaurants. If the Company is not able to effectively manage and acquire new restaurants that successfully generate revenue, it may not be able to grow and maintain its business as anticipated, and its sales may decline and its future business, financial condition and results of operations may be materially adversely affected.
There can be no assurances that future revenue or capital infusion will be sufficient to enable the Company to develop its business to a level where it will be profitable or continuously to generate positive cash flows. Our auditor, YCM CPA Inc., has indicated in their report on the Company’s financial statements for the fiscal year ended December 31, 2023 that there is “substantial doubt about our ability to continue as a going concern”. A “going concern” opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives.
Management’s plan to alleviate the substantial doubt about our ability to continue as a going concern include working to improve the Company’s liquidity and capital sources mainly through cash flow from its operations and raise sufficient capital through equity or debt financing, strategic alliances or otherwise. If we are unable to achieve these goals, our business will be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors will lose their investment.
In the absence of an additional liquidity, our ability to continue to operate will be impaired, and we may not be able to continue as a going concern. Additionally, even if we raise sufficient capital through equity or debt financing, strategic alliances or otherwise or generate additional revenue there can be no assurances that future revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or to generate positive cash flows.
We have historically incurred recurring losses and it is uncertain whether we may continue to incur losses in the future.
Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayment to financial institutions upon maturity, we temporarily suspended our production and normal business operations and we were involved in certain legal proceedings beginning in November 2019. The COVID-19 outbreak and spread further disrupted our business activities during the period from the beginning of 2020 up to May 2020 when we resumed our business operations. Historically, we reported recurring losses of approximately $23.63 million and $0.86 million for the years ended December 31, 2023 and 2022, respectively. On October 31, 2021, we acquired 51% equity interests of Far Ling’s Inc. and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $3.1 million and $3.2 million in food service revenue for the years ended December 31, 2022 and 2023, respectively. However, we fully discontinued our petfood manufacturing segment in 2023 and currently our revenue is substantially generated from the restaurant business segment. Our business turnaround currently depends, in part, on our ability to successfully introduce, manage and acquire new restaurants. If we are not able to effectively manage and acquire new restaurants that successfully generate revenue, we may not be able to grow and maintain our business as anticipated. In order to achieve profitability, among other factors, management must successfully execute our growth and restaurant operations in the markets on which we are focused. If we are unable to successfully take necessary steps, we may be unable to sustain or increase our profitability in the future.
2
We discontinued our petfood manufacturing segment and the turnaround of our business depends, in part, on our ability to successfully generate revenue in the restaurant segment.
Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayments upon maturity, we suspended our production and normal petfood business operations and we were involved in certain legal proceedings beginning in November 2019. The COVID-19 outbreak and spread further disrupted our business activities from the beginning of 2020 up to May 2020 when we resumed our petfood business operations. These factors led to significant decrease in our petfood sales. On October 31, 2021, we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $3.1 million and $3.2 million in food service revenue for the years ended December 31, 2022 and 2023, respectively.
We discontinued our petfood business during the first quarter of 2023 and we fully disposed of Tiandihui because its bankruptcy process concluded and all claims against it were processed by December 27, 2023. Our decision to discontinue our petfood business was driven largely by the following factors: the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; decreased demand for sales of petfood; its historical performance and expected business forecasts in the absence of further capital investments and opportunity costs; and lawsuits and the closing of our manufacturing facilities.
Our turnaround depends, in part, on our ability to successfully introduce manage and acquire new restaurants. This, in turn, depends on our ability to predict and respond to evolving consumer trends, demands and preferences. The management and acquisition of restaurants involves considerable costs. If we are not able to effectively manage and acquire new restaurants that successfully generate revenue, we may not be able to grow and maintain our business as anticipated, and our sales may decline and our business, financial condition and results of operations may be materially adversely affected.
We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.
Our future success depends heavily upon the continued service of our key executives. We rely on their business, industry, financial and capital markets knowledge and experience. If our CEO or CFO became unable or unwilling to continue in their present positions, we may not be able to replace them easily, our business may be significantly disrupted and our financial condition and results of operations may be materially adversely affected.
We do not maintain key man life insurance on any of our senior management or key personnel.
The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our Company. In addition, we compete for qualified personnel with other companies, and we face competition in attracting skilled personnel and retaining the members of our senior management team. These personnel possess technical and business capabilities which are difficult to replace. There is intense competition for experienced senior management with technical and industry expertise in our industry, and we may not be able to retain our key personnel. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
While we are not aware of any data breach in the past, cyber-attacks, computer viruses or any future failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information could result in a data breach which could materially adversely affect our reputation, financial condition and operating results.
As part of business operations, we collect, process, store and transmit our employees, business partners and other third party data. Our customers, business partners and employees expect we adequately safeguard and protect their sensitive personal and business information. We may experience cyber-attacks and other security incidents of varying degrees from time to time, and we may incur significant costs in protecting against or remediating such incidents. In addition, we are subject to a variety of laws and regulations in the PRC and other countries relating to cybersecurity and data protection. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with customers and cooperation partners could be severely damaged. Affected third parties or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper access to or disclosure of data, which could cause us to incur significant expense and liability, and our business and operations could be materially and adversely affected.
3
Risks Related to the Restaurant Segment
Our restaurant base is geographically concentrated in Missouri, and we could be negatively affected by conditions specific to this state.
Bo Lings is located in Missouri. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in Missouri have had, and may continue to have, material adverse effects on our business, financial condition or results of operations. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by adverse conditions in this market compared to other chain restaurants with a broader national footprint.
Failure to preserve the value and relevance of our brand could have an adverse impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand, including corporate purpose, mission and values. Brand value is based in part on consumer perceptions, which are affected by a variety of factors, including the nutritional content and preparation of our food, the ingredients we use, the manner in which we source commodities and our general business practices, including the people practices at Bo Lings. Consumer acceptance of our offerings is subject to change for a variety of reasons, and some changes can occur rapidly. For example, nutritional, health, environmental and other scientific studies and conclusions, which constantly evolve and may have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that affect the “informal eating out” (“IEO”) segment or perceptions of our brand, generally or relative to available alternatives. Our business could also be impacted by business incidents or practices, whether actual or perceived, particularly if they receive considerable publicity or result in litigation, as well as by our position or perceived lack of position on environmental, social responsibility, public policy, geopolitical and similar matters. Consumer perceptions may also be affected by adverse commentary from third parties, including through social media or conventional media outlets, regarding the IEO segment or our brand, culture, operations, suppliers or franchisees. If we are unsuccessful in addressing adverse commentary or perceptions, whether or not accurate, our brand and financial results may suffer.
If we do not anticipate and address evolving consumer preferences and effectively execute our pricing, promotional and marketing plans, our business could suffer.
Our continued success depends on our ability to build upon our historic strengths and competitive advantages. In order to do so, we need to anticipate and respond effectively to continuously shifting consumer demographics and trends in food sourcing, food preparation, food offerings, and consumer behavior and preferences, including with respect to environmental and social responsibility matters, in the IEO segment. If we are not able to predict, or quickly and effectively respond to, these changes, or if our competitors predict or respond more effectively, our financial results could be adversely impacted.
Our ability to build upon our strengths and advantages also depends on the impact of our pricing, promotional and marketing plans, and the ability to adjust these plans to respond quickly and effectively to evolving customer behavior and preferences, as well as shifting economic and competitive conditions. Existing or future pricing strategies and marketing plans, as well as the value proposition they represent, are expected to continue to be important components of our business strategy. However, they may not be successful, or may not be as successful as the efforts of our competitors, which could negatively impact sales, guest counts and market share.
We face intense competition in our market, which could hurt our business.
We compete primarily in the IEO segment, which is highly competitive. We also face sustained, intense competition from traditional, fast casual and other competitors, which may include many non-traditional market participants such as convenience stores, grocery stores, coffee shops and online retailers. We expect our environment to continue to be highly competitive, and our results in any particular reporting period may be impacted by a contracting IEO segment or by new or continuing actions, product offerings or consolidation of our competitors and third-party partners, which may have a short- or long-term impact on our results.
We compete on the basis of product choice, quality, affordability, service and location. In particular, we believe our ability to compete successfully in the current market environment depends on our ability to improve existing products, successfully develop and introduce new products, price our products appropriately, deliver a relevant customer experience, manage the complexity of our restaurant operations, manage our investments in technology and modernization, and respond effectively to our competitors’ actions or offerings or to unforeseen disruptive actions. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics, which could have the overall effect of harming our business.
Food safety and foodborne illness concerns may have an adverse effect on our reputation and business.
Foodborne illnesses, such as E. coli, hepatitis A and salmonella, may occur within our system from time to time. In addition, food safety issues such as food tampering, contamination and adulteration occur or may occur within our system from time to time. Any report or publicity linking us, our competitors, our restaurant, to instances of foodborne illness or food safety issues could adversely affect our brand and reputation as well as our revenues and profits and possibly lead to product liability claims, litigation and damages. If a customer of our restaurant becomes ill from foodborne illnesses or as a result of food safety issues, it may be temporarily closed, which would decrease our revenues.
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Risks Related to Doing Business in China
Because of our corporate structure, we as well as the investors are subject to unique risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including but not limited to limitation regulatory review of overseas listing of PRC companies through a special purpose vehicle. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard. We may also be subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory Commission (“CSRC”) if we fail to comply with their rules and regulations. Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.
Our PRC subsidiaries are located in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The PRC government exercises significant control over China’s economic growth through strategical allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies. While the Chinese economy has experienced significant growth in the past decades, growth has been uneven, both geographically and among various sectors of the economy. The growth of the Chinese economy may not continue at a rate experienced in the past, and the impact of COVID-19 on the Chinese economy may continue. Any prolonged slowdown in the Chinese economy may reduce the demand for our services and materially and adversely affect our business and results of operations. Furthermore, any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could have a material adverse effect on the overall economic growth of China and market demand for our products and services. Such developments could adversely affect our businesses, lead to reduction in demand for our products and services and adversely affect our competitive position.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. We conduct some of our business through our PRC Subsidiaries, and therefore these subsidiaries are generally subject to laws and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection requirements, etc. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties, including any inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
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The Chinese government exerts substantial influence over the manner in which we must conduct our business activities and may intervene or influence our operations at any time, which could result in a material change in our operations and the value of our Common Shares.
The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to securities regulation, data protection, cybersecurity and mergers and acquisitions and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Government actions in the future could significantly affect economic conditions in China or particular regions thereof and could require us to materially change our operating activities or divest ourselves of any interests we hold in Chinese assets. Our business may be subject to various government and regulatory interference in the provinces in which we operate. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry.
Given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or become worthless.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severely Cracking Down on Illegal Securities Activities According to Law, or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems, will be taken to deal with the risks and incidents of China-concept overseas listed companies. As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions from PRC government authorities in connection with the Opinions.
On June 10, 2021, the Standing Committee of the National People’s Congress of China, or the SCNPC, promulgated the PRC Data Security Law, which took effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.
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In early July 2021, regulatory authorities in China launched cybersecurity investigations with regard to several China-based companies that are listed in the United States. The Chinese cybersecurity regulator announced on July 2 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s app be removed from smartphone app stores. On July 5, 2021, the Chinese cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and Boss of KANZHUN LIMITED (Nasdaq: BZ). On July 24, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly released the Guidelines for Further Easing the Burden of Excessive Homework and Off-campus Tutoring for Students at the Stage of Compulsory Education, pursuant to which foreign investment in such firms via mergers and acquisitions, franchise development, and variable interest entities are banned from this sector.
On November 14, 2021, the Cyberspace Administration of China (“CAC”) released the Regulations on the Network Data Security Management (Draft for Comments), or the Data Security Management Regulations Draft, to solicit public opinion and comments. Pursuant to the Data Security Management Regulations Draft, data processor holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Data processing activities refers to activities such as the collection, retention, use, processing, transmission, provision, disclosure, or deletion of data. According to the latest amended Cybersecurity Review Measures, which was promulgated on December 28, 2021, and became effective on February 15, 2022 and replace the Cybersecurity Review Measures promulgated on April 13, 2020, an online platform operator holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Since the Cybersecurity Review Measures is new, the implementation and interpretation thereof is not yet clear. As of the date of this annual report, we have not been informed by any PRC governmental authority of any requirement that we file for approval.
On August 17, 2021, the State Council promulgated the Regulations on the Protection of the Security of Critical Information Infrastructure, or the Regulations, which took effect on September 1, 2021. The Regulations supplement and specify the provisions on the security of critical information infrastructure as stated in the Cybersecurity Review Measures. The Regulations provide, among others, that protection department of certain industry or sector shall notify the operator of the critical information infrastructure in time after the identification of certain critical information infrastructure.
On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights, and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may file a lawsuit with a People’s Court. Given that the above mentioned newly promulgated laws, regulations and policies were recently promulgated or issued, and have not yet taken effect (as applicable), their interpretation, application and enforcement are subject to substantial uncertainties.
Draft rules for China-based companies seeking for securities offerings in foreign stock markets was released by the CSRC for public consultation. While such rules have not yet come into effect, the Chinese government may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit or completely hinder our ability to offer or continue to offer our Common Shares to investors and could cause the value of our Common Shares to significantly decline or become worthless.
On December 24, 2021, the CSRC and relevant departments of the State Council published the Draft Rules Regarding Overseas Listings, which aim to regulate overseas securities offerings and listings by China-based companies, are available for public consultation. The Draft Rules Regarding Overseas Listing aim to lay out the filing regulation arrangement for both direct and indirect overseas listing and clarify the determination criteria for indirect overseas listing in overseas markers.
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The Draft Rules Regarding Overseas Listing, among other things, stipulate that, after making initial applications with overseas stock markets for initial public offerings or listings, all China-based companies shall file with the CSRC within three working days. The required filing materials with the CSRC include (without limitation): (i) record-filing reports and related undertakings, (ii) compliance certificates, filing or approval documents from the primary regulator of the applicants’ businesses (if applicable), (iii) security assessment opinions issued by related departments (if applicable), (iv) PRC legal opinions, and (v) prospectus. In addition, overseas offerings and listings may be prohibited for such China-based companies when any of the following applies: (1) if the intended securities offerings and listings are specifically prohibited by the laws, regulations or provision of the PRC; (2) if the intended securities offerings and listings may constitute a threat to, or endanger national security as reviewed and determined by competent authorities under the State Council in accordance with laws; (3) if there are material ownership disputes over applicants’ equity interests, major assets, core technologies, etc.; (4) if, in the past three years, applicants’ domestic enterprises, controlling shareholders or de facto controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in the past three years, any directors, supervisors, or senior executives of applicants have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Draft Administrative Provisions further stipulate that a fine between RMB 1 million and RMB 10 million may be imposed if an applicant fails to fulfill the filing requirements with the CSRC or conducts an overseas offering or listing in violation of the Draft Rules Regarding Overseas Listings, and in cases of severe violations, a parallel order to suspend relevant businesses or halt operations for rectification may be issued, and relevant business permits or operational license revoked.
The Draft Rules Regarding Overseas Listings, if enacted, may subject us to additional compliance requirements in the future, and though we believe that none of the situations that would clearly prohibit overseas listing and offering applies to us, we cannot assure you that we will be able to receive clearance of such filing requirements in a timely manner, or at all. There is also the possibility that we may not be able to obtain or maintain such approval or that we inadvertently concluded that such approval was not required. If prior CSRC approval was required while we inadvertently concluded that such approval was not required or if applicable laws and regulations or the interpretation of such were modified to require us to obtain the CSRC approval in the future, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from offerings into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Common Shares. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer the Common Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations, and cause the Common Shares to significantly decline in value or become worthless.
CSRC and other Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. Additional compliance procedures may be required in connection offerings, and, if required, we cannot predict whether we will be able to obtain such approval. If we are required to obtain PRC governmental permissions to commence the sale of securities, we will not commence offerings until we obtain such permissions. As a result, we face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or be worthless.
On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Since this document is relatively new, uncertainties still exist in relation to how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our future business, results of operations, and the value of our securities.
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Further, Chinese government continues to exert more oversight and control over Chinese technology firms. On July 2, 2021, Chinese cybersecurity regulator announced, that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s application be removed from smartphone application stores. On July 5, 2021, the Chinese cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and Boss of KANZHUN LIMITED (Nasdaq: BZ).
Therefore, CSRC and other Chinese government agencies may exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers, especially those in the technology field. As of the date of this annual report, we have not received any requirement to obtain approval of CSRC to list on U.S. exchanges. Further, however, given the current regulatory environment in the PRC, we and our PRC subsidiaries are still subject to the uncertainty of interpretation and enforcement of the rules and regulations in the PRC, which can change quickly with little advance notice, and any future actions of the PRC authorities, additional compliance procedures may be required in connection with this offering and our business operations. As a result, we face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our Common Shares to significantly decline or be worthless.
We or our PRC subsidiaries may be subject to PRC laws relating to the use, sharing, retention, security and transfer of confidential and private information, such as personal information and other data. These laws continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.
The Cybersecurity Law, which was adopted by the National People’s Congress on November 7, 2016 and came into force on June 1, 2017, and the Cybersecurity Review Measures, or the “Review Measures,” which were promulgated on April 13, 2020, amended on December 28, 2021 and became effective on February 15, 2022, provide that personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affect or may affect national security, it should be subject to cybersecurity review by the CAC. In addition, a cybersecurity review is required where critical information infrastructure operators, or the “CIIOs,” purchase network-related products and services, which products and services affect or may affect national security. Due to the lack of further interpretations, the exact scope of what constitute a “CIIO” remains unclear. Further, the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws. In addition, Review Measures stipulates that an online platform operator holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Cybersecurity Review Measures does not provide a definition of “online platform operator”, therefore, we cannot assure you that we will not be deemed as an “online platform operator”. As of the date of this annual report, we or our PRC subsidiaries have not received any notice from any authorities identifying us as a CIIO or requiring us to undertake a cybersecurity review by the CAC. Further, as of the date of this annual report, we or our PRC subsidiaries have not been subject to any penalties, fines, suspensions, investigations from any competent authorities for violation of the regulations or policies that have been issued by the CAC. On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law which took effect on September 1, 2021. The Data Security Law requires that data shall not be collected by theft or other illegal means, and it also provides that a data classification and hierarchical protection system shall be established. The data classification and hierarchical protection system protects data according to its importance in economic and social development, and the damages it may cause to national security, public interests, or the legitimate rights and interests of individuals and organizations if the data is falsified, damaged, disclosed, illegally obtained or illegally used, which protection system is expected to be built by the state for data security in the near future. On November 14, 2021, CAC published the Regulations on the Network Data Security Management (Draft for Comments), or the Data Security Management Regulations Draft to solicit public opinion and comments. Under the Data Security Management Regulations Draft, which provides that an overseas initial public offering to be conducted by a data processor processing the personal information of more than one million individuals shall apply for a cybersecurity review. Data processor means an individual or organization that independently makes decisions on the purpose and manner of processing in data processing activities, and data processing activities refers to activities such as the collection, retention, use, processing, transmission, provision, disclosure, or deletion of data. We may be deemed as a data processor under the Data Security Management Regulations Draft. However, the Data Security Management Regulations Draft has not been formally adopted. It is uncertain when the final regulation will be issued and take effect, how it will be enacted, interpreted or implemented, and whether it will affect us. There remains uncertainty as to how the Review Measures and the Data Security Management Regulations Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Review Measures and the Data Security Regulations Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we and our PRC subsidiaries expect to take all reasonable measures and actions to comply. We cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no assurance that we and our PRC subsidiaries can fully or timely comply with such laws should they be deemed applicable to our operations. Any cybersecurity review could also result in negative publicity with respect to our company and diversion of our managerial and financial resources. There is no certainty as to how such review or prescribed actions would impact our operations and we cannot guarantee that any clearance can be obtained or any actions that may be required for our continued listing on the Nasdaq capital market and the offering as well can be taken in a timely manner, or at all.
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In addition, according to the Personal Information Protection Law, where the purpose of the activity is to provide a product or service to that natural person located within China, such activity shall comply with the Personal Information Protection Law. Further, the Data Security Law provides that where any data handling activity carried out outside of the territory of China harms the national security, public interests, or the legitimate rights and interests of citizens or organizations of China, legal liability shall be investigated in accordance with such law. However, the Personal Information Protection Law and the Data Security Law are relatively new, there remains uncertainty as to how the laws will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the two laws.
The regulatory requirements with respect to cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, and significant changes, resulting in uncertainties about the scope of our responsibilities in that regard. Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us to government enforcement actions and investigations, fines, penalties, suspension, or disruption of our PRC subsidiaries’ operations, among other things.
We may be liable for improper use or appropriation of personal information provided by our customers.
Our business can potentially involve collecting and retaining certain internal and customer data. We also maintain information about various aspects of our operations as well as regarding our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies, and their employees from selling or otherwise illegally disclosing a citizen’s personal information obtained in performing duties or providing services or obtaining such information through theft or other illegal ways. On November 7, 2016, the SCNPC issued the Cyber Security Law of the PRC, or Cyber Security Law, which became effective on June 1, 2017. Pursuant to the Cyber Security Law, network operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.
The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the CAC, the Ministry of Industry and Information Technology, or MIIT, and the Ministry of Public Security, have been increasingly focused on regulation in data security and data protection.
The PRC regulatory requirements regarding cybersecurity are evolving. For instance, various regulatory bodies in China, including the CAC, the Ministry of Public Security and the State Administration for Market Regulation, or the SAMR (formerly known as State Administration for Industry and Commerce, or the SAIC), have enforced data privacy and protection laws and regulations with varying and evolving standards and interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on June 1, 2020, was amended on December 28, 2021, and became effective on February 15, 2022. According to the Cybersecurity Review Measures, (i) operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security; (ii) online platform operators who are engaged in data processing are also subject to the regulatory scope; (iii) the CSRC is included as one of the regulatory authorities for purposes of jointly establishing the state cybersecurity review working mechanism; (iv) online platform operators holding more than one million users/users’ individual information and seeking a listing outside China shall file for cybersecurity review; and (v) the risks of core data, material data or large amounts of personal information being stolen, leaked, destroyed, damaged, illegally used or illegally transmitted to overseas parties and the risks of critical information infrastructure, core data, material data or large amounts of personal information being influenced, controlled or used maliciously shall be collectively taken into consideration during the cybersecurity review process.
Certain internet platforms in China have been reportedly subject to heightened regulatory scrutiny in relation to cybersecurity matters. As of the date of this prospectus supplement, we and our PRC subsidiaries have not been informed by any PRC governmental authority of any requirement that we file for a cybersecurity review. However, if any of us is deemed to be a critical information infrastructure operator or a company that is engaged in data processing and holds personal information of more than one million users, we could be subject to PRC cybersecurity review.
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As of the date hereof, we are of the view that we and our PRC subsidiaries are in compliance with the applicable PRC laws and regulations governing the data privacy and personal information in all material respects, including the data privacy and personal information requirements of the CAC, and we and our PRC subsidiaries have not received any complaints from any third party, or been investigated or punished by any PRC competent authority in relation to data privacy and personal information protection. However, as there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we or our PRC subsidiaries could be subject to cybersecurity review, and if so, we may not be able to pass such review. In addition, we or our PRC subsidiaries could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, removal of our app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations.
On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which took effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.
As uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot assure you that we and our PRC subsidiaries will comply with such regulations in all respects and we or our PRC subsidiaries may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. We or our PRC subsidiaries may also become subject to fines and/or other sanctions which may have material adverse effect on our business, operations and financial condition.
While we and our PRC subsidiaries take various measures to comply with all applicable data privacy and protection laws and regulations, the current security measures and those of our third-party service providers may not always be adequate for the protection of our customer, employee or company data. We or our PRC subsidiaries may be a target for computer hackers, foreign governments or cyber terrorists in the future.
Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of our third-party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques.
Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate use of security controls. Any of such incidents may harm our reputation and adversely affect our business and results of operations. In addition, we may be subject to negative publicity about our security and privacy policies, systems, or measurements. Any failure to prevent or mitigate security breaches, cyber-attacks or other unauthorized access to our systems or disclosure of our customers’ data, including their personal information, could result in loss or misuse of such data, interruptions to our service system, diminished customer experience, loss of customer confidence and trust, impairment of our technology infrastructure, and harm our reputation and business, resulting in significant legal and financial exposure and potential lawsuits.
Since our operations and some of our assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers.
Our operations and some assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
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We may be subject to PRC regulatory limitations on merger and acquisition (M&A) activities.
Foreign enterprises that engage in M&A activities inside and outside China are subject to different regulatory limitations under Chinese laws and regulations. The key regulations governing such activities within PRC are Wholly Foreign-Owned Enterprise Law, the Interim Provisions on the Domestic Investment of Foreign-Funded Enterprise, the Catalogue for the Guidance of Foreign Investment Industries (amended in 2017) and other relevant Chinese laws and regulations. Under these laws and regulations, conducting M&A in China requires that Tiandihui and Qingdao Tiandihui Pet Foodstuffs Co., Ltd are wholly foreign-owned enterprises “WFOE” be profitable, and a timely application with and approval by of local regulatory agencies of any proposed M&A transaction. The M&A activities outside the PRC are governed by several rules and regulations, including PRC Administrative Measures on Offshore Investment, the Regulation on Foreign Exchange Administration of the PRC, the Notice of the State Administration of Foreign Exchange on Issuing the Provisions on the Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions, the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Resident’s Financing and Round-trip Investment Through Offshore Special Purpose Vehicles. Under these laws and regulations, our WFOE must get approval from the PRC Ministry of Commerce or its branch offices for any proposed offshore M&A transaction, and complete its foreign exchange registration. We cannot offer any assurance that in the event we seek such approvals or registrations we will be able to secure them in a timely fashion or will be able to receive them at all; negative feedback from the regulatory agencies or our failure to register such proposed transactions may have material adverse impact on our business expansion and could materially affect our business operation and finance condition. In addition, since approval and/or registration procedures required time to complete, these processes may cause additional delays to our onshore or offshore M&A projects, which, in turn, may have adverse impact on our business and operations.
Fluctuation of the Renminbi may indirectly affect our financial condition by affecting the volume of cross-border money flow.
The value of the RMB fluctuates and is subject to changes in the PRC’s political and economic conditions. We do not currently engage in hedging activities to protect against foreign currency risks. Even if we choose to engage in such hedging activities, we may not be able to do so effectively. Future movements in the exchange rate of the RMB could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors for services performed outside of China. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more rapid appreciation of the Renminbi against the U.S. dollar. Any material revaluation of Renminbi may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any new Renminbi denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes.
If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
If you are a United States holder, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.
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We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
Based on the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by the U.S. Internal Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, a U.S. investor will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes if either:
| ● | 75% or more of our gross income in a taxable year is passive income; or |
| ● | the average percentage of our assets by value in a taxable year that produce or are held for the production of passive income (which includes cash) is at least 50%. |
The calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change. We cannot assure that we will not be a PFIC for any taxable year.
Introduction of new laws or changes to existing laws by the PRC government may adversely affect our business.
The PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions such as the U.S., decided cases (which may be taken as reference) do not form part of the legal structure of the PRC and thus have no binding effect. Furthermore, in line with its transformation from a centrally planned economy to a more market-oriented economy, the PRC government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or their interpretation may be subject to further changes. Such uncertainty and prospective changes to the PRC legal system could adversely affect our results of operations and financial condition.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC, which may take as long as six months in the ordinary course. We receive the majority of our revenues in Renminbi. Under our current corporate structure, our income is derived from payments from WFOE. The October 8, 2016 Provisional Measures for Filling Administration of Establishment and Changes of Foreign-Investment Enterprise (the “Establishment and Changes Provision”) promulgated by the PRC Ministry of Commerce and was amended on July 30, 2017, regulates the recordation procedures with respect to the establishment and changes of a foreign-invested enterprise which do not fall within the scope of special administration measures for foreign investment admission as stipulated by the state; for those entities that do fall within the regulatory reach of special administration measures must go through approval procedures according to relevant laws and regulations governing foreign investment. We do not believe that such measures will have any impact on our income derived from payment from our WFOE because:
| ● | We do not fall within the scope of special access administrative measures for foreign investment admission as stipulated by the state, and therefore are not required to go through approval procedures. |
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| ● | The Establishment and Changes Provision regulates the recordation procedures relating to the establishment and changes of a foreign-invested enterprise, which including but not limited to: (i) the changes of company name, registered address, duration of operation, business scope, registered capital, total investment, shareholders, merger, division and termination of the enterprise; and (ii) the corporate name change, domicile or place of incorporation, subscribed capital, investment period. Based on the foregoing and our current corporate structure, our income is derived from payment from our WFOE, but the Establishment and Changes Provisions do not regulate our origin of income or dividend policy, and therefore will not have any impact on our dividend distribution. |
Shortages in the availability of foreign currency may restrict the ability of WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC SAFE by complying with certain procedural requirements. However, approval from appropriate PRC government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production costs.
In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008 and was amended on December 28, 2012, to clarify certain details in connection with the implementation of the Labor Contract Law, the PRC State Council promulgated the Implementing Rules for the Labor Contract Law on September 18, 2008, which came into effect immediately (collectively as “new laws”). The legislation formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, these new laws provide for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the new laws require the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the new laws require an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth under the new laws. Because of the lack of precedent for the enforcement of such a law, the standards and procedures set forth under the new laws in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in the PRC that such an “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the new laws, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract not possible. To date, there has been very little guidance or precedent as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC are covered by the new laws and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, these new laws can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.
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Changes in PRC’s political and economic policies could harm our business.
Our results of operations, financial condition and prospects are subject to economic, political and legal developments in the PRC. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. The PRC economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the PRC government have had a positive effect on the economic development of PRC, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the PRC economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development (“OECD”). These differences include, without limitation:
| ● | economic structure; |
| ● | level of government involvement in the economy; |
| ● | level of development; |
| ● | level of capital reinvestment; |
| ● | control of foreign exchange; |
| ● | methods of allocating resources; and |
| ● | balance of payments position. |
As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to those of the OECD member countries. Since 1979, the Chinese government has promulgated many new laws and regulations covering general economic matters. Despite these efforts to develop a legal system, the PRC’s system of laws is not yet complete. Even where adequate law exists in the PRC, enforcement of existing laws or contracts based on existing law may be uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of the PRC’s judiciary, in many cases, creates additional uncertainty as to the outcome of any lawsuit. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Our activities in the PRC will also be subject to administration review and approval by various national and local agencies of the PRC’s government. Because of the changes occurring in the PRC’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Although we have obtained all required governmental approvals to operate our business as currently conducted, to the extent we are unable to obtain or maintain required governmental approvals, the PRC government may, in its sole discretion, prohibit us from conducting our business.
If relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversy between the United States and China could adversely affect the market price of our common shares and our ability to access U.S. capital markets.
The Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our investment in that country.
Our business is subject to political and economic uncertainties and may be adversely affected by political, economic and social developments in the PRC. Over the past several years, the PRC government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The PRC government may not continue to pursue these policies or may alter them to our detriment from time to time with little, if any, prior notice. Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our investment in the PRC and in the total loss of any investment in us.
Because our operations are located in the PRC, information about our operations is not readily available from independent third-party sources.
Our shareholders may have greater difficulty in obtaining information about them on a timely basis than would shareholders of a U.S.-based company. Their operations will continue to be conducted in the PRC and shareholders may have difficulty in obtaining information about them from sources other than the companies themselves. Information available from newspapers, trade journals, or local, regional or national regulatory agencies such as issuance of construction permits and contract awards for development projects will not be readily available to shareholders and, where available, will likely be available only in Chinese. Shareholders will be dependent upon management for reports of their progress, development, activities and expenditure of proceeds.
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Failure to comply with PRC laws and regulations related to labor and employee benefits may subject us to penalties or additional cost.
Companies operating in China are required to comply with various laws and regulations related to labor and employment benefits. For example, companies are required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing provident funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where our employees are based. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Apart from that, if a company intends adopt flexible working hour arrangement and comprehensive working hour scheme, it shall fulfill the requirements in relevant regulations, and make filings with labor authorities, or the company will be subject to penalties and may be required to pay extra fees to its employees. As confirmed by the relevant local authorities and our directors, in no records of violation were found on PRC subsidiaries for social insurance and/or housing fund during 2023.
However, we cannot assure you that we have complied or will be able to comply with all labor-related law and regulations, including those relating to obligations to make social insurance payments, contribute to the housing provident funds, as well as make all filing for comprehensive working hour scheme. Our failure to make contributions to various employee benefit plans and in complying with applicable PRC labor-related laws may subject us to fines, penalties, government investigations or labor disputes and we could be required to make up the contributions for these plans as well as to pay late fees and fines, which may adversely affect our financial condition and results of operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We implemented an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. We believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.
We are a holding company incorporated in the British Virgin Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, Our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.
In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our PRC subsidiaries’ ability to pay dividends and other distributions to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends to us may restrict our ability to satisfy our liquidity requirements.
In addition, the Enterprise Income Tax Law of PRC, and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
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Risks Related to the Ownership of Our Common Shares
We are a holding company incorporated in the British Virgin Islands. As a holding company with no material operations of our own, we conduct a substantial majority of our operations through our subsidiaries.
Investors in our common shares should be aware that they may never directly hold equity interests in our subsidiaries, but rather purchasing equity solely in TDH Holdings, Inc. our British Virgin Islands holding company, which does not directly own substantially all of our business in China and the United States and conducted by our subsidiaries. Our Common shares are shares in TDH Holdings, Inc., a BVI holding company instead of shares of our subsidiaries in China and the United States. This structure is subject to certain legal and operational risks, including risks associated with our subsidiaries’ operations in China, including changes in the legal, political and economic policies of the Chinese government, the relations between China and the United States, Chinese or United States regulations, all of which may materially and adversely affect our business, financial condition and results of operations and/or the value of our Common Shares or could significantly decline or become worthless.
Recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our listing.
In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC, and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years.
On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB on Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the U.S.
On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. There is currently no legal process under which such a co-audit may be performed in China. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective. The measures in the PWG Report are presumably subject to the standard SEC rulemaking process before becoming effective. On August 10, 2020, the SEC announced that SEC Chairman had directed the SEC staff to prepare proposals in response to the PWG Report, and that the SEC was soliciting public comments and information with respect to these proposals.
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On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.
Furthermore, the Holding Foreign Companies Accountable Act (“HFCA Act”), which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within three years, may result in the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time.
In addition, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if signed into law, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years.
On November 5, 2021, the SEC approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100 provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China, and (2) Hong Kong. The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements. Our auditor is headquartered in California and is not subject to this determination announced by the PCAOB.
On August 26, 2022, the PCAOB signed a SOP with the CSRC and the MOF of the PRC regarding cooperation in the oversight of PCAOB-registered public accounting firms in the PRC and Hong Kong which establishes a method for the PCAOB to conduct inspections of PCAOB-registered public accounting firms in the PRC and Hong Kong, as contemplated by the Sarbanes-Oxley Act. Under the agreement, (a) the PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates without consultation with, or input from, PRC authorities; (b) procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed; (c) the PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates; and (d) the PCAOB shall have the unfettered ability to transfer information to the SEC in accordance with the Sarbanes-Oxley Act, and the SEC can use the information for all regulatory purposes, including administrative or civil enforcement actions. The PCAOB was required to reassess its determinations as to whether it is able to carry out inspections and investigations completely and without obstruction by the end of 2022. On December 15, 2022, the PCAOB determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and vacated its previous determinations. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB will consider the need to issue a new determination.
Congress passed fiscal year 2023 Omnibus spending legislation in December 2022, which contained provisions to accelerate the HFCAA timeline for implementation of trading prohibitions from three years to two years. As a result, the SEC is required to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections or complete investigations for two consecutive years.
Our auditor, the independent registered public accounting firm that issues the audit report for the year ended December 31, 2022 included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in California and was last inspected by the PCAOB in March 2023. According to our auditor, the PCAOB will conduct regular inspections. In the event that, in the future, either there is any regulatory change or step taken by PRC regulators that does not permit YCM CPA Inc. to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, or the PCAOB expands the scope of the determinations so that we will be subject to the HFCA Act, as the same may be amended, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including “over-the-counter” trading, may be prohibited, under the HFCA Act. The recent developments would add uncertainties to our listing and we cannot assure you whether Nasdaq Capital Market or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.
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The HFCA Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our continued listing.
On May 20, 2020, the U.S. Senate passed the HFCA Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives approved the HFCA Act. On December 18, 2020, the HFCA Act was signed into law. On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. A company will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above. Furthermore, on June 22, 2021, the U.S. Senate passed the AHFCAA, which, if signed into law, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. Furthermore, on June 22, 2021, the U.S. Senate passed the AHFCAA, which, if signed into law, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China and (2) Hong Kong. Our auditor is headquartered in California and is not subject to this determination announced by the PCAOB.
Our auditor, the independent registered public accounting firm that issues the audit report for the year ended December 31, 2023 included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in California and was last inspected by the PCAOB in March 2023. According to our auditor, the PCAOB will conduct regular inspections.
The recent developments would add uncertainties to our listing and we cannot assure you whether the Nasdaq Capital Market or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit. Furthermore, the HFCA Act, which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within three years, may result in the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time.
Our management team has limited experience in managing a U.S. public company and complying with laws applicable to such company, the failure of which may adversely affect our business, financial conditions and results of operations.
Our current management team has limited experience in managing a U.S. publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to U.S. public companies. Prior to the completion of our initial public offering, we mainly operated our businesses as a private company in the PRC. As a result of our IPO, our company became subject to significant regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and investors, and our management currently has no experience in complying with such laws, regulations and obligations. Our management team may not successfully or efficiently manage our transition to becoming a U.S. public company. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial conditions and results of operations.
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If our financial condition deteriorates as a NASDAQ listed company, we may not meet continued listing standards on the NASDAQ Capital Market.
If our shares are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are not so listed or are delisted at some later date, our common shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common shares are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.
We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
The market price of shares may be volatile, which could cause the value of your investment to decline.
Worldwide market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about our industry in or individual scandals, and in response the market price of our common shares could decrease significantly. In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, or at all.
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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Shares may decline.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, we are required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. Currently we have not established and maintained effective disclosure controls and procedures. In addition, there are material weaknesses in our internal control over financial reporting. Specifically, the material weakness identified by our management include (i) a lack of sufficient accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; and (ii) a lack of an effective review process which may lead to material audit adjustments to the financial statements. In order to address the foregoing material weakness, we have put in place additional controls, including, among others, hiring and replacing certain management team members. Our CEO has established a new management team to deal with operation management challenges of the Company, and our CFO has been working on improving the Company’s financial and reporting functions. We also plan to hire more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and implement regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel. Overall, the Company is working through and standardizing its business processes, instituting business procedures and adding controls and additional supervision, particularly, in the areas of control duties and data sharing and supervision so as to provide effective means of linking various functions and departments within the Company. If we are unable to resolve material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate affairs will be governed by our memorandum and articles of association, the BVI Business Companies Act, 2004 (as amended), referred to below as the “BVI Act”, and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from the common law of England and the wider Commonwealth, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are largely codified in the BVI Act, but are potentially not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. As a result of all of the above, holders of our shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.
British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.
Shareholders of British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States Shareholders of a British Virgin Islands company could, however, bring a derivative action in the British Virgin Islands courts, and there is a clear statutory right to commence such derivative claims under Section 184C of the BVI Act. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
The laws of the British Virgin Islands may provide less protection for minority shareholders than those under U.S. law, so minority shareholders may have less recourse than they would under U.S. law if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, the rights of minority shareholders are protected by provisions of the BVI Act dealing with shareholder remedies and other remedies available under common law (in tort or contractual remedies). The principal protection under statutory law is that shareholders may bring an action to enforce the constitutional documents of the company (i.e. the memorandum and articles of association) as shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association of the company. A shareholder may also bring an action under statute if he feels that the affairs of the company have been or will be carried out in a manner that is unfairly prejudicial or discriminating or oppressive to him. The BVI Act also provides for certain other protections for minority shareholders, including in respect of investigation of the company and inspection of the company books and records. There are also common law rights for the protection of shareholders that may be invoked, largely dependent on English common law, since the common law of the British Virgin Islands for business companies is limited.
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We may not be able to pay any dividends on our shares in the future due to British Virgin Islands law.
Under British Virgin Islands law, we may only pay dividends to our shareholders if the value of our assets exceeds our liabilities and we are able to pay our debts as they become due. We cannot give any assurance that we will declare dividends of any amounts, at any rate or at all in the future. Future dividends, if any, will be at the discretion of our board of directors, and will depend upon our results of operations, cash flows, financial condition, payment to us of cash dividends by our subsidiaries, capital needs, future prospects and other factors that our directors may deem appropriate.
ITEM 4. INFORMATION ON THE COMPANY
History and Development of the Company
We started our company in 2002 in Qingdao, Shandong Province, PRC as a petfood company.
The following chart reflects our organizational structure as of the filling date:
On September 20, 2018, the Board has approved acquisitions by the Company of TDH Group BVBA, a company established under the laws of Belgium and TDH JAPAN, a company established under the laws of Japan. In connection with the foregoing transactions the Company executed Share Sale and Purchase Agreements (together, the “Agreements”) pursuant to which the Company agreed to pay approximately USD$ 936,782 and USD $156,130 (RMB 6 million and RMB 1 million), respectively, to acquire all of outstanding securities of TDH Group BVBA and TDH JAPAN, respectively, from the sole shareholder of each entity, Rongfeng Cui, the Company’s former CEO. The purchase consideration under the Agreements was paid by issuance of 936,782 and 156,130 restricted common shares of the Company, respectively. Rongfeng Cui incorporated TDH Group BVBA in 2012 and TDH JAPAN in 2017 to develop and maintain all the clients in Europe and Japan, and to distribute and expand product sales in European and Japanese markets. Effective August 2, 2019, Rongfeng Cui ceased to be Company’s CEO and Dandan Liu was appointed as the CEO in his stead. TDH Japan has been deregistered and dissolved in February 2021. As of the date of this filing, TDH Group BVBA is currently under bankruptcy proceeding.
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On April 22, 2002 Tiandihui was incorporated in Qingdao City, PRC. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui and it entered into bankruptcy proceedings. On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. As a result, Tiandihui has been fully disposed as of December 31, 2023.
On July 19, 2016, Tiandihui acquired 100% shares of Chongai Jiujiu from Rongfeng Cui and Yanjuan Wang for $87,849 (RMB 610,000). The acquisition of Chongai Jiujiu was a transaction between entities under common control. Chongai Jiujiu had immaterial operations and suffered recurring operating losses since its inception. In December 2023, the Company transferred all its ownership interests in Chongai Jiujiu to a third party. The disposition of Chongai Jiujiu did not represent a strategic shift of the Company’s business due to immateriality, accordingly, the discontinued operations of Chongai Jiujiu are not presented and disclosed in this Annual Report.
On January 22, 2020, Qingdao Tiandihui Pet Foodstuffs Co., Ltd. (“Tiandihui Pet Foodstuffs”) was incorporated in Qingdao City, PRC.
On January 21, 2020, Qingdao Tiandihui Foodstuffs Sales Co., Ltd. (“Tiandihui Foodstuffs Sales”) was incorporated in Qingdao City, PRC. Tiandihui Foodstuffs Sales is a wholly owned subsidiary of Tiandihui Pet Foodstuffs.
On February 27, 2020, TDH Foods Limited was incorporated in Hong Kong, with the purpose of being a holding company for equity interests in Tiandihui Pet Foodstuffs. TDH Foods Limited does conduct any operations or own any material assets or liabilities.
On August 24, 2020, TDH Holdings, Inc. acquired 100% equity interests of TDH Foods Limited.
In December 2020, TDH Holdings Inc. acquired remaining 1% equity interest of TDH Petfood LLC. As a result, TDH Petfood LLC became a wholly-owned subsidiary of TDH Holdings, Inc. TDH Petfood LLC had no active business operations since its incorporation, and it has been deregistered and dissolved in 2021.
On June 4, 2021, TDH Income Corporation (“TDH Income”) was incorporated in Nevada. TDH Holdings, Inc. owns a 99.99% interest in TDH Income, and in December 2021, TDH Holdings, Inc. acquired the remaining 0.01% interest in TDH Income. As a result, TDH Income became a wholly-owned subsidiary of TDH Holdings, Inc.
On June 9, 2021, Ruby21Noland LLC (“Ruby21Noland”) was incorporated in Missouri. Ruby21Noland is a wholly owned subsidiary of TDH Income.
On October 31, 2021, TDH Income Corporation acquired 51% equity interests of Far Ling’s Inc.
On October 31, 2021, TDH Income Corporation acquired 100% equity interests of Bo Ling’s Chinese Restaurant, Inc.
On January 22, 2022, Beijing Wenxin Co., Ltd. (“Beijing Wenxin”) was incorporated in Beijing City, PRC.
On March 27, 2023, Qingdao Chihong Information Consulting Co., Ltd. (“Qingdao Chihong”) was incorporated in Qingdao City, PRC.
Recent Developments
Discontinued operations
We discontinued our petfood manufacturing segment during the first quarter of 2023. Our decision to discontinue our petfood business was driven largely by the following factors: the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; decreased demand for sales of petfood; its historical performance and expected business forecasts in the absence of further capital investments and opportunity costs; lawsuits and the closing of our manufacturing facilities and them being subject to bankruptcy proceedings. We believe the discontinuation of our petfood manufacturing business will provide us with the opportunity to redirect our focus and resources towards expanding and improving our restaurant segment.
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On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. Due to the completion of Tiandihui’s bankruptcy proceedings, all the claims against it were concluded. As a result, Tiandihui has been fully disposed as of December 31, 2023, and all the material claims against Tiandihui that arose prior to the date of the bankruptcy completion were addressed.
Business Overview
Special Considerations
Implications of the HFCA Act
We are not a Chinese operating company but a British Virgin Islands holding company with operations conducted by our subsidiaries established in Missouri, Nevada, PRC, Belgium, and Hong Kong.
PRC laws and regulations governing business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in the operations of our PRC subsidiaries and Hong Kong subsidiaries, significant depreciation of the value of our Common Shares, or a complete hindrance of our ability to offer or continue to offer our securities to investors and cause the value of such securities to significantly decline or be worthless. The Chinese government may intervene or influence the operations of our PRC operating entities at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in the operations of our PRC operating entities and/or the value of our Common Shares. Further, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement.
Trading in our Common Shares may be prohibited on national exchanges or “over-the-counter” markets under the HFCA Act if the PCAOB is unable to inspect our auditors for three consecutive years beginning in 2021, and as a result, an exchange may determine to delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the AHFCAA, which, if signed into law, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. Pursuant to the HFCA Act, the PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC, and (2) Hong Kong. In addition, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations.
Our auditor is currently subject to PCAOB inspections and the PCAOB is thus able to inspect our auditor. Our auditor is headquartered in California and was last inspected by the PCAOB in March 2023. According to our auditor, the PCAOB will conduct regular inspections. Our auditor is not headquartered in mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination. Notwithstanding the foregoing, in the future, if there is any regulatory change or step taken by PRC regulators that does not permit YCM CPA Inc., to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, or the PACOB expands the scope of its determination so that we are subject to the HFCA, as the same may be amended, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including trading on the national exchange and trading on “over-the-counter” markets, may be prohibited under the HFCA Act.
Cash Flows through Our Organization
We are a holding company with no operations of its own. We conduct our operations principally in the United States and China through our subsidiaries. As a result, we may rely upon dividends paid to us by our subsidiaries in the PRC to pay dividends and to finance any debt we may incur. As of the date of this report, none of our subsidiaries has issued any dividends or distributions to us and we have not made any dividends or distributions to our shareholders. Our subsidiaries in the PRC generate and retain cash generated from operating activities and re-invest it in our business.
Current PRC regulations permit our subsidiaries in mainland China to pay dividends to the Company only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Under our current corporate structure, we rely on dividend payments or other distributions from our subsidiaries to fund any cash and financing requirements we may have, including the funds necessary to pay dividends and other cash distributions to our shareholders or to service any debt we may incur. If any subsidiary incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to us. In addition, under PRC laws and regulations, each of our Chinese subsidiaries is required to set aside a portion of their net income each year to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital. This reserve is not distributable as dividends. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends, loans or advances. Further, the PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. If we are unable to receive funds from our subsidiaries, we may be unable to pay cash dividends on our common shares.
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Cash dividends, if any, on our common shares will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10%. A 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises. Any gain realized on the transfer of common shares by such investors is also subject to PRC tax at a current rate of 10% which in the case of dividends will be withheld at source if such gain is regarded as income derived from sources within the PRC.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC resident enterprise. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong resident enterprise must be the beneficial owner of the relevant dividends; and (b) the Hong Kong resident enterprise must directly hold no less than 25% share ownership in a PRC entity during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot be certain that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to our Hong Kong subsidiaries. As of the date of this report, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Our Hong Kong subsidiaries intend to apply for the tax resident certificate when our subsidiaries in mainland China plan to declare and pay dividends to their Hong Kong parent companies.
As an offshore holding company, we will be permitted under PRC laws and regulations to provide funding from the proceeds of our offshore fund-raising activities to our subsidiaries in China only through loans or capital contributions, subject to the satisfaction of the applicable government registration and approval requirements. Before providing loans to our PRC subsidiaries, we will be required to make filings about details of the loans with the State Administration of Foreign Exchange of the PRC (the “SAFE”) in accordance with relevant PRC laws and regulations. Our PRC subsidiaries that receive the loans are only allowed to use the loans for the purposes set forth in these laws and regulations. Under regulations of the SAFE, Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of investments and investments outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made.
Under PRC law, we may provide funding to our PRC subsidiaries only through capital contributions or loans, and prior to the dismantling of our PRC consolidated affiliated entities only through loans to our former consolidated affiliated entities, subject to satisfaction of applicable government registration and approval requirements.
For the year ended December 31, 2023, we provided working capital loans of $0 million in aggregate to our subsidiaries.
We have not declared or paid any cash dividends, nor do we have any present plan to pay any cash dividends on our common shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
As of the date of this report, we do not anticipate any difficulties on our ability to transfer cash between subsidiaries. We have not installed any cash management policies that dictate the amount of such funds and how such funds are transferred.
Overview
Petfood Manufacturing
We started our company in 2002 in Qingdao, Shandong Province, PRC with a single mission of becoming a producer of high-quality petfood for pet owners in China and worldwide. Historically, we anticipated our growth would be driven by two key factors: a significant increase in the number of pet owners and in the size of the petfood market in China which would translate into expansion opportunities for us, and a fundamental change in Chinese society towards pets, pet ownership and care, such that the trends of pet humanization and consumer concerns for pet health and wellness would in turn would create a growing industry for petfood and products. We priced our products to be accessible to the average consumer.
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Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayments upon maturity, we suspended our production and normal business operations and we were involved in certain legal proceedings beginning in November 2019. Although we resumed our operations in May 2020 factors including the Covid-19 pandemic, the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; and decreased demand for sales of petfood, led to a continuous decrease in our petfood revenue from $0.02 million in 2022 to $0 million in 2023. Accordingly, we sought strategic alternatives to the petfood industry and entered the restaurant segment on October 31, 2021, when we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $3.1 million and $3.2 million in restaurant food service revenue for the years ended December 31, 2022 and 2023, respectively. In addition, we decided to discontinue our petfood manufacturing business segment in the first quarter of 2023 due to the above operational challenges and to focus on our restaurant segment. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui, and it entered into bankruptcy proceedings. On November 3, 2023, our remaining pet food manufacturing facility was auctioned by the court for $875,321 (RMB 6.28 million) to pay off bankruptcy debts. On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. As a result, Tiandihui has been fully disposed as of December 31, 2023.
Restaurant Segment
On October 31, 2021, the Company completed the acquisition of 51% equity interests of Far Ling’s Inc. and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. The acquisition brought a new revenue source for the Company.
Bo Lings Chinese Restaurant, which was founded by Richard (Bo) and Far Ling (Ling) Ng, husband and wife, in 1981. Today there are 5 Bo Lings Chinese Restaurants in the Kansas City area, as well as a warehouse for distribution of supplies. All Bo Lings restaurants are full service that include a dining area, bar, carry out menu and offer catering services. The location we purchased is in Kansas City and offers a full Cantonese Dim Sum menu and space for banquets. Most of the menu items are prepared onsite in the kitchen and cooked to order. Business is managed by Richard and Far Ling with a team of employees in each restaurant, including bookkeepers, a marketing manager and a purchasing director. Over the years, we believe Bo Lings has built a reputation as one of the best Chinese restaurants in the Kansas City area. Currently, no other Chinese Restaurant has 2 or more restaurants in our area.
Business Strategy
Our Growth agenda is based on four key drivers:
| ● | Culture and Talent: Leverage our culture and people capability to fuel brand performance and franchise success; |
| ● | Operating Capability: Recruit and equip high-quality restaurant operators to deliver great customer experiences; |
| ● | Strategically optimize our restaurant portfolio and pursue high quality assets and acquisitions: We aim to prudently pursue investments in high-quality assets. Our investment strategy primarily focuses on, restaurant brands with excellent growth potential and synergy, and related business such as catering and events. We continue to identify and evaluate investment opportunities in high-quality brands to capture growth opportunities. We will prudently assess investment targets based on each candidate’s strategic value, brand equity, business scale and financial performance, among other factors; and |
| ● | Menu Innovations: Offering appealing, tasty and convenient food at great prices is our value proposition. We focus on the development and innovation of new recipes and improvement of existing products. |
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Operating Strategy
Our operating strategy is built on the following key components:
| ● | Offering high quality, freshly prepared food: We place a great deal of emphasis on providing our guests with high quality, freshly prepared food. As part of our process, we have developed proprietary recipes to provide consistency in quality and taste. We expect our employees to inspect every entrée before it leaves the kitchen to confirm it matches the guest’s order and meets our standards for quality, portion size, appearance and presentation; |
| ● | Creating a comfortable atmosphere with a focus on high quality service: We believe the service quality and atmosphere we establish is a key component for fostering repeat business. We focus on keeping our table-to-server ratios low to allow our servers to truly focus on their guests and serve their needs in a personal, individualized manner. In addition, Bo Lings features a modern design; and |
| ● | Offering attractive price points: When we evaluate menu pricing, we focus on remaining disciplined as we balance short-term pressures with long-term growth while always keeping our guest top of mind. Prices are reviewed and are offered at moderate price points that we believe are as low as or lower than those offered by our competitors without sacrificing food quality. Within each menu category, we offer a choice of several price points with the goal of fulfilling each guest’s budget and value expectations. Based on the results of our pricing evaluations, we will continue to take pricing actions as we feel are needed. |
Marketing
Our marketing strategy aims to promote our brands while retaining a localized focus. We strive to increase restaurant sales by increasing the frequency of visits by our current guests and attracting new guests at Bo Lings and also by communicating and promoting our food quality, the guest experience and value. We accomplish these objectives through three major initiatives.
Local Restaurant Marketing. Given our strategy to be a neighborhood destination, local restaurant marketing is integral in developing brand awareness in each market.
In-restaurant Marketing. A significant portion of our marketing is spent communicating with our guests inside our restaurants through point of purchase materials.
Advertising. We do not rely on national television or print advertising to promote our brands. Earned local media is a critical part of our strategy that features our products and people. We use mailing lists, social media and digital marketing, to promote the brand and engage with our guests. Additionally, we continue to look for ways through various strategic initiatives to drive awareness and guest engagement with our brands.
Supply and Distribution
Bo Lings purchases a number of food and paper products, equipment and other restaurant supplies. The principal items purchased include chicken, cheese, beef and pork products, paper and packaging materials. Prices paid for these supplies fluctuate. When prices increase, Bo Lings may attempt to pass on such increases to its customers, although there is no assurance that this can be done in practice. Bo Lings does not typically experience significant continuous shortages of supplies, and alternative sources for most of these supplies are generally available.
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Seasonal Operations
Bo Lings does not consider its operations to be seasonal to any material degree.
Competition
Competition in the restaurant industry is intense. We compete with well-established food service companies on the basis of taste, quality and price of the food offered, service, atmosphere, location, take-out and delivery options as well as the overall dining experience. Our competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators that have opened restaurants in various markets to well-capitalized national restaurant chains. We also face competition from meal kit delivery services as well as the supermarket industry. In addition, improving product offerings of fast casual and quick-service restaurants and better execution of to-go sales, together with negative economic conditions could cause consumers to choose less expensive alternatives. Although we believe that we compete favorably with respect to each of the above channels, other restaurants and retail establishments compete for the same casual dining guests, quality site locations and restaurant-level employees as we do. We expect intense competition to continue across all aspects of the restaurant industry.
Environmental Matters
The Company is not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures. However, the Company cannot predict the effect on our operations due to possible future environmental legislation or regulations. During 2023, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.
Human Capital Management
Due to the discontinuation of out petfood manufacturing segment we have reduced our number of employees in response to those challenges. As of the date of this filing, we employ around 56 full-time employees. With the exception of Bo Lings’ employees, all of our employees are located in Beijing and Shandong Province, PRC.
Our History and Corporate Structure
We are a holding company incorporated in the British Virgin Islands (incorporated on September 30, 2015) that owns all of the outstanding capital stock of TDH HK Limited, our wholly-owned Hong Kong subsidiary (TDH HK). We also own all of the outstanding capital stock of TDH Foods Limited, another wholly-owned Hong Kong subsidiary, and holds a 100% interest in TDH Income Corporation, a Nevada limited liability company. TDH HK, in turn, owns all of the outstanding capital stock of Tiandihui, our operating subsidiary based in Qingdao City, Shandong Province, China, incorporated in April 2002 as a PRC limited liability company Tiandihui. TDH Foods Limited owns 100% of the outstanding capital stock of Qingdao Pet Foodstuffs, with its wholly-owned subsidiary of Tiandihui Foodstuffs Sales. TDH HK Limited owns 100% of the outstanding capital stock of Tiandihui Pet Foodstuffs, with its wholly-owned subsidiary of Beijing Chongai Jiujiu Cultural Communication Co., Ltd. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed, and we fully disposed Tiandihui. In December 2023, the Company transferred all its ownership interests in Chongai Jiujiu to a third party. TDH Income Corporation owns 100% of the outstanding capital stock of Ruby21Noland LLC. Ruby21Noland LLC was incorporated in the State of Missouri on June 9, 2021. On October 31, 2021, TDH Income Corporation acquired 51% equity interests of Far Ling’s Inc. On October 31, 2021, TDH Income Corporation acquired 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. On January 22, 2022, Beijing Wenxin was incorporated in Beijing City, PRC. On March 27, 2023, Qingdao Chihong was incorporated in Qingdao City, PRC.
On September 20, 2018, the Board approved acquisitions by the Company of TDH Group BVBA, a company established under the laws of Belgium and TDH JAPAN, a company established under the laws of Japan. In connection with the foregoing transactions the Company executed Share Sale and Purchase Agreements (together, the “Agreements”) pursuant to which the Company agreed to pay approximately USD$ 936,782 and USD $156,130 (RMB 6 million and RMB 1 million), respectively, to acquire all of outstanding securities of TDH Group BVBA and TDH JAPAN, respectively, from the sole shareholder of each entity, Rongfeng Cui, the Company’s former CEO. The purchase consideration under the Agreements was paid by issuance of 936,782 and 156,130 restricted common shares of the Company, respectively. Rongfeng Cui incorporated TDH Group BVBA in 2012 and TDH JAPAN in 2017 to develop and maintain all the clients in Europe and Japan, and to distribute and expand product sales in European and Japanese markets. TDH Japan has been deregistered and dissolved in February 2021. As of the date of this filing, TDH Group BVBA is currently under bankruptcy proceeding.
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Intellectual Property
The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to all of the world’s major intellectual property conventions, including:
| ● | Convention establishing the World Intellectual Property Organization (June 3, 1980); |
| ● | Paris Convention for the Protection of Industrial Property (March 19, 1985); |
| ● | Patent Cooperation Treaty (January 1, 1994); and |
| ● | Agreement on Trade-Related Aspects of Intellectual Property Rights (November 11, 2001). |
The PRC Trademark Law, adopted in 1982 and revised in 2013, with its implementation rules adopted in 2014, protects registered trademarks. The Trademark Office of the State Administration of Industry and Commerce of the PRC, handles trademark registrations and grants trademark registrations for a term of ten years.
Our primary trademark portfolio consists of 15 registered trademarks relating to petfood and manufacturing, we do not currently have any patents related to our restaurant business.
Properties
Under Chinese law, all of the land in China is either state-owned or collectively-owned, depending on its location and the specific laws governing such land. Collectively-owned land is owned by rural collectives and generally cannot be used for non-agricultural purposes unless approved by the Chinese government. Collectively-owned land cannot be transferred, leased or mortgaged to non-collectives without first being converted into state-owned land. Individuals and entities may acquire rights to use state-owned land, or land-use-rights, for commercial, industrial or residential purposes by means of mutual agreement, tender, auction or listing for sale from local land authorities or an existing holder of a land-use-right. Land-use-rights granted for commercial, industrial and residential purposes may be granted for a period of up to 40, 50 or 70 years, respectively. This period may be renewed at the expiration of the initial and any subsequent terms, subject to compliance with relevant laws and regulations. Land-use-rights are transferable and may be used as security for borrowings and other obligations.
Our principal executive office is located at Beijing Wenxin Co., Ltd., Room 1104, Full Tower, 9 East Third Ring Middle Road, Chaoyang District, Beijing, PRC. Our telephone number is +86-166-7863-6230. Our website address is www.tiandihui.com. The information on our website is not part of this Annual Report.
In addition, on November 3, 2023, our remaining pet food manufacturing facility was auctioned by the court for $875,321 (RMB6.28 million) to pay off bankruptcy debts. Our Bo Lings restaurant is located at 4701 Jefferson St, Kansas City, Missouri 64112.
Government Regulation
In the U.S., the Food and Drug Administration regulates both content and labeling of all animal food, China does not have a significant body of petfood laws, rules or regulations. Various regulatory agencies (e.g., the Ministry of Agriculture, the General Administration for Quality Supervision, Inspection and Quarantine) administer a set of standards, but there appears to be no single regulatory or administrative agency that is fulfills the comprehensive regulatory function. We are also subject to PRC labor and employment laws, laws governing advertising and other laws. We monitor changes in these laws and believe that our operations are in compliance in all material aspects with all PRC rules and regulations applicable to petfood production. However, many such rules and regulations are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial uncertainty regarding the future interpretation and application of these laws or regulations.
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U.S. Restaurant Operation.
The Company and its U.S. operations, are subject to various federal, state and local laws affecting our business, including laws and regulations concerning information security, privacy, labor and employment, health, marketing, food labeling, competition, public accommodation, sanitation and safety. Bo Lings and any additional restaurant we open in the U.S. must comply with licensing requirements and regulations promulgated by a number of governmental authorities, which include health, sanitation, safety, fire and zoning agencies in the state and/or municipality in which the restaurant is located. To date, the Company has not been materially adversely affected by such licensing requirements and regulations or by any difficulty, delay or failure to obtain required licenses or approvals.
Regulation of Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (1996), as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) and the Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for most capital account items, such as direct investment, loans, repatriation of investment and investment in securities outside China, unless the prior approval of State Administration of Foreign Exchange (SAFE) or its local counterparts is obtained. In addition, any loans to an operating subsidiary in China that is a foreign-invested enterprise, cannot, in the aggregate, exceed the difference between its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered capital must be approved by the PRC Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals or registrations on a timely basis, if at all, which could result in a delay in the process of making these loans. The dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.
Dividend Distribution. The principal regulations governing the distribution of dividends by foreign holding companies include the Company Law of the PRC (1993), as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000 and 2016 respectively, and the Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014 respectively. Under these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned investment enterprises in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal years have been offset.
Circular 37. On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, PRC residents shall apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments before contributing the domestic assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required if the registered overseas SPV’s basic information such as domestic individual resident shareholder, name, operating period, or major events such as domestic individual resident capital increase, capital reduction, share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by overseas SPV, overseas investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to make foreign exchange registration if required by SAFE and its branches. Moreover, Circular 37 applies retroactively. As a result, PRC residents who have contributed domestic assets or interests to a SPV, but failed to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37, are required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine of up to RMB 300,000 for an organization or up to RMB 50,000 for an individual. PRC residents who control our company are required to register with SAFE in connection with their investments in us. If we use our equity interest to purchase the assets or equity interest of a PRC company owned by PRC residents in the future, such PRC residents will be subject to the registration procedures described in Circular 37.
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New M&A Regulations and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, China Security Regulation Commission (CSRC) and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006 and was amended on June 22, 2009. This New M&A Rule, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process. The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement. Our PRC counsel has advised us that, based on their understanding of the current PRC laws and regulations:
| ● | We currently control PRC operating companies by virtue of TDH Foods Limited acquiring 100% of the equity interests of Tiandihui Pet Foodstuffs, which are regulated by the New M&A Rule. According to the New M&A Rule, when a domestic company or a domestic natural person, through an overseas company established or controlled by it, to acquire a domestic company’s equity interest which is related to or connected with it, approval from Ministry of Commerce is required. At the time of our equity interest acquisition, as the acquiree, Tiandihui Pet Foodstuffs was not related to or connected with the foreign investor, or the acquirer, TDH Foods Limited. Accordingly, we did not need the approval from Ministry of Commerce. In addition, we have received all relevant approvals and certificates required for the acquisition. |
| ● | The CSRC approval under the New M&A Rule only applies to overseas listings of SPVs that have used their existing or newly issued equity interest to acquire existing or newly issued equity interest in Chinese domestic companies, or a SPV-domestic company share swap. TDH Holdings, Inc. does not constitute a SPV that is required to obtain approval from the CSRC for overseas listing under the New M&A Rule because there has not been any SPV-domestic company share swap in our corporate history; and |
Notwithstanding the above analysis, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like the one contemplated by this Annual Report are subject to the New M&A Rule.
Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign-owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors; and the Notice of the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment.
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Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC, MOFCOM and SAFE. Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purpose, which is subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange. Under these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to the governmental approval.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
We started our company in 2002 in Qingdao, Shandong Province, PRC with a single mission of becoming a producer of high-quality petfood for pet owners in China and worldwide. Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayments upon maturity, we suspended our production and normal business operations, and we were involved in certain legal proceedings beginning in November 2019. Although we resumed our operations in May 2020 factors including the Covid-19 pandemic, the increase in costs of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; decreased demand for sales of petfood, led to a dramatic decrease in our petfood sales revenue. Additionally, our remaining production facility was frozen by court order and became subject to Tiandihui’s bankruptcy proceeding in 2022. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Qingdao Tiandihui Foodstuffs Co., Ltd., and it entered into bankruptcy proceedings. We decided to discontinue our petfood manufacturing business segment in the first quarter of 2023 due to the above operational challenges. Accordingly, we sought strategic alternatives to the petfood industry and entered the restaurant segment on October 31, 2021, when we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. and plan to focus on our restaurant segment. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was been implemented and the bankruptcy proceedings were completed. As a result, Tiandihui has been fully disposed as of December 31, 2023.
We are a holding company incorporated in the British Virgin Islands (incorporated on September 30, 2015) that owns all of the outstanding capital stock of TDH HK Limited, our wholly-owned Hong Kong subsidiary (TDH HK). We also own all of the outstanding capital stock of TDH Foods Limited, another wholly-owned Hong Kong subsidiary, and holds a 100% interest in TDH Income Corporation, a Nevada limited liability company. TDH HK, in turn, owns all of the outstanding capital stock of Tiandihui, our operating subsidiary based in Qingdao City, Shandong Province, China, incorporated in April 2002 as a PRC limited liability company. TDH Foods Limited owns 100% of the outstanding capital stock of Tiandihui Pet Foodstuffs, with its wholly-owned subsidiary of Qingdao Foodstuff Sales Co., Ltd. We conduct some of our business through Tiandihui Pet Foodstuff and Tiandihui Foodstuff Sales which has one wholly-owned subsidiary: Beijing Chongai Jiujiu Cultural Communication Co., Ltd. (incorporated on March 3, 2011). TDH Income Corporation owns 100% of the outstanding capital stock of Ruby21Noland LLC. Ruby21Noland LLC was incorporated in the State of Missouri on June 9, 2021. On October 31, 2021, TDH Income Corporation acquired 51% equity interests of Far Ling’s Inc. On October 31, 2021, TDH Income Corporation acquired 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. In addition, TDH Group BVBA, a Belgium company is wholly-owned by TDH Holdings, Inc.; TDH JAPAN, a Japanese company is wholly-owned by TDH Holdings, Inc. TDH Japan has been deregistered and dissolved in February 2021. On January 22, 2022, Beijing Wenxin was incorporated in Beijing City, PRC. On March 27, 2023, Qingdao Chihong was incorporated in Qingdao City, PRC. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. In December 2023, the Company transferred all its ownership interests in Chongai Jiujiu to a third party.
Our principal executive office is located at Beijing Wenxin Co., Ltd., Room 1104, Full Tower, 9 East Third Ring Middle Road, Chaoyang District, Beijing, PRC. Our telephone number is +86-166-7863-6230. Our website address is www.tiandihui.com. The information on our website is not part of this Annual Report.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual filing. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this annual filing.
Recent Developments
Discontinued operations
We discontinued our petfood manufacturing segment during the first quarter of 2023. On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings had completed. As a result, Tiandihui has been fully disposed as of December 31, 2023. Our decision to discontinue our petfood business was driven largely by the following factors: the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; decreased demand for sales of petfood; its historical performance and expected business forecasts in the absence of further capital investments and opportunity costs; lawsuits and the closing of our manufacturing facilities and them being subject to the bankruptcy proceeding. We believe the discontinuation of our petfood manufacturing business will provide us with the opportunity to redirect our focus and resources towards expanding and improving our restaurant segment.
We have resolved the legal challenges and resumed normal business operations
In order to diversify our revenue streams, on October 31, 2021, we acquired 51% equity interests of Far Ling’s Inc. and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $3.2 million and $3.1 million in food service revenue for the years ended December 31, 2023 and 2022, respectively. We decided to discontinue our petfood manufacturing business segment in the first quarter of 2023 due to the operational challenges and we plan to focus on our restaurant segment. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. Our business turnaround currently depends, in part, on our ability to successfully introduce manage and acquire new restaurants. If we are not able to effectively manage and acquire new restaurants that successfully generate revenue, we may not be able to grow and maintain our business as anticipated. We reported a net loss of approximately $23.63 million in fiscal year 2023 as compared to a net income of $0.86 million in 2022 and a net loss of $6.7 million in 2021, it is uncertain whether we may be able to continue to achieve profitability in the future.
Although we are currently trying to implement our business strategies in order to manage the future growth of our business, we cannot assure our current efforts may achieve the anticipated results and we may continue to incur operating losses in the near term. We cannot guarantee that going forward we will operate profitably. In order to achieve profitability, among other factors, management must successfully execute our growth and operations in the markets on which we are focused. If we are unable to successfully take necessary steps, we may be unable to sustain or increase our profitability in the future.
We face substantial challenges in our effort to resume normal business activities. Our future growth will place a significant strain on our sales and marketing capacities, administrative and operating infrastructure, and other resources. We need to evaluate and identify suitable strategic or acquisition opportunities, complete such transactions on commercially favorable terms, or successfully integrate business operations, infrastructure and management philosophies of acquired restaurant businesses and companies, resolve the substantial litigation and judgements to which we are subject and raise substantial capital. There may be particular complexities, regulatory or otherwise, associated with our expansion into new markets, and our strategies may not succeed beyond our current markets. If we are unable to effectively address these challenges, our ability to execute acquisitions as a component of our long-term strategy will be impaired, which could have an adverse effect on our growth or our ability to function as a going concern. We also need to expand our customer base, refine our operational, financial and management controls and reporting systems and procedures. If we fail to efficiently manage this expansion of our business, our costs and expenses may increase more than anticipated and we may not successfully attract a sufficient number of customers in a cost-effective manner, respond to competitive challenges, or otherwise execute our business plans. In addition, we may, as part of carrying out our growth strategies, adopt new initiatives to implement new pricing models and strategies. We cannot assure you that these initiatives may achieve the anticipated results.
Our ability to effectively implement our strategies and sustain and manage future growth of our business will depend on a number of factors, including our ability to: (i) effectively market our restaurants to potential customers; (ii) develop and acquire new restaurants and related businesses; (iii) effectively recruit, train and motivate a large number of new employees; (iv) improve our operational, financial and management controls and efficiencies; (v) raise substantial amounts of capital; and (vi) make sound business decisions. These activities require significant capital expenditures and investment of valuable management and financial resources, and our growth will continue to place significant demands on our management. There are no guarantees that we will be able to effectively manage any future growth in an efficient, cost-effective and timely manner, or at all. If we do not effectively manage the growth of our business and operations, our reputation, results of operations and overall business and prospects, and our ability to continue as a going concern could be negatively impacted.
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Overview
We started our company in 2002 in Qingdao, Shandong Province, PRC with a single mission of becoming a a producer of high-quality petfood for pet owners in China and worldwide. Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayments upon maturity, we suspended our production and normal business operations and we were involved in certain legal proceedings beginning in November 2019. Although we resumed our operations in May 2020 factors including the Covid-19 pandemic, the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; and decreased demand for sales of petfood, led to a decrease in our petfood revenue from $0.47 million in 2021, to $0.02 million in 2022 and to only $0 million in 2023. Additionally, our remaining petfood manufacturing facility was frozen by the court and became subject to Tiandihui’s bankruptcy proceeding in 2022. We discontinued our petfood manufacturing segment during the first quarter of 2023. Accordingly, we sought strategic alternatives to the petfood industry and entered the restaurant segment on October 31, 2021, when we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $3.1 million and $3.2 million in food service revenue for the years ended December 31, 2022 and 2023, respectively. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed.
Revenues from continuing operations
Historically before 2019, our revenue primarily was generated from sales of our petfood products to customers mainly through our overseas and domestic distribution agents, and online sales through various electronic commerce platforms. Revenue consists of the invoiced value for the sales, net of value-added tax (“VAT”), business tax, applicable local government levies and returns. Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayment upon maturity, we suspended our production and normal business operations, and we were involved in certain legal proceedings beginning in November 2019. Although we resumed our operations in May 2020 factors including the COVID-19 pandemic, the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; and decreased demand for sales of petfood, led to a decrease in our petfood revenue from $0.47 million in 2021, to $0.02 million in 2022 and to only $0 million in 2023. We decided to discontinue our petfood manufacturing business segment in the first quarter 2023. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed, and our pet food business line has been substantially terminated.
On October 31, 2021 we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. and started our restaurant business. This resulted in an increase of $3.1 million and $3.2 million in food service revenue for the years ended December 31, 2022 and 2023, respectively.
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The following factors affected the revenues we derived from our operations from 2021 to 2023.
COVID-19 Impact: Our operations may be further affected by the ongoing COVID-19 pandemic. A COVID-19 resurgence could negatively affect the execution of customer contracts and the collection of customer payments. Although the spread of COVID-19 appears to be under control currently, the extent to which the COVID-19 pandemic may impact our future financial results will depend on future developments, such as new information on the effectiveness of the mitigation strategies, the duration, spread, severity, and recurrence of COVID-19 and any COVID-19 variants, the related travel advisories and restrictions, the overall impact of the COVID-19 pandemic on the global economy and capital markets, and the efficacy of COVID-19 vaccines, which may also take extended time to be widely and adequately distributed, all of which remain highly uncertain and unpredictable. Given this uncertainty, we are currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity, and results of operations if the current situation continues.
Our ability to maintain our competitive advantages. We decided to discontinue our petfood manufacturing business segment in the first quarter 2023 and focus on our restaurant segment. However, the market conditions and consumer preferences change rapidly. If we fail to maintain our reputation and competitive advantages, customers demand for our dining products and services could decline. In addition, competition in the restaurant industry is intense. We face sustained, intense competition from traditional, fast casual and other competitors, which may include many non-traditional market participants such as convenience stores, grocery stores, coffee shops and online retailers. We expect our environment to continue to be highly competitive, and our results in any particular reporting period may be impacted by a contracting IEO segment or by new or continuing actions, product offerings or consolidation of our competitors and third-party partners, which may have a short-term or long-term impact on our results. We compete on the basis of product choice, quality, affordability, service and location. In particular, we believe our ability to compete successfully in the current market environment depends on our ability to improve existing products, successfully develop and introduce new products, price our products appropriately, deliver a relevant customer experience, manage the complexity of our restaurant operations, manage our investments in technology and modernization, and respond effectively to our competitors’ actions or offerings or to unforeseen disruptive actions. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics, which could have the overall effect of harming our business.
Loss of key personnel. Our revenue was derived from our competitive advantages in our products. We rely heavily on the expertise and leadership of our senior management to maintain our core competence. The loss of the service of any of our key personnel could adversely affect our business.
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Macro-economic conditions. Our business, financial condition and results of operations may be materially adversely affected by a challenging economic climate, including adverse changes in interest rates, volatile commodity markets and inflation, contraction in the availability of credit in the market and reductions in consumer spending. A macroeconomic downturn, which decreases the disposable personal income, may contribute to decreased sales of our petfood products and our restaurant business.
Costs and Expenses from continuing operations
Our costs and expenses primarily include the following:
Costs of revenues. Cost of revenues of our petfood business consists primarily of direct raw materials, direct payroll of workshop staff, utility and supply costs consumed in the manufacturing process, manufacturing labor, depreciation expense and overhead expenses necessary to manufacture finished goods as well as distribution costs such as inbound freight charges. Cost of revenues of our restaurant business consist primarily of food and packaging costs, payroll and employee benefit costs, store lease and occupancy costs and depreciation and amortization costs.
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation expense for our corporate staff in supporting departments, communication costs, gasoline, shipping and handling cost, welfare expenses, education expenses, professional fees (including consulting, audit and legal fees), travel and business hospitality expenses.
Income tax expense. We account for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.
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The following factors affect our cost of revenues and expense.
Price fluctuation of raw materials. For our petfood business, the raw materials purchase costs significantly impact our cost of goods sold. Any significant fluctuation of the market price of raw materials may negatively affect our operating results. Even if our current materials supply is relatively stable, we could be impacted by material price fluctuation in coming years. For our restaurant business, food and beverage purchase costs and labor costs also significantly impact our costs of goods sold.
Prevailing salary levels. Our cost of revenues is impacted by prevailing salary levels. Although we have not been subject to significant wage inflation, a significant increase in the market rate for wages could harm our operating results and our operating margin. Our ability to attract, retain, and expand our senior management and our professional and technical staff is an important factor in determining our future success. From time to time, it may be difficult to attract and retain qualified individuals with the required expertise at a fair wage.
Depreciation. Our depreciation expenses are mainly driven by the net value of machinery equipment, motor vehicles, buildings, lease restaurant store and other items. Depreciation of property, plant and equipment is calculated based on cost, less their estimated residual value, if any, using the straight-line method over estimated useful life from 5 years to 50 years. Any change of the depreciation accounting policy or impairment of our property may affect our operating results.
Shipping and handling expense. Our shipping and handling expense includes domestic freight, overseas freight, domestic express shipping fee. In order to reduce shipping and handling cost, we are trying to negotiate with and establish closer cooperation with several shipping companies providing express shipping services in order to lock favorable fee rates and reduce the domestic express fees.
Results of Operations
For the years ended December 31, 2023, 2022 and 2021
| December 31 | 2023 vs | 2022 vs | ||||||||||||||||||
| 2023 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Net revenues from continuing operations | 3,175,809 | 3,098,733 | 1,081,095 | 2.49 | % | 186.63 | % | |||||||||||||
| Cost of revenues from continuing operations | 2,146,215 | 2,046,200 | 769,967 | 4.89 | % | 165.75 | % | |||||||||||||
| Gross profit | 1,029,594 | 1,052,533 | 311,128 | -2.18 | % | 238.30 | % | |||||||||||||
| Gross margin | 32.42 | % | 33.97 | % | 28.78 | % | N/A | N/A | ||||||||||||
| Selling expense | 90,659 | 91,370 | 74,278 | -0.78 | % | 23.01 | % | |||||||||||||
| General and administrative expenses | 4,269,092 | 4,002,346 | 3,541,872 | 6.66 | % | 13.00 | % | |||||||||||||
| Stock-based compensation expense | 3,040,000 | - | - | 100.00 | % | N/A | ||||||||||||||
| Impairment of goodwill | - | - | 355,570 | N/A | -100.00 | % | ||||||||||||||
| Loss from operations | (6,370,157 | ) | (3,048,016 | ) | (3,322,141 | ) | 108.99 | % | 16.73 | % | ||||||||||
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Revenues from continuing operations.
Our revenue from continuing operations were $3,175,809, $3,098,733 and $1,081,095 for the years ended December 31, 2023, 2022 and 2021, respectively. Our total revenue from continuing operations increased by $77,076 or 2.49% when comparing 2023 to 2022 and increased by $2,017,638 or 186.63% when comparing 2022 to 2021.
The following table displays our revenue from our continuing operations by different marketing channels.
| December 31 | 2023 vs | 2022 vs | ||||||||||||||||||
| 2023 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Pet food oversea sales | - | - | 134,896 | N/A | -100 | % | ||||||||||||||
| Pet food domestic sales | 754 | 25,849 | 308,267 | -97 | % | -92 | % | |||||||||||||
| Pet food electronic commerce sales | - | - | 34,590 | N/A | -100 | % | ||||||||||||||
| Restaurant revenue | 3,175,055 | 3,074,007 | 606,463 | 3 | % | 407 | % | |||||||||||||
| Less: Sale tax and addition | - | (1,123 | ) | (3,121 | ) | -100 | % | -64 | % | |||||||||||
| Total revenues from continuing operations | 3,175,809 | 3,098,733 | 1,081,095 | 2 | % | 187 | % | |||||||||||||
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
For the year ended December 31, 2023, for revenue generated from petfood sales of our continuing operations, our domestic sales decreased by $25,095 or 97%, and there was no e-commerce sales and overseas sales of petfood products. However, revenue from our restaurant business segment in the United States increased by $101,048 or 3%. As a result, our total revenue increased by $77,076 or 2% when comparing 2023 to 2022.
The decrease of petfood sales revenue of our continuing operations in 2023 was primarily due to the discontinuation of our pet food manufacturing business segment in the first quarter of 2023.
As a result of the above, our total revenues from continuing operations for the fiscal year 2023 increased as compared with the fiscal year 2022.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
For the year ended December 31, 2022, for revenue generated from petfood sales of our continuing operations, our domestic sales decreased by $282,418 or 92%, and there was no e-commerce sales and overseas sales of petfood products. However, revenue from our restaurant business segment in the United States increased by $2,467,544 or 407%. As a result, our total revenue increased by $2,017,638 or 187% when comparing 2022 to 2021.
The decrease of petfood sales revenue of our continuing operations in 2022 was mainly due to the following factors: Due to the sharp rise in market price of raw materials, the lack of operational efficiency of our production facilities and our inability to make bank loan repayments upon maturity, we suspended our production and normal business operations and we were involved in certain legal proceedings beginning in November 2019. Although we resumed our operations in May 2020 factors including the COVID-19 pandemic, the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; and decreased demand for sales of petfood, led to a decrease in our petfood revenue from $0.47 million in 2021 and to only $0.02 million in 2022. Additionally, our remaining petfood production facility was frozen by the court and became subject to Tiandihui’s bankruptcy proceeding in 2022. We decided to discontinue our petfood manufacturing business segment in the first quarter 2023 due to the above operational challenges.
On the other hand, revenue from our restaurant business segment increased by $2,467,544 or 407% when comparing 2022 to 2021. On October 31, 2021, we acquired 51% equity interests of Far Ling’s Inc. and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. Revenue from our restaurant business primarily includes food and beverage sales of $606,463 for the last two months in 2021 after we acquired the business on October 31, 2021 and include 12 months of sales in 2022.
As a result of the above, our total revenues from continuing operations for the fiscal year 2022 increased as compared with the fiscal year 2021.
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The revenue generated from different product lines from our continuing operations are set forth as following:
| December 31 | 2023 vs | 2022 vs | ||||||||||||||||||
| 2023 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Pet chews | - | 8,367 | 46,112 | -100 | % | -82 | % | |||||||||||||
| Dried pet snacks | - | 8,005 | 293,325 | -100 | % | -97 | % | |||||||||||||
| Wet canned petfood | - | 1,290 | 10,760 | -100 | % | -88 | % | |||||||||||||
| Dental health snacks | - | 550 | 6,127 | -100 | % | -91 | % | |||||||||||||
| Restaurant revenue | 3,175,055 | 3,074,007 | 606,463 | 3 | % | 407 | % | |||||||||||||
| Others | 754 | 7,637 | 121,429 | -90 | % | -94 | % | |||||||||||||
| Less: Sale tax and addition | - | (1,123 | ) | (3,121 | ) | -100 | % | -64 | % | |||||||||||
| Total revenues from continuing operations | 3,175,809 | 3,098,733 | 1,081,095 | 2 | % | 187 | % | |||||||||||||
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Our total revenue from continuing operations increased by $77,076 or 2% when comparing 2023 to 2022, among which, revenue generated from pet chews decreased by $8,367 or 100%, revenue from dried pet snacks decreased by $8,005 or 100%, revenue generated from wet canned petfoods decreased by $1,290 or 100%, revenue generated from dental health snacks decreased by $550 or 100%, from the year ended December 31, 2022 to the year ended December 31, 2023, respectively. The decrease of petfood sales revenue of our continuing operations in 2023 was primarily due to the discontinuation of our pet food manufacturing business segment in the first quarter of 2023. On the other hand, on October 31, 2021, we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $101,048 in restaurant revenue in 2023 from food and beverage sales to customers as compared to 2022.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Our total revenue from continuing operations increased by $2,017,638 or 187% when comparing 2022 to 2021, among which, revenue generated from pet chews decreased by $37,745 or 82%, revenue from dried pet snacks decreased by $285,320 or 97%, revenue generated from wet canned petfoods decreased by $9,470 or 88%, revenue generated from dental health snacks decreased by $5,577 or 91%, from the year ended December 31, 2021 to the year ended December 31, 2022, respectively. In addition, revenue generated from dental health snacks decreased by $6,127 or 100%, from the year ended December 31, 2021 to the year ended December 31, 2022. The decrease in petfood sales was primarily due to our inability to fulfill customer orders on a timely basis due to disruption of supply chain and logistics caused by the COVID-19, as well as decrease of sales order, and our unfavorable selling price which led to our products became less attractive to customers. In addition, our petfood manufacturing activities were suspended in 2022 because our remaining petfood production facility was frozen by the court and became subject to Tiandihui’s bankruptcy proceeding. On the other hand, on October 31, 2021, we acquired 51% equity interests of Far Ling’s Inc and 100% equity interests of Bo Ling’s Chinese Restaurant, Inc. This resulted in an increase of $2,467,544 in restaurant revenue in 2022 from food and beverage sales to customers as compared to 2021.
The revenue generated from different countries from our continuing operations are set forth as following:
| December 31 | 2023 vs | 2022 vs | ||||||||||||||||||
| 2023 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| South Korea | - | - | 37,320 | N/A | -100 | % | ||||||||||||||
| China | 754 | 25,849 | 342,857 | -97 | % | -92 | % | |||||||||||||
| U.S. | 3,175,055 | 3,074,007 | 606,463 | 3 | % | 407 | % | |||||||||||||
| Other countries | - | - | 97,576 | N/A | -100 | % | ||||||||||||||
| Less: Sale tax and addition | - | (1,123 | ) | (3,121 | ) | -100 | % | -64 | % | |||||||||||
| Total revenues from continuing operations | 3,175,809 | 3,098,733 | 1,081,095 | 2 | % | 187 | % | |||||||||||||
“Other countries” is comprised of all countries whose revenues, individually, were less than 10% of the Company’s revenues.
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Overall, in terms of revenue from our continuing operations, our petfood sales to the China domestic market and overseas market both significantly decreased in 2023 and 2022, mainly due to the discontinuation of our pet food manufacturing business segment in the first quarter of 2023. On the other hand, revenue from United States increased by $101,048 in 2023 as compared to 2022 attributable to the restaurant business.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Overall, in terms of revenue from our continuing operations, our petfood sales to the China domestic market and overseas market both significantly decreased in 2022 as compared to 2021, mainly due to decreased sales volume of our products as affected by the negative impact of COVID-19 as discussed above, as well as decrease in sales orders, and our unfavorable selling price. On the other hand, revenue from United States increased by $2,467,544 in 2022 as compared to 2021 attributable to the restaurant business we acquired in October 2021 and we had 12 months operations in 2022 as compared to only 2 months operations in 2021.
Cost of revenues from continuing operations
Our cost of revenues from our continuing operations is primarily comprised of the cost of our raw materials, labor and overhead costs. Our cost of revenues from continuing operations, increased by $100,015 or 4.89% for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to increased food and beverage costs, labor costs and overhead costs associated with our restaurant business. Cost of revenues associated with our petfood sales was immaterial in 2023. Our cost of revenues as a percentage of revenue was 67.58% and 66.03% for the years ended December 31, 2023, and 2022, respectively.
Our cost of revenues from our continuing operations is primarily comprised of the cost of our raw materials, labor and overhead costs. Our cost of revenues from continuing operations, increased by $1,276,233 or 165.75% for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to increased food and beverage costs, labor costs and overhead costs associated with our restaurant business. Cost of revenues associated with our petfood sales was immaterial in 2022. Our cost of revenues as a percentage of revenue was 66.03% and 71.21% for the years ended December 31, 2022, and 2021, respectively.
Gross margin from continuing operations
Our gross margin from continuing operations was 32.42% for the year ended December 31, 2023, compared with gross margin of 33.97% for the year ended December 31, 2022. The decrease in gross margin was mainly due to decreased gross margin of our restaurant business and changes in related sales mix of food and beverage products, labor costs and overhead costs in 2023 as compared to 2022.
Our gross margin from continuing operations was 33.97% for the year ended December 31, 2022, compared with gross margin of 28.78% for the year ended December 31, 2021. The improvement in gross margin was mainly due to increased gross margin of our restaurant business and changes in related sales mix of food and beverage products in 2022 as compared to 2021.
Operating expenses from continuing operations
Operating expenses from our continuing operations were $7,399,751, and $4,100,549 for the years ended December 31, 2023 and 2022, respectively, an increase of $3,299,202, or 80.46%. The ratio of operating expenses as a percentage of revenue increased from 132.33% for the year ended December 31, 2022 to 233.00% for the year ended December 31, 2023.
Selling expense from our continuing operations was $90,659 and $91,370 for the years ended December 31, 2023, and 2022, respectively, a decrease of $711 or 0.78%. Our selling expenses decreased in 2023 compared to 2022, mainly due to the company’s management saving expenses.
General and administrative expenses from our continuing operations was $7,309,092, and $4,002,346 for the years ended December 31, 2023 and 2022 respectively, representing an increase of $3,306,746, or 82.62%. The main reason for the increase was mainly due to increased payroll expenses as a result of the increase in the number of employees and stock-based compensation expense due to extension of warrants exercise date.
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Operating expenses from our continuing operations were $4,100,549, and $3,971,720 for the years ended December 31, 2022 and 2021, respectively, an increase of $128,829, or 3.24%. The ratio of operating expenses as a percentage of revenue decreased from 367.38% for the year ended December 31, 2021 to 132.33% for the year ended December 31, 2022.
Selling expense from our continuing operations was $91,370 and $74,278 for the years ended December 31, 2022, and 2021, respectively, an increase of $17,092 or 23.01%. The increase in our selling expense was in line with our increased restaurant business segment revenue in 2022. As our revenue increased, our marketing campaign related costs and sales commission paid to our sales teams increased in 2022 as compared to 2021.
General and administrative expenses from our continuing operations was $4,002,346, and $3,541,872 for the years ended December 31, 2022 and 2021 respectively, representing an increase of $460,474, or 13.00%. The main reason for the increase was mainly due to increased depreciation and amortization expenses related to our restaurant business.
Impairment of goodwill was $0, $0 and $355,570 for the years ended December 31, 2023, 2022 and 2021, respectively. There was no such goodwill impairment in 2023 and 2022. In connection with our acquisition of restaurant business, we recognized a goodwill of $355,570 as of the acquisition date. However, due to our significant net loss in fiscal year 2021, goodwill of $355,570 has been fully impaired for the year ended December 31, 2021.
Loss from operations from continuing operations.
Our loss from operations associated with our continuing operations was $6,370,157 for the year ended December 31, 2023, while our loss from operations was $3,048,016 for the year ended December 31, 2022. Our operating loss as a percentage of total revenues was negative 200.58%, and negative 98.36% for the years ended December 31, 2023 and 2022, respectively. The continuous loss from operation was mainly due to increased operating expenses in 2023.
Our loss from operations associated with our continuing operations was $3,048,016 for the year ended December 31, 2022, while our loss from operations was $3,660,592 for the year ended December 31, 2021. Our operating loss as a percentage of total revenues was negative 98.36%, and negative 338.60% for the years ended December 31, 2022 and 2021, respectively. The continuous loss from operation was mainly due to increased operating expenses in 2022.
Income taxes expense from continuing operations.
Due to our continuous operating loss for the years ended December 31, 2023, 2022 and 2021, we reported minimal income tax benefit for those years.
Net loss from discontinued operations
On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui, and it entered into bankruptcy proceedings. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. In the consolidated statements of operations and comprehensive income (loss), results from discontinued operations is reported separately from the income and expenses from continuing operations and prior periods are presented on a comparative basis. In order to present the financial effects of the continuing operations and discontinued operations, revenues and expenses arising from intra-group transactions are eliminated except for those revenues and expenses that are considered to continue after the disposal of the discontinued operations. Our net loss from discontinued operations amounted to $15,095,547, $339,054 and $2,645,831 for the years ended December 31, 2023, 2022 and 2021, respectively.
41
Net loss.
As a result of the above, our total net loss was $23,631,516 for the year ended December 31, 2023, compared to the net income of $855,013 for the year ended December 31, 2022. The decrease in our net income was due to the closure of the bankruptcy proceedings of Tiandihui in December 2023.
Our total net loss was $855,013 or the year ended December 31, 2022, compared to the net loss of $6,715,958 for the year ended December 31, 2021. The increase in our net income was due to increased revenue from our restaurant business segment and increased investment income for the year ended December 31, 2022.
Going Concern and Capital Resources
Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We discontinued our petfood business during the first quarter of 2023 and we fully disposed of Tiandihui in December 2023 as a result of the completion of the bankruptcy proceeding. Currently our revenue is substantially generated from the restaurant business segment. Our business turnaround depends, in part, on our ability to successfully introduce manage and acquire new restaurants. If we are not able to effectively manage and acquire new restaurants that successfully generate revenue, we may not be able to grow and maintain our business as anticipated, and our sales may decline and our future business, financial condition and results of operations may be materially adversely affected. Furthermore, our business operations may be further affected by the COVID-19 pandemic. There can be no assurances that future revenue or capital infusion will be sufficient to enable us to develop our business to a level where we will be profitable or continuously to generate positive cash flows.
For the year ended December 31, 2023, our revenue from the restaurant business segment increased by approximately $0.08 million as compared to 2022 and we reported a net loss of approximately $23.63 million and negative cash flows from operating activities of approximately $2.49 million in 2023. We discontinued our petfood manufacturing business segment in 2023. As a result, it is uncertain our future revenue and cash flows will be sufficient to support our growth. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date that our consolidated financial statements are issued.
In assessing our liquidity, management monitors and analyzes our cash and cash equivalent, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments. As of December 31, 2023, we had cash and cash equivalent of approximately $13.66 million. We also had short-term investment of approximately $13.32 million, which are highly liquid and can be covered into cash and used in our operations if needed.
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Based on our current financial conditions, our cash balance and revenues generated from our business operations may not be currently sufficient and cannot be projected to cover our future operating expenses and meet our obligations as they become due for the next twelve months after the date that our financial statements are issued.
Management’s plan to alleviate the substantial doubt about our ability to continue as a going concern include attempting to improve our business profitability, generating sufficient cash flow from our operations to meet our operating needs on a timely basis, and obtaining additional working capital funds through debt and equity financings in order to meet our anticipated cash requirements. We also plan to evaluate and identify suitable strategic or acquisition opportunities, complete such transactions on commercially favorable terms, or successfully integrate business operations, infrastructure and management philosophies of acquired businesses and companies. Due to the effects discussed above, to the extent that we experience an adverse operating environment, incur unanticipated capital expenditures, or if we decide to accelerate our growth, then substantial additional financing may be required. Currently, we are working to improve our liquidity and capital sources primarily through financial support from our principal shareholder and the exploration of additional debt or equity financing possibilities. In order to fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain additional funds as needed. At the present time, however, we do not have commitments of funds from any third party. No assurance can be given that additional financing, if required, would be available on favorable terms or at all. If we do not secure capital needed for our operations, we may have to temporarily suspend or to terminate our operations.
Based on above reasons, there is a substantial doubt about the Company’s ability to continue as a going concern for the next 12 months from the date of this filing.
During the year ended December 31, 2023, our cash used in operating activities was $2,492,725, cash used in investing activities was $6,067,051, cash provided by financing activities was $1,921,554, and had the negative effect of prevailing exchange rates on our cash of $1,557,521. During the year ended December 31, 2022, our cash used in operating activities was $2,072,715, cash used in investing activities was $1,332,827, cash provided by financing activities was $6,055,480, and had the positive effect of prevailing exchange rates on our cash of $985,263. During the year ended December 31, 2021, our cash used in operating activities was $3,299,563, cash used in investing activities was $1,642,776, cash provided by financing activities was $17,952,057, and had the negative effect of prevailing exchange rates on our cash of $247,807.
Net cash used in operating activities for the year ended December 31, 2023 totaled $2,492,725 (including cash flows of $ 3,525,413 used in operating activities from our continuing operations and cash flows of $1,032,689 provided by operating activities from discontinued operations). The activities were mainly comprised of a net loss of $23,631,516, depreciation and amortization of $80,149, fair value change of short-term investments $2,644,576, inventory write-down of $42,866, stock-based compensation of 3,040,000, a decrease in prepayment and other current net assets of $10,418, an decrease in other current liabilities of $887,302, and a decrease in accounts payable of $1,748.
Net cash used in operating activities for the year ended December 31, 2022 totaled $2,072,715 (including cash flows of $ 1,977,789 used in operating activities from our continuing operations and cash flows of $94,926 used in operating activities from discontinued operations). The activities were mainly comprised of a net income of $803,700, depreciation and amortization of $17,114, fair value change of short-term investments $4,161,093, inventory write-down of $11,532, an increase in prepayment and other current net assets of $1,017,261, an increase in other current liabilities of $1,054,749, and a decrease in accounts payable of $305,382.
43
Net cash used in operating activities for the year ended December 31, 2021 totaled $3,299,563 (including cash flows of $8,154,363 used in operating activities from our continuing operations and cash flows of $4,854,800 provided by operating activities from discontinued operations). The activities were mainly comprised of a net loss of $6,120,308, depreciation and amortization of $466,720, fair value change of short-term investments $495,265, bad debt provision $2,168 a decrease in net accounts receivable of $127,057, a decrease in Operating lease liabilities of $4,830,456, an increase in prepayment and other current net asset $793,726, an increase in other current liabilities of $793,726, and an increase in account payable of $64,427.
Net cash used in investing activities for the year ended December 31, 2023 totaled $6,067,051 from our continuing operations, primarily include purchase of short-term investments of $37,066,925 and proceeds from sale of short-term investments of $31,024,365. There was no cash used in our discontinued operations during the year ended December 31, 2023.
Net cash used in investing activities for the year ended December 31, 2022 totaled $1,332,827 from our continuing operations, primarily include purchase of short-term investments of $45,418,240 and proceeds from sale of short-term investments of $41,150,967. There was no cash used in our discontinued operations during the year ended December 31, 2022.
Net cash used in investing activities for the year ended December 31, 2021 totaled $1,642,776 from our continuing operations, primarily include cash obtained from business acquisition of $171,827, payment for a business acquisition of $1,020,000, purchases of short-term investments of $4,372,809 and proceeds from sale of short-term investments of $3,578,206. There was no cash used in our discontinued operations during the year ended December 31, 2022.
For the year ended December 31, 2023, net cash provided by financing activities from continuing operations was $1,921,554, of which borrowing from related parties amounted to $1,928,329 and repayments to related parties of $6,774.
For the year ended December 31, 2022, net cash provided by financing activities from continuing operations was $6,055,480, which is from the proceeds from issuance of common shares of $6,017,781.
For the year ended December 31, 2021, net cash provided by financing activities was $17,952,057 (including cash flows of $21,556,174 provided by financing activities from continuing operations and cash flows of $3,604,117 used in discontinued operations), primarily include Proceeds from issuance of common shares of $20,222,188, Repayments of short-term loans of $1,458,040, and Repayments of short term loans - related parties of $22,302.
Our long-term future capital requirements will depend on many factors, including our level of revenue, the timing and extent of our spending to support the maintenance and growth of our operations, the expansion of our sales and the continued market acceptance of our products and projects.
We expect to incur additional costs associated with being a reporting company in the United States, primarily due to increased expenses that we incur to comply with the requirements of the Sarbanes-Oxley Act of 2002, as well as costs related to accounting and tax services, legal expenses and investor and stockholder-related expenses. These additional long-term expenses may require us to seek other sources of financing, such as additional borrowings or public or private equity or debt capital. The availability of these other sources of financing will depend upon our financial condition and results of operations as well as prevailing market conditions, and may not be available on terms reasonably acceptable to us or at all.
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Regulatory Restrictions on Capital Injections
We used proceeds from our initial public offering and subsequent offerings to fund our business. Accordingly, the following regulations have to be followed, regarding capital injections to foreign-invested enterprises.
Chinese regulations relating to investments in offshore companies by Chinese residents. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Round-trip Investment through Offshore Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires Chinese residents to register and update certain investments in companies incorporated outside of China with their local SAFE branch. SAFE also subsequently issued various guidance and rules regarding the implementation of SAFE Circular 37, which imposed obligations on Chinese subsidiaries of offshore companies to coordinate with and supervise any Chinese-resident beneficial owners of offshore entities in relation to the SAFE registration process.
We may not be aware of the identities of all of our beneficial owners who are Chinese residents. We do not have control over our beneficial owners and cannot assure you that all of our Chinese -resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are Chinese residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our Company who are Chinese residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our Chinese subsidiaries to fines and legal sanctions, which may be substantial. Failure to register may also limit our ability to contribute additional capital to our Chinese subsidiaries and limit our Chinese subsidiaries’ ability to distribute dividends to our Company. These risks may have a material adverse effect on our business, financial condition and results of operations.
China regulates loans to and direct investment in Chinese entities by offshore holding companies and there is governmental control of currency conversion. We are an offshore holding company conducting our operations in China through our wholly owned subsidiary Tiandihui. As an offshore holding company, we may make loans and additional contributions to Tiandihui subject to approval from government authorities.
Any loan to Tiandihui, which is treated as a foreign-invested enterprise under Chinese law, is subject to Chinese regulations and foreign exchange loan registrations. In January 2003, the China State Development and Reform Commission, SAFE and Ministry of Finance jointly promulgated the Circular on the Interim Provisions on the Management of Foreign Debts, or the Circular 28, limiting the total amount of foreign debt a foreign-invested enterprise may incur to the difference between the amount of total investment approved by the Ministry of Commerce or its local counterpart for such enterprise and the amount of registered capital of such enterprise, and requiring registration of any such loans with SAFE. As of December 31, 2016, the amount of approved total investment of Tiandihui was $2,707,490 (RMB 18,800,000) and TDH HK have invested the same amount of $2,707,490 (RMB 18,800,000) into Tiandihui, which means Tiandihui needs to obtain additional approval for total investment amount from the local counterpart of Ministry of Commerce. During 2017, we have successfully obtained the investment approval from Ministry of Commerce for our proceeds of IPO.
In March 2015, SAFE issued the Circular Concerning the Reform of the Administration of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which became effective in June 2015. SAFE Circular 19 regulates the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. Furthermore, SAFE promulgated a circular in June 2016, SAFE Circular 16, which further revises some clauses in the SAFE Circular 19. SAFE Circular 19 and 16 provide that the capital-account foreign exchange incomes of a domestic enterprise shall not be directly or indirectly used for expenditures that are forbidden by relevant laws and regulations, for purposes that are not included in the business scope approved by the applicable government authority, shall not be directly or indirectly used for investments in securities or for any other kind of wealth-managing investments than banks’ principal-secured products unless otherwise prescribed by other laws and regulations, shall not be directly or indirectly used for issuing RMB entrusted loans (unless expressly permitted in the business scope approved by the competent governmental authorities) or repaying inter-enterprise loans (including advances by the third party) or repaying bank loans in RMB which have been sub-lent to third parties, shall not be used for granting loans to non-affiliated enterprises unless expressly permitted in the business scope and shall not be used for the construction or purchase of real estate not for self-use (except for real estate enterprises). In addition, SAFE supervises the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company by further focusing on ex post facto supervision and violations. These two circulars may limit our ability to use the net proceeds from this offering to invest in or acquire any other Chinese companies in China, which may adversely affect our liquidity and our ability to fund and expand our business in China.
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Capital Resources
As of December 31, 2023 and 2022
The following table provides certain selected balance sheets comparisons between years ended December 31, 2023 and 2022:
| December 31, | ||||||||||||||||
| 2023 | 2022 | Fluctuation | % | |||||||||||||
| ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | 13,661,382 | $ | 21,857,125 | (8,195,743 | ) | -37 | |||||||||
| Short-term investments | 13,317,882 | 9,922,366 | 3,395,516 | 34 | ||||||||||||
| Accounts receivable, net | 4,961 | 29,318 | (24,357 | ) | -83 | |||||||||||
| Advanced to suppliers, net | - | 2,789 | (2,789 | ) | -100 | |||||||||||
| Inventories, net | - | 987 | (987 | ) | -100 | |||||||||||
| Prepayment and other current assets, net | 237,052 | 127,834 | 109,218 | 85 | ||||||||||||
| Current Assets held for sale associated with discontinued operation of Tiandihui | - | 1,841,335 | (1,841,335 | ) | -100 | |||||||||||
| Total current assets | 27,221,277 | 33,781,754 | 6,560,477 | -19 | ||||||||||||
| Property, plant and equipment, net | 682,636 | 698,044 | (15,408 | ) | -2 | |||||||||||
| Land use rights, net | 426,316 | 481,840 | (55,524 | ) | -12 | |||||||||||
| Operating lease right-of-use assets | 571,168 | 783,658 | (212,490 | ) | -27 | |||||||||||
| Non current assets held for sale associated with discontinued operation of Tiandihui | - | 768,101 | (768,101 | ) | -100 | |||||||||||
| Total non-current assets | 1,680,120 | 2,731,643 | (1,051,523 | ) | -38 | |||||||||||
| Total assets | $ | 28,901,397 | $ | 36,513,397 | (7,612,000 | ) | -21 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Accounts payable | $ | 460,776 | $ | 491,850 | (31,074 | ) | -6 | |||||||||
| Account payable - related parties | - | 1,033 | (1,033 | ) | -100 | |||||||||||
| Advances from customers | 4,045 | 11,024 | (6,979 | ) | -63 | |||||||||||
| Bank overdrafts | 77,486 | 74,425 | 3,061 | 4 | ||||||||||||
| Short term loans - related parties | 277,408 | 266,451 | 10,957 | 4 | ||||||||||||
| Taxes payable | 54,003 | 11,923 | 42,080 | 353 | ||||||||||||
| Due to related parties | 1,983,430 | 55,747 | 1,927,683 | 3457 | ||||||||||||
| Operating lease liabilities, current | 219,917 | 212,814 | 7,103 | 3 | ||||||||||||
| Other current liabilities | 311,979 | 1,212,420 | (900,411 | ) | -74 | |||||||||||
| Current Liabilities held for sale associated with discontinued operation of Tiandihui | - | 12,337,657 | (12,337,657 | ) | -100 | |||||||||||
| Total current liabilities | 3,389,044 | 14,675,344 | (11,286,300 | ) | -77 | |||||||||||
| Operating lease liabilities - related party, non-current | 463,196 | 683,113 | (219,917 | ) | -32 | |||||||||||
| non-current Liabilities held for sale associated with discontinued operation of Tiandihui | - | 1,037 | (1,037 | ) | -100 | |||||||||||
| Total liabilities | 3,852,240 | 15,359,494 | (11,507,254 | ) | -75 | |||||||||||
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We maintain cash and cash equivalents in mainland China, Hong Kong, New Zealand and U.S. on December 31, 2023 and 2022.
| December 31, | ||||||||
| Country | 2023 | 2022 | ||||||
| China (Mainland) | $ | 371,807 | $ | 1,777,357 | ||||
| China (Hong Kong) | 2,018,727 | 80,021 | ||||||
| Hong Kong (through a broker account) | 107,918 | 189,056 | ||||||
| New Zealand (through a broker account) | 8,477,703 | 16,246,621 | ||||||
| U.S. | 2,685,227 | 3,564,070 | ||||||
| Total | $ | 13,661,382 | $ | 21,857,125 | ||||
The majority of our cash balances at December 31, 2023 and 2022 are in form of USD and held in a broker accounts in New Zealand and Hong Kong and bank accounts at financial institutions located in China. Cash held in banks in China is not insured. In 1996, the Chinese government introduced regulations relaxing restrictions on the conversion of the RMB; however restrictions still remain, including restrictions on foreign-invested entities. Foreign-invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to China government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in China is not readily deployable by us for use outside of China.
Cash and cash equivalents and restricted cash
As of December 31, 2023, cash and cash equivalents were $13,661,382, compared to $21,857,125 at December 31, 2022. The components of this decrease of $8,195,743 reflected below.
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (2,492,725 | ) | $ | (2,072,715 | ) | ||
| Net cash provided by investing activities | (6,067,051 | ) | (1,332,827 | ) | ||||
| Net cash provided by (used in) financing activities | 1,921,554 | 6,055,480 | ||||||
| Exchange rate effect on cash and restricted cash | (1,557,521 | ) | 985,263 | |||||
| Net cash (outflow) inflow | $ | (8,195,743 | ) | $ | 3,635,201 | |||
We had current restricted cash of $0 and $1,289,051 as of December 31, 2023 and 2022, respectively. As legal proceedings have all been concluded, there are no restricted funds available as of December 31, 2023.
Short-term investments
During the years ended December 31, 2023 and 2022, the Company acquired equity securities of certain publicly listed companies through various open market transactions. The Company’s investments in marketable securities are accounted for pursuant to ASC 321 and reported at their readily determinable fair value as quoted by market exchanges in the consolidated balance sheets with changes in fair value recognized in earnings. Changes in fair value, including realized gain of approximately $0.44 million and unrealized loss of approximately $3.08 million for the year ended December 31, 2023. Changes in fair value, including realized gain of approximately $4.19 million and unrealized gain of approximately $0.03 million for the year ended December 31, 2022, which were included in “investment income” in the accompanying consolidated statements of operations and comprehensive loss.
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Accounts receivable
Accounts receivable, net as of December 31, 2023 was $4,961, a decrease of $24,357 compared to $29,318 as of December 31, 2022. $6,408 and $29,421 allowance for credit losses was recorded for the years ended December 31, 2023 and 2022, respectively.
Inventories
As of December 31, 2023, our inventory balance was $0, a decrease of $987, or 100% compared to $987 as of December 31, 2022. The decrease is due to the discontinuation of our pet food manufacturing activities in 2023.
Due to related parties
As of December 31, 2023, the balances of due to related parties were $1,983,430, an increase of $1,927,683 compared to $55,747 on December 31, 2022. The balance of due to related parties represented expenses incurred by related parties in the ordinary course of business, expense paid by related parties on behalf of the Company as well as the loans the Company obtained from related parties for working capital purpose. The loans owed to the related parties are interest free, unsecured and repayable on demand.
Property, plant and equipment, net
Property, plant and equipment, net as of December 31, 2023 were $682,636, a decrease of $15,408 compared to $698,044, as of December 31, 2022. The decrease in balance of property, plant and equipment was mainly due to the provision of depreciation. Depreciation expense for the years ended December 31, 2023 and 2022 was $26,860 and $62,547, respectively.
Intangible assets, net
Intangible assets, net as of December 31, 2023 were $426,316, a decrease of $55,524 compared to $481,840 as of December 31, 2022. During the years ended December 31, 2023 and 2022, amortization expense amounted to $55,570 and $53,975, respectively.
Accounts payable
Accounts payable represents our commercial credit offered to the suppliers and notes payable was the bank acceptance notes to suppliers.
Accounts payable decreased by $31,074, to $460,776 as of December 31, 2023, from $491,850 as of December 31, 2022, mostly due to Far Ling’s supplier payables and rent.
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Taxes payable
Taxes payable represents the accrued enterprise income tax at the year end.
Balance of taxes payable as of December 31, 2023 was $54,003 representing an increase decrease of $42,080, or 353%, compared with balance of $11,923 as of December 31, 2022.
Tabular Disclosure of Contractual Obligations
We have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.
As of December 31, 2023, we had the following contractual obligations:
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Lease Obligations | $ | 683,113 | 240,000 | 443,113 | - | - | ||||||||||||||
| Total | $ | 683,113 | $ | 240,000 | $ | 443,113 | $ | - | $ | - | ||||||||||
The Company has signed one lease agreement for restaurant premises. The remaining lease term of the Company’s leases ranges from approximately 3 years.
Off-Balance Sheet Arrangements
Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
| ● | Any obligation under certain guarantee contracts, |
| ● | Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets, |
| ● | Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and |
| ● | Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us. |
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We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
The critical accounting policies summarized in this section are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this Annual Report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Significant estimates and assumptions by management include, among others, useful lives and impairment of long-lived assets, allowance for credit losses, write-down in value of inventories and income taxes including the valuation allowance for deferred tax assets. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.
Inventories
Inventories, consisting of raw materials, work in progress, and finished goods, are stated at the lower of cost or net realizable value, with cost computed on a weighted-average basis. The valuation of inventory requires us to estimate excess and slow-moving inventory. We evaluate the recoverability of our inventory based on assumption about expected demand, market conditions, forecasts prepared by its customers, sales contracts and orders in hand.
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Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company recorded impairment loss on long-lived assets other than goodwill of $1,954, $6,833 and $217,257 and for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company’s goodwill is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In testing for goodwill impairment, the Company compares the fair value of its reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. The Company recorded impairment of goodwill of $0, $0, and $355,570 for the years ended December 31, 2023, 2022 and 2021, respectively.
Lease Commitments
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (together with all amendments subsequently issued thereto, “ASC Topic 842”), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance within ASC Topic 842, which among others, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
The initial lease liability is equal to the future fixed minimum lease payments discounted using the Company’s incremental borrowing rate, on a secured basis. The lease term includes option renewal periods and early termination payments when it is reasonably certain that the Company will exercise those rights. The initial measurement of the right-of-use asset is equal to the initial lease liability plus any initial direct costs and prepayments, less any lease incentives.
Payments made under operating leases are charged to the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease period. The Company does not have finance lease arrangements as of December 31, 2023 and 2022.
Loss Contingencies
The Company records accruals for certain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. When a loss contingency is not both probable and estimable, the Company does not record an accrued liability but discloses the nature and the amount of possible loss, if material, in the notes to the consolidated financial statements.
The Company reviews the developments in contingencies that could affect the amount of the provisions that has been previously recorded, and the matters and related possible losses disclosed. The Company makes adjustments to provisions and changes to its disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. The assessment of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves complex judgments about future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any.
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Revenue Recognition
Revenue is measured according to ASC Topic 606, Revenue from Contracts with Customers. The Company currently generated revenue from two sources: sales of petfood products and revenue from restaurant business operation.
Revenue for sale of products is derived from contracts with customers, which primarily include the sale of petfood products. The Company recognizes revenue upon transfer of control of promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer.
The Company started to generate revenue from restaurant business operation when the Company acquired Far Ling’s Inc. and Bo Ling’s Chinese Restaurant, Inc. in late 2021. Revenue from providing dining services and sales of meals is recognized at point when services are rendered. The Company recognizes revenues in the form of restaurant sales at the time of the sale when payment is made by the customer, as the Company has completed its performance obligation, namely the provision of food and beverage, and the accompanying customer service, during the customer’s visit to the restaurant.
Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities, including value-added tax (“VAT”), business tax, applicable local government levies. At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated sales returns based upon historical experience and related terms of customer arrangements.
The Company elected to account for shipping and handling fees that occur after the customer has obtained control of goods, for instance, free onboard shipping point arrangements, as a fulfillment cost and accrues for such costs.
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard is measured on the same basis as under the revenue standard.
Contract liabilities are recorded when consideration is received from a customer prior to transferring the control of goods to the customer or other conditions under the terms of a sales contract. As of December 31, 2023 and 2022, the Company recorded contract liabilities of $4,045 and $11,024, respectively, which were presented as advances from customers on the accompanying consolidated balance sheets. During the years ended December 31, 2023, 2022 and 2021, the Company recognized $6,979, $6,970 and $163,074 of contract liabilities as revenue, respectively.
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollar (“$”), which is the reporting currency of the Company. The functional currency of TDH Holdings, TDH HK, TDH Foods, TDH Income Corporation, Ruby21Noland LLC, Far Ling’s Inc, Bo Ling’s Chinese Restaurant, Inc and TDH Petfood LLC is United States dollar. The functional currency of Tiandihui, Tiandihui Pet Foodstuffs, Tiandihui Foodstuffs Sales and Chongai Jiujiu, is Renminbi (“RMB”). The functional currency of TDH Group BVBA is Euro (“€”). For the subsidiaries whose functional currencies are RMB, Euro and Yen, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. The resulting translation adjustments are included in determining other comprehensive income or loss. Transaction gains and losses are reflected in the consolidated statements of operations.
The exchange rates used to translate amounts in RMB into U.S. Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=RMB):
| Period Covered | Balance Sheet Date Rates | Average Rates | ||||||
| Year ended December 31, 2023 | 7.0827 | 7.0467 | ||||||
| Year ended December 31, 2022 | 6.9646 | 6.7261 | ||||||
The exchange rates used to translate amounts in Euro into U.S. Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=€):
| Period Covered | Balance Sheet Date Rate | Average Rate | ||||||
| Year ended December 31, 2023 | 0.9012 | 0.9153 | ||||||
| Year ended December 31, 2022 | 0.9383 | 0.9485 | ||||||
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Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurement for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The Company measures certain financial assets, including the investment under the measurement alternative method and equity method on other-than-temporary basis, intangible assets and fixed assets at fair value when an impairment charge is recognized.
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, short-term investment, accounts receivable, advances to suppliers, inventories, prepayments and other current assets, accounts payable, notes payables, advances from customers, taxes payable, bank overdrafts, short term loans and other current liabilities, the carrying amounts approximate their fair values due to the short maturities.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, (Topic 848). The amendments in Topic 848 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Topic 848 can be applied by all entities as of the beginning of the interim period that includes March 12, 2020, or any date thereafter, and entities may elect to apply the amendments prospectively through December 31, 2022. The Company did not utilize the optional expedients and exceptions provided by this standard during the year ended December 31, 2021. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The amendments in these ASUs are effective for the Company’s fiscal years, and interim periods within those fiscal years beginning December 31, 2024. The Company does not expect to early adopt this guidance and is in the process of evaluating the impact of adoption of this guidance on the Company’s consolidated financial statements.
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In October 2021, the FASB issued ASU No. 2021-08, “‘Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for the Company beginning after December 15, 2023, and are applied prospectively to business combinations that occur after the effective date. The Company does not expect the adoption of ASU 2021-04 will have a material effect on the consolidated financial statements.
In November 2023, the Financial Accounting Standards Board issued updated accounting guidance for Segment Reporting, effective January 1, 2024, with early adoption permitted. The updated guidance requires enhanced disclosures for significant expenses by reportable operating segment. Significant expense categories and amounts are those regularly provided to the chief operating decision maker (CODM) and included in the measure of a segment’s profit or loss. The updated guidance will also require us to disclose the title and position of our CODM, including an explanation of how our CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. We plan to adopt the new standard for the annual reporting period beginning April 1, 2024. The updated guidance is not expected to have a material impact to our consolidated financial statements.
In December 2023, the Financial Accounting Standards Board issued updated accounting guidance on Disclosures for Income Taxes, effective January 1, 2025, with early adoption permitted. The updated guidance requires additional disclosure and disaggregated information in the Income Tax Rate reconciliation using both percentages and reporting currency amounts, with additional qualitative explanations of individually significant reconciling items. The updated guidance also requires disclosure of the amount of income taxes paid (net of refunds received) disaggregated by jurisdictional categories (federal (national), state and foreign). We are currently assessing the updated guidance, however it is not expected to have a material impact to our consolidated financial statements.
Impact of Inflation
We do not believe the impact of inflation on our Company is material. Our operations are in China and China’s inflation rates have been relatively stable in the last three years: 2.6% in 2023, 3.7% in 2022, and 1.1% in 2021.
Impact of Foreign Currency Fluctuations
We do not believe the impact of foreign currency fluctuations on our Company is material. Regarding purchase of raw materials, we are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China.
Most of our oversea sales are denominated in US dollars, for which our oversea sales are exempted from the risk of foreign currency fluctuation.
We have not had any foreign currency investments hedged by currency borrowings or other hedging instruments. We manage our price risks through productivity improvements and cost-containment measures
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
| A. | Directors and senior management |
The following table sets forth our executive officers and directors, their ages and the positions held by them as of April 29, 2024:
| Name | Age | Position | ||
| Dandan Liu | 36 | Chief Executive Officer, Class A Director | ||
| Feng Zhang | 41 | Chief Financial Officer, Class A Director | ||
| Caifen Zou(1) (2) (3) | 59 | Class B Director, independent | ||
| Qiu Li (1) (2) (3) | 63 | Class B Director, independent | ||
| Owens Meng (1) (2) (3) | 46 | Class C Director, independent |
| (1) | Member of the Audit Committee. |
| (2) | Member of the Compensation Committee. |
| (3) | Member of the Nominating and Corporate Governance Committee. |
Dandan Liu was appointed as the Company’s Chief Executive Officer effective as of August 2, 2019 and Chair on September 15, 2021. Dandan Liu has served as a Class A director of the Company since February 2019. Ms. Liu founded Beijing Houxin Investments Co., Ltd. in June 2012 and served as its Chief Executive Officer and Chairman from June 2012 to July 2020. Ms. Liu’s valuable entrepreneurial, management, and investment experience together with her in-depth knowledge of the Company provide her with the qualifications and skills to serve as a director of our Company.
Feng Zhang was appointed as the Company’s Chief Financial Officer on February 19, 2020. From August 2018 to September 2019, Feng Zhang worked as Senior Accounting Manager for Beijing Longguang Energy Technology Co., Ltd. From July 2017 to July 2018, Mr. Zhang worked as Accounting Manager for Hebei Yinlong Renewable Energy Co., Ltd. From March 2015 to June 2017, Mr. Zhang worked as Audit Manager for Beijing Xinghua Certified Public Accountants Firm (Partnership). From June 2006 to February 2015, Mr. Zhang worked as Accounting Manager for Boda Instrument Group Co., Ltd. Mr. Zhang is a Certified Public Accountant and received his bachelor degree in Assets Appraisal from Hebei Agricultural University.
Qiu Li is an independent director of the company. Ms. Li has been Senior Consultant of Hangzhou Guohan Financial Holding Co., Ltd. since November 2015. Between March 2010 and October 2015, Ms. Li was director of audit of Hengfeng Bank Hangzhou Branch. Between November 1987 and March 2010, Ms. Li held several managerial positions at Hengfeng Bank headquarter. Ms. Li is a China Certified Public Accountants (CPA). Ms. Li holds a Bachelor’s degree in Management from Shandong Cadres Correspondence University. The Board of Directors determined that Ms. Li should serve as our director based on her experience in business and accounting matters.
Caifen Zou has served as Senior Advisor of Shandong Renhe Guarantee Company since August 2019. From December 1993 to July 2019, Ms. Zou has served in a number of senior executive roles within CITIC Bank Weihai Branch, including senior manager of Personal Credit Department, general manager of Retail Banking Department, and deputy section chief of Accounting Department, etc. Ms. Zou received her Associate’s degree in Administration Management from Shandong Normal University, and held Intermediate Accountant Qualification Certificate and Intermediate Economist Qualification Certificate in China. The Board of Directors determined that Ms. Zou should serve as our director based on her experience and expertise in accounting, management and internal controls.
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Owens Meng is an independent director. Since September 2013, Owens Meng has been the managing director of Beijing Songlin Xinya Financial Consultants, Ltd. From November 2007 to September 2013, he served as chief representative of Sherb Consulting LLC Beijing Representative Office, and managing director of Sherb & Co, LLP, a mid-sized accounting firm which has audited more than 25 China-based, US publicly traded companies. From July 2003 to October 2007, Mr. Meng worked as an audit manager for Grant Thornton Beijing. Mr. Meng received his CPA permit from the state of Delaware, and is a member of China Institute of Certified Public Accountants (CICPA), and a Certified Internal Auditor of the Institute of Internal Auditors. Mr. Meng holds a Bachelor’s degree in accounting and economics from Beijing Technology and Business University. Mr. Meng has served as an independent director of China Customer Relations Centers, Inc. (Nasdaq: CCRC) since September 2014. Mr. Meng was nominated as a director because of his experience in auditing, US GAAP and compliance issues.
Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board of directors include, among others:
| ● | appointing officers and determining the term of office of the officers; |
| ● | authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable; |
| ● | exercising the borrowing powers of the company and mortgaging the property of the company; |
| ● | executing checks, promissory notes and other negotiable instruments on behalf of the company; and maintaining or registering a register of mortgages, charges or other encumbrances of the company. |
A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
A director is not required to hold shares as a qualification to office.
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| B. | Compensation |
The following table shows the annual compensation paid by us for the years ended December 31, 2023 and 2022 to our principal executive officers.
| Name and principal position | Year | Salary ($) | Bonus ($) | Total Paid ($) | |||||||||||
| Dandan Liu | 2023 | 95,000 | (1) | 1,998,457 | (2) | 2,093,457 | |||||||||
| CEO and director | 2022 | 95,000 | (1) | 35,000 | 130,000 | ||||||||||
| Feng Zhang | 2023 | 58,000 | (1) | - | 58,000 | ||||||||||
| CFO | 2022 | 58,000 | (1) | - | 58,000 | ||||||||||
| (1) | Includes $10,000 received as compensation for serving as a director. |
| (2) | Includes bonuses of $1,963,457 for the years 2019 to 2022. |
Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors.
Director Compensation
Directors are entitled to receive compensation for their actual travel expenses for each Board meeting attended. We paid $10,000 compensation to each of our directors during each of the years ended December 31, 2023 and 2022.
Limitation of Director and Officer Liability
Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Our memorandum and articles of association provide that, to the fullest extent permitted by British Virgin Islands law or any other applicable laws, our directors will not be personally liable to us or our shareholders for any acts or omissions in the performance of their duties. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.
We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
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Retirement Benefits
As of December 31, 2023, we have contributed to the government-mandated employee welfare and retirement benefit plan and provided pension, retirement or similar benefits to its employees. The PRC regulations require us to pay the local labor administration bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The local labor administration bureau, which manages various investment funds, will take care of employee retirement, medical and other fringe benefits. We have no further commitments beyond our monthly contribution.
Employment Agreements
Employment agreement with Dandan Liu, CEO
On August 1, 2022, TDH Holdings, Inc. renewed the employment agreement with Dandan Liu to serve in the role of Chief Executive Officer for the initial period of 3 years (commencing as of August 1, 2022 and terminating on July 31, 2025), which term may be automatically renewed for another 3 years unless either party to the agreement terminates the agreement at least 60 days prior to the expiration of the term. Under the terms of this agreement, Ms. Liu’s annual salary is USD 120,000 payable in 12 equal monthly installments until July 31, 2025. Ms. Liu may be eligible to receive an annual bonus in the amount of 10% of the growth in book value as of the last fiscal year end, subject to review of corporate performance goals set forth by the Compensation Committee. The Compensation Committee will have the sole discretion whether Ms. Liu is entitled to the bonus and the amount of the payment, if any. The employment agreement may be terminated by either party upon 60 days advance notice to the other party. The Company will reimburse Ms. Liu for all reasonable out of pocket expenses in connection with travel, entertainment and other expenses incurred in the performance of her duties. The agreement also contains certain confidentiality, non-disclosure and other provisions that are customary to the agreements of this nature.
Employment agreement with Feng Zhang, CFO
On January 4, 2024, TDH Holdings, Inc. renewed the employment agreement with Feng Zhang to serve in the role of Chief Financial Officer for the initial period of three years, (commencing as of January 4, 2024 and terminating on January 3, 2027). Under the terms of this agreement, Mr. Zhang’s annual salary is USD 48,000 payable in 12 equal monthly installments. The employment agreement may be terminated by either party upon 15-day advance notice to the other party. The Company will reimburse Mr. Zhang for all reasonable out of pocket expenses in connection with travel, entertainment and other expenses incurred in the performance of his duties. The agreement also contains certain confidentiality, non-disclosure and other provisions that are customary to the agreements of this nature.
| C. | Board Practices |
Composition of Board; Risk Oversight
Our Board of Directors presently consists of five directors. The Board membership is divided into three classes, Class A, B and C, respectively, as nearly equal in number as the total number of directors permits. Class A directors will face re-election at our next annual meeting of shareholders and every three years thereafter. Class B directors will face re-election at our second annual meeting of shareholders and every three years thereafter. Class C directors will face re-election at our third annual meeting of shareholders and every three years thereafter.
Except as noted above, there are no family relationships between any of our executive officers and directors. Officers are elected by, and serve at the discretion of, the board of directors. Our board of directors shall hold meetings on at least a quarterly basis. As a smaller reporting company under the NASDAQ rules we are only required to maintain a board of directors comprised of at least 50% independent directors, and an audit committee of at least two members, comprised solely of independent directors who also meet the requirements of Rule 10A-3 under the Securities Exchange Act of 1934. There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated. Our board plays a significant role in our risk oversight. The board makes all relevant Company decisions. As such, it is important for us to have our Chief Executive Officer serve on the board as he plays key roles in the risk oversight or the Company. As a smaller reporting company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.
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Director Independence
Our board has reviewed the independence of our directors, applying the NASDAQ independence standards. Based on this review, the board determined that each of Caifen Zou, Qiu Li, and Owens Meng are “independent” within the meaning of the NASDAQ rules. In making this determination, our board considered the relationships that each of these non-employee directors has with us and all other facts and circumstances our board deemed relevant in determining their independence. As required under applicable NASDAQ rules, we anticipate that our independent directors will meet on a regular basis as often as necessary to fulfill their responsibilities, including at least annually in executive session without the presence of non-independent directors and management.
Board Committees
Currently, three committees have been established under the board: the Audit Committee, the Compensation Committee and the Nominating Committee.
The Audit Committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements of our company, including the appointment, compensation and oversight of the work of our independent auditors. The Compensation Committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). The Nominating Committee of the board is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors.
Audit Committee
The Audit Committee will be responsible for, among other matters:
| ● | appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm; |
| ● | discussing with our independent registered public accounting firm the independence of its members from its management; |
| ● | reviewing with our independent registered public accounting firm the scope and results of their audit; |
| ● | approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
| ● | overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; |
| ● | reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and regulatory requirements; |
| ● | coordinating the oversight by our board of directors of our code of business conduct and our disclosure controls and procedures; |
| ● | establishing procedures for the confidential and/or anonymous submission of concerns regarding accounting, internal controls or auditing matters; and |
| ● | reviewing and approving related-party transactions. |
Our Audit Committee consists of Caifen Zou, Qiu Li, and Owens Meng, with Owens Meng serving as chair of the Audit Committee. Our board has affirmatively determined that each of the members of the Audit Committee meets the definition of “independent director” for purposes of serving on an Audit Committee under Rule 10A-3 of the Exchange Act and NASDAQ rules. In addition, our board has determined that Lei Wang qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K and meets the financial sophistication requirements of the NASDAQ rules.
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Compensation Committee
The Compensation Committee will be responsible for, among other matters:
| ● | reviewing and approving, or recommending to the board of directors to approve the compensation of our CEO and other executive officers and directors; |
| ● | reviewing key employee compensation goals, policies, plans and programs; |
| ● | administering incentive and equity-based compensation; |
| ● | reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and |
| ● | appointing and overseeing any compensation consultants or advisors. |
Our Compensation Committee consists of Caifen Zou, Qiu Li, and Owens Meng, with Qiu Li serving as chair of the Compensation Committee. Our board has affirmatively determined that each of the members of the Compensation Committee meets the definition of “independent director” for purposes of serving on Compensation Committee under NASDAQ rules.
Nominating Committee
The Nominating Committee will be responsible for, among other matters:
| ● | selecting or recommending for selection candidates for directorships; |
| ● | evaluating the independence of directors and director nominees; |
| ● | reviewing and making recommendations regarding the structure and composition of our board and the board committees; |
| ● | developing and recommending to the board corporate governance principles and practices; |
| ● | reviewing and monitoring the Company’s Code of Business Conduct and Ethics; and |
| ● | overseeing the evaluation of the Company’s management |
Our Nominating Committee consists of consists of Caifen Zou, Qiu Li, and Owens Meng, with Caifen Zou serving as chair of the Nominating Committee. Our board has affirmatively determined that each of the members of the Nominating Committee meets the definition of “independent director” for purposes of serving on a Nominating Committee under NASDAQ rules.
Duties of Directors
Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached. The functions and powers of our board of directors include, among others:
| ● | appointing officers and determining the term of office of the officers; |
| ● | authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable; |
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| ● | exercising the borrowing powers of the company and mortgaging the property of the company; |
| ● | executing checks, promissory notes and other negotiable instruments on behalf of the company; and maintaining or registering a register of mortgages, charges or other encumbrances of the company. |
A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
Limitation on Liability and Other Indemnification Matters
British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
| D. | Employees |
The table below provides information as to the total number of employees at the end of the last three fiscal years. We have no contracts or collective bargaining agreements with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our employees to be good.
| 2021 | 2022 | 2023 | ||||||||||
| Number of Employees | 42 | 51 | 56 | |||||||||
| E. | Share Ownership |
See Item 7 below.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| A. | Major shareholders |
The following table sets forth, as of April 26, 2024 certain information regarding beneficial ownership of our shares by each person who is known by us to beneficially own more than 5% of our shares. The table also identifies the share ownership of each of our directors, each of our named executive officers, and all directors and officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares indicated. Our major shareholders do not have different voting rights than any other holder of our shares. Shares which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and investment power. Except as otherwise indicated below, each beneficial owner holds voting and investment power directly. The percentage of ownership is based on 10,323,268 shares issued and outstanding as of this Annual Report. Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Beijing Wenxin Co., Ltd., Room 1104, Full Tower, 9 East Third Ring Middle Road, Chaoyang District, Beijing, PRC.
| Name of Beneficial Owner | Shares Owned | Percentage | ||||||
| Dandan Liu | 1,354,697 | 13.1 | % | |||||
| Feng Zhang | — | — | ||||||
| Caifen Zou(1) | — | — | ||||||
| Qiu Li(1) | — | — | ||||||
| Owens Meng(1) | — | — | ||||||
| Directors & executive officers as a group (5 persons) | 1,354,697 | 13.1 | % | |||||
| Xiumei Lan | 620,000 | 6.0 | % | |||||
| Liping Gao | 640,000 | 6.2 | % | |||||
| Yanli Xu | 580,000 | 5.6 | % | |||||
| 5% or Greater Shareholders as a group (2 persons) | 1,840,000 | 17.8 | % |
| (1) | Independent director. |
| B. | Related Party Transactions |
The related parties had transactions for the years ended December 31, 2023, 2022 and 2021 consist of the following:
| Name of Related Party | Nature of Relationship at December 31, 2023 | |
| Dandan Liu | Chairman of the Board, Shareholder, Chief Executive Officer (“CEO”) | |
| Rongfeng Cui | Former Chairman of the Board and Former CEO. Rongfeng Cui ceased to be the CEO of the Company effective August 2, 2019. | |
| Rongbing Cui | Former Chief Financial Officer (“CFO”), Rongfeng Cui’s brother | |
| Feng Zhang | CFO | |
| Yanjuan Wang | Rongfeng Cui’s wife | |
| Yan Fu | Former Sales Vice President | |
| Yuxiang Qi | Dandan Liu’s mother | |
| Tide (Shanghai) Industrial Co. Ltd. | Owned by Rongfeng Cui and Yanjuan Wang |
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| Name of Related Party | Nature of Relationship at December 31, 2021 | |
| Qingdao Like Pet Supplies Co., Ltd. | Rongfeng Cui served as CEO, and Shuhua Cui, sister of Rongfeng Cui, served as the legal person. On May 26, 2016, both Rongfeng Cui and Shuhua Cui resigned from their positions, but still have significant influence on Like. | |
| Qingdao Saike Environmental Technology Co., Ltd. | Owned by Rongfeng Cui and Yanjuan Wang | |
| Huangdao Ding Ge Zhuang Kangkang Family Farm | Controlled by Rongfeng Cui’s father | |
| TDH Group BVBA | A Belgium company solely owned by Rongfeng Cui prior to November 30, 2018; a wholly owned subsidiary of the Company since November 30, 2018 | |
| TDH JAPAN | A Japanese company solely owned by Rongfeng Cui prior to November 30, 2018; a wholly owned subsidiary of the Company since November 30, 2018. Dissolved in February 2021. | |
| Qingdao Yinhe Jiutian Information Technology Co., Ltd. | Solely owned by Rongbing Cui | |
| Huangdao Hanyinhe Software Development Center Co., Ltd. | Solely owned by Xiaomei Wang | |
| Beijing Quanmin Chongai Information Technology Co., Ltd. (“Quanmin Chongai”) | Rongbing Cui serves as supervisor of Quanmin Chongai | |
| LAI LINGS LENEXA | Raymond Ng is the son of Richard Ng | |
| Products Inc. | Owned by Richard Ng | |
| Bo Lings at Zona Rosa in the Northland | Owned by Richard Ng | |
| Richard Ng | Richard owns 49% control of Far Ling’s Inc. |
Due to related parties from continuing operations
Due to related parties consisted of the following:
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Dandan Liu | 1,963,457 | - | ||||||
| Rongfeng Cui | - | 33,624 | ||||||
| Feng Zhang | - | 22,123 | ||||||
| Products Inc. | 19,973 | - | ||||||
| Total | $ | 1,983,430 | $ | 55,747 | ||||
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The balance of due to related parties represents expenses paid by related parties on behalf of the Company as well as advances the Company obtained from related parties for working capital purposes. The amounts owed to the related parties are unsecured, non-interest bearing and payable on demand.
Short term loans from related parties
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Rongfeng Cui | $ | 277,408 | $ | 266,451 | ||||
| Total | $ | 277,408 | $ | 266,451 | ||||
In March 2018, TDH Group BVBA borrowed non-interest bearing, unsecured long term loans from Rongfeng Cui in the aggregate amount of €250,000 (approximately $288,000), of which payments of €60,000 (approximately $69,000), €60,000 (approximately $69,000), €60,000 (approximately $69,000), €60,000 (approximately $69,000), €10,000 (approximately $11,500) and $0 were due in the years ended December 31, 2019, 2020, 2021, 2022, 2023 and thereafter, respectively. The Company did not make any repayment to Rongfeng Cui during the years ended December 31, 2013, 2022 and 2021, such failure to pay may lead to callable of the loan at any time by Rongfeng Cui. As a result, the corresponding loan was classified as current liability and included in short term loans – related parties as of December 31, 2023 and 2022. The Company is aware of the possible penalty and/or other consequence due to the default, however, no reasonable estimate can be made at this time.
Modification of Loans from related party
In January 2018, the Company entered into a loan agreement with Dandan Liu. In May 2018, the agreement was amended to, among others, reclassify unpaid interest payable to the principal of the loan, resulting in an increase of principal from RMB3,000,000 (approximately $466,000) to RMB3,030,000 (approximately $471,000) and increase the interest rate from 3% to 15%. Interest rate will be 24% for the period past due. In March 2019, the agreement was further amended to, among others, reclassify unpaid interest payable to the principal of the loan, resulting in an increase of principal to RMB3,484,500 (approximately $539,000) and extend the maturity date from January 2019 to May 2019. As of Dec. 31, 2022, the loan had $69,566 of interest outstanding. In connection with the bankruptcy proceedings of Tiandijhui, on December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. Pursuant to the judgment and decision by the Court, loans payable plus accrued interest to be paid to Dandan Liu were not approved by the bankruptcy distribution plan. As a result, the loans are included in the loss from discontinued operation of Tiandihui for the year ended December 31, 2023.
In June 2018, the Company entered into a loan agreement with Yuxiang Qi. Interest rate was 15% during the loan period and 24% for the period past due. In March 2019, the agreement was amended to, among others, reclassify unpaid interest payable to the principal of the loan, resulting in an increase of principal from RMB3,000,000 (approximately $462,000) to RMB3,405,000 (approximately $522,000) and extend the maturity date from December 2018 to May 2019. Pursuant to the judgment and decision by the Court in connection with the bankruptcy distribution plan, only RMB 94,270 (approximately $13,284) in principal of the loan was approved by the court. The Company made the payment of RMB 94,270 (approximately $13,284) to Yuxiang Qi in December 2023.
The interest expenses for the loans from related parties amounted to $0, $0 and $29,581 for the years ended December 31, 2023, 2022 and 2021, respectively.
Accounts payable to related parties
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Richard Ng | $ | - | $ | 1,033 | ||||
| Total | $ | - | $ | 1,033 | ||||
| C. | Interests of Experts and Counsel |
Not required.
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ITEM 8. FINANCIAL INFORMATION
| A. | Consolidated Statements and Other Financial Information. |
See Item 18 for our audited consolidated financial statements.
Legal Proceedings
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Since November 2019, the Company has been involved in a number of claims pending in various courts, in arbitration, or otherwise unresolved as of December 31, 2022. These claims were substantially related to non-payment of wage payables, non-payment of vendor payables and non-payment of loans and notes payables. These legal proceedings led to, among others, the Company’s certain bank accounts and property, plant and equipment judicially frozen by the court as of December 31, 2022 and 2021. On March 13, 2021, the property and factory buildings above the land owned by Tiandihui were auctioned by the court for $5,098,461 (RMB 33.14 million). In 2021, we have paid RMB 3.73 million to substantially settle the labor arbitration cases with our former employees, and certain proceeds were used to repay the bank loans. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui., and it entered into bankruptcy proceedings. On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. As a result, Tiandihui has been fully disposed as of December 31, 2023, and substantially all the material claims against Tiandihui that arose prior to the date of the bankruptcy completion were addressed. However, we may be subject to claims that were not discharged in the bankruptcy proceedings, if any. To the extent any pre-bankruptcy liability still remains, the ultimate resolution of such claims and other obligations may have a material adverse effect on our future operating results, profitability and financial condition.
Dividend Policy
The holders of shares of our common shares are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary and other holdings and investments. In addition, the operating companies may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our common shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.
To date, none of the PRC subsidiaries has made any dividends or distributions to TDH Holdings, Inc. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our Common Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiaries, TDH HK Limited and TDH Food Limited. Current PRC regulations permit the PRC Subsidiaries to pay dividends to TDH HK Limited and TDH Food Limited only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.
| B. | Significant Changes |
Except as disclosed elsewhere in this Annual Report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this Annual Report.
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ITEM 9. THE OFFER AND LISTING
| A. | Offer and Listing Details |
We completed our initial public offering on September 21, 2017. Our Common Shares trade under the trading symbol “PETZ” on the NASDAQ Capital Market. As of April 26, 2024, there were approximately 14 holders of record of our Common Shares. This excludes our Common Shares owned by shareholders holding Common Shares under nominee security position listings. On April 26, 2024 the last sales price of our Common Shares as reported on the NASDAQ Capital Market was $1.17 per common share.
| B. | Plan of Distribution |
Not Applicable.
| C. | Markets |
Our shares have been listed on the NASDAQ Stock Market under the symbols PETZ, since September 21, 2017, following the completion of our initial public offering.
| D. | Selling Shareholders |
Not Applicable.
| E. | Dilution |
Not Applicable.
| F. | Expenses of the Issue |
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
| A. | Share Capital |
Not Applicable.
| B. | Memorandum and Articles of Association |
The information required by Item 10.B of Form 20-F is included in the section titled “Description of Share Capital” in our Registration Statement on Form F-1 initially filed with the SEC on August 11, 2017 (File No.: 333-219896), which section is incorporated herein by reference.
| C. | Material Contracts |
None
| D. | Exchange controls |
Under British Virgin Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
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| E. | Taxation |
PRC Enterprise Income Tax
According to the Enterprise Income Tax Law of PRC (the “EIT Law”), which was promulgated on March 16, 2007, last amended in February 2017 and became effective as of January 1, 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform rate of 25%. The Regulation on the Implementation of Enterprise Income Tax Law of the PRC (the “EIT Rules”) was promulgated on December 6, 2007 and became effective on January 1, 2008. On April 14, 2008, the Chinese Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation enacted the Administrative Measures for Certifying High and New Technology Enterprises (the “Certifying Measures”), which retroactively became effective on January 1, 2008 and was amended on January 29, 2016. Under the EIT Law and the Certifying Measures, certain qualified high-tech companies may benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified into certain industries strongly supported by the Chinese government and set forth by certain departments of the Chinese State Council. Tiandihui was granted the high and new technology enterprise (“HNTE”) qualification valid until the year end of December 2018. The Company was subject to 25% income tax rate in 2021 and 2022. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui, and it entered into bankruptcy proceedings. Under the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident enterprise”, which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define “de facto management body” as a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, at April 22, 2009 which provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following criteria are satisfied:
| ● | the place where the senior management and core management departments that are in charge of its daily operations perform their duties is mainly located in the PRC; |
| ● | its financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC; |
| ● | its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and |
| ● | more than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC. |
We do not believe that we meet the conditions outlined in the preceding paragraph since Tiandihui does not have a PRC enterprise or enterprise group as our primary controlling shareholder. In addition, we are not aware of any offshore holding companies with a corporate structure similar to the Company that has been deemed a PRC “resident enterprise” by the PRC tax authorities.
If we are deemed a China resident enterprise, we may be subject to the EIT at the rate of 25% on our global income, except that the dividends we receive from our Chinese subsidiaries may be exempt from the EIT to the extent such dividends are deemed dividends among qualified resident enterprises. If we are considered a resident enterprise and earn income other than dividends from our Chinese subsidiaries, a 25% EIT on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
PRC VAT
According to the Provisional Regulations of the People’s Republic of China on Value-added Tax (2017), which were revised and came into effect on November 20, 2017, the sales of goods, processing, repair and replacement services, sales of services, intangible assets, immovable property and imported goods within the territory of the People’s Republic of China must pay VAT. The amount of VAT payable is calculated as “output VAT” minus “input VAT”, and the rates of VAT are 13% or 9% for sales of our goods as determined by State Administration of Taxation.
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People’s Republic of China Taxation
Under the EIT law and EIT Rules, both of which became effective on January 1, 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform rate of 25%, unless they qualify for certain exceptions. On April 14, 2008, the Chinese Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation enacted the Certifying Measures, which retroactively became effective on January 1, 2008 and was amended on January 29, 2016 provide that certain qualified high-tech companies may benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified into certain industries strongly supported by the Chinese government and set forth by certain departments of the Chinese State Council. Tiandihui was granted the HNTE qualification valid for three years commencing on December 2, 2016. Tiandihui’s status as a “high-tech enterprise” was automatically revoked by the relevant government departments when it expired on December 2, 2019. We are a holding company incorporated in the British Virgin Islands and we gain substantial income by way of dividends from our PRC subsidiaries. The EIT Law and Rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC Subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has tax treaty with China that provides for a different withholding arrangement.
British Virgin Islands Taxation
Under the BVI Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.
United States Federal Income Taxation
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
| ● | banks; |
| ● | financial institutions; |
| ● | insurance companies; |
| ● | regulated investment companies; |
| ● | real estate investment trusts; |
| ● | broker-dealers; |
| ● | traders that elect to mark to market; |
| ● | U.S. expatriates; |
| ● | tax-exempt entities; |
| ● | persons liable for alternative minimum tax; |
| ● | persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction; |
| ● | persons that actually or constructively own 10% or more of our voting shares; |
| ● | persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or |
| ● | persons holding our common shares through partnerships or other pass-through entities. |
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Prospective purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.
Taxation of Dividends and Other Distributions on our Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, to the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The dividends will not be eligible for the dividends-received deduction allowed in respect of dividends received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the common shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, our common shares will be considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States when they are listed on the NASDAQ Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our common shares, including the effects of any change in law after the date of this Annual Report.
Dividends on our common shares will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our common shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
Taxation of Dispositions of Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of shares equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the common shares for more than one year, you will be eligible for the capital gains tax rate of 20% (or lower for individuals in lower tax brackets). The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.
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Passive Foreign Investment Company
Based on our current and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2022. Our actual PFIC status for the current taxable years ending December 31, 2022 will not be determinable until after the close of such year and, accordingly, there is no guarantee that we will not be a PFIC for the current year. PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
| ● | at least 75% of its gross income is passive income; or |
| ● | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”). |
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our common shares, our PFIC status will depend in large part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us to become a PFIC. If we are a PFIC for any year during which you hold common shares, we will continue to be treated as a PFIC for all succeeding years during which you hold common shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the common shares.
If we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the common shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the common shares will be treated as an excess distribution. Under these special tax rules:
| ● | the excess distribution or gain will be allocated ratably over your holding period for the common shares; |
| ● | the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and |
| ● | the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. The tax liability for amounts allocated to such years cannot be offset by any net operating losses for such years, and gains realized on the sale of the common shares cannot be treated as capital, even if you hold the common shares as capital assets. |
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the common shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close of your taxable year over your adjusted basis in such common shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations that are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “Taxation of Dividends and Other Distributions on our Shares” generally would not apply.
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The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including the NASDAQ Capital Market. If the common shares are regularly traded on the NASDAQ Capital Market and if you are a holder of common shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold common shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the common shares and any gain realized on the disposition of the common shares.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information.
United States Federal Income Taxation
The following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax matters related to an investment in our common shares. It is directed to U.S. Holders (as defined below) of our common shares and is based on laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in our common shares, such as the tax consequences under state, local and other tax laws. The following brief description applies only to U.S. Holders (defined below) that hold common shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this Annual Report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this Annual Report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes:
| ● | an individual who is a citizen or resident of the United States; |
| ● | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
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| ● | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| ● | a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
Belgium taxation
The current enterprise income tax rate is approximately 34%, which includes 3% additional tax, for Belgium companies. Small and medium-sized enterprises may enjoy preferential tax rate if they meet the requirements.
Japan taxation
The enterprise income tax includes national income tax and local special tax for companies operated in Japan. The current national enterprise income tax rate is 30%. And the actual income tax burden will be around 35% - 40% given the local special tax was considered.
| F. | Dividends and paying agents |
Not required.
| G. | Statement by experts |
Not required.
| H. | Documents on display |
We file annual reports and other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are exempt from the insider short-swing disclosure and profit recovery rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request copies of the documents upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains reports and other information regarding registrants (including us) that file electronically with the Commission which can be assessed at http://www.sec.gov.
| I. | Subsidiary Information |
Not required.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
Our main interest rate exposure relates to bank borrowings. We manage our interest rate exposure with a focus on reducing our overall cost of debt and exposure to changes in interest rates. Prior to Tiandihui’s final bankruptcy property distribution plan approved by the Court on December 27, 2023, the Company had short-term bank loans of $4,986,206 as of December 31, 20222, payable to several PRC financial institutions, which were also guaranteed corporately or personally. Tiandihui also pledged certain property and equipment as collateral to further guarantee these loans. As a result of the court approved bankruptcy property distribution plan, the Tiandihui’s liabilities addressed during the bankruptcy proceedings have been fully discharged as of December 31, 2023. As of December 31 2023, we did not carry any outstanding bank loans. In 2022, we had $211.45 million weighted average outstanding bank loans, with weighted average effective interest rate of 9.42%. In 2021, we had $2.69 million weighted average outstanding bank loans, with weighted average effective interest rate of 9.41%.
As of December 31, 2023, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our company would have been $0, lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and loan receivables.
As of December 31, 2022, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our company would have been $21,145, lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and loan receivables
Foreign Currency Risk
Our functional currency is the RMB, Euro and Yen, and our financial statements are presented in U.S. dollar. We mainly use RMB in domestic transaction, and the transaction settled with Euro and Yen are immaterial. The RMB depreciated against the U.S. dollar by1.69% in 2023 and depreciated against the U.S. dollar by 9.23% in 2022. The change in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying change in our business or results of operation.
Currently, our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, our exposure to foreign exchange risk will primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar may materially affect our earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars in the future.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
With the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and
12.D.4, this Item 12 is not applicable, as the Company does not have any American Depositary Shares.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2023 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision of and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on the foregoing, the Certifying Officers concluded that as of the Evaluation Date the Company’s disclosure controls and procedures were not effective as of December 31, 2023.
The material weakness identified by our management include (i) a lack of sufficient accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; and (ii) a lack of an effective review process which may lead to material audit adjustments to the financial statements.
In order to address the foregoing material weakness, we have put in place additional controls, including, among others, hiring and replacing certain management team members. Our CEO has established a new management team to deal with operation management challenges of the Company, and our CFO has been working on improving the Company’s financial and reporting functions. We also plan to hire more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and implement regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel. We also plan to set up an internal audit function to improve overall internal control. Our senior management will also hold internal meetings, discussions, trainings, and seminars on a monthly basis to review our financial statements and operational performance and to identify areas to improve our internal control procedures. Overall, the Company is working through and standardizing its business processes, instituting business procedures and adding controls and additional supervision, particularly, in the areas of control duties and data sharing and supervision so as to provide effective means of linking various functions and departments within the Company.
We intend to complete the remediation effort on or before the end of the 2024 fiscal year and will conduct periodic assessments of the state of the Company’s financial reporting measures and systems, as a whole.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purpose in accordance with U.S. generally accepted accounting principles.
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Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, management used the framework set forth in the report Internal Control – Integrated framework issued in 2013 by the Committee of Sponsoring Organization of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communication and (5) monitoring.
Based on these evaluations, our management concluded that, due to the material weakness described above, our internal control over financial reporting was not effective as of December 31, 2023.
Attestation report of the registered public accounting firm.
Not applicable.
Changes in Internal Controls over Financial Reporting
Other than the changes described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
Our Board of Directors has determined that Owens Meng is an audit committee financial expert as that term is defined in Item 16A(b) of Form 20-F, and “independent” as that term is defined in the NASDAQ listing standards.
ITEM 16B. CODE OF ETHICS.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. A copy of the Code of Business Conduct and Ethics is available on our website, 6.tiandihui.com. The information on our corporate website is not a part of this Annual Report.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table represents the approximate aggregate fees for services rendered by YCM CPA INC. for the periods indicated:
| December 31, 2023 | December 31, 2022 | |||||||
| Audit Fees | $ | 150,000 | $ | 160,000 | ||||
| Audit Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total Fees | $ | 150,000 | $ | 160,000 | ||||
Pre-Approval of Services
Our audit committee evaluated and approved in advance the scope and cost of the engagement of an auditor before the auditor rendered its audit and non-audit services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
No purchases of our securities were made by us or our affiliates in 2023.
75
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.
The information contained in our Form 6-K filed on January 4, 2022 is incorporated herein by reference pursuant to instruction 2 of Item 16F.
ITEM 16G. CORPORATE GOVERNANCE
We are incorporated in the BVI and our corporate governance practices are governed by applicable BVI law, our memorandum and articles of association. In addition, because our common shares are listed on the NASDAQ Capital Market, we are subject to NASDAQ’s corporate governance requirements.
NASDAQ Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Listing Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement. Our BVI counsel, Ogier, has provided a letter to NASDAQ certifying that under BVI law, we are not required to follow Nasdaq rules 5635(b) and 5635(d) to seek shareholders’ approval of any issuance of securities in connection with a transaction other than a public offering where such transaction involves the issuance of securities representing more than 20% of our total outstanding ordinary shares or results in a change of control of a company.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
ITEM 16J. INSIDER TRADING POLICY
Pursuant to applicable SEC transition guidance, the disclosure required by Item 16J will become applicable to the Company beginning in the full fiscal year ending on December 31, 2024.
ITEM 16K. CYBERSECURITY
The Company’s cybersecurity risk management program consists of:
| i. | An overall strategy to develop, improve and maintain its cybersecurity processes, policies, and governance frameworks that have been integrated into our existing risk management framework |
| ii | Detailed set of cybersecurity policies and procedures |
| iii. | Investment in IT security and a cybersecurity team |
| iv. | Engaging external cybersecurity service providers |
| v | Robust training plan for all its employees |
| vi. | Governance - Board and management oversight |
The underlying control framework of the Company’s cybersecurity program is based on recognized best practices and standards set by the U.S. National Institute of Standards and Technology, which organizes cybersecurity risks into five categories: identify, protect, detect, respond and recover.
The Company has established policies and procedures for all key aspects of its cybersecurity program including an information security policy, password policy, incident management policy, third party security management policy, business continuity plans, cyber incident response plans and information security management system contingency plans. The Company has not engaged third-party experts to assist with assessing, identifying, and managing our cybersecurity risks.
As part of the Company’s cybersecurity strategy, it continues to expand its investments in IT security, including to identify and protect critical assets, strengthen, monitor and alert its information security management system and engage with cybersecurity experts. The Company holds regular cybersecurity meetings, to assess and manage cybersecurity threats and to provide cybersecurity updates to senior management and the Board of Directors.
The Board of Directors considers cybersecurity risk as part of its risk oversight function and oversees the Company’s cybersecurity risk exposures and the steps taken by management to monitor and mitigate cybersecurity risks. The Board of Directors ensures allocation and prioritization of resources and overall strategic direction for cybersecurity and ensures alignment with the Company’s overall strategy.
To-date, the Company is not aware of any material risks from cybersecurity threats, that have materially affected or are reasonably likely to materially affect the Company, including its business strategy, results of operations or financial condition. However, despite our efforts, we cannot eliminate all risks from cybersecurity threats, or provide assurances that we have not experienced undetected cybersecurity incidents.
76
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The financial statements are filed as part of this Annual Report beginning on page F-1.
ITEM 19. EXHIBITS
| (1) | Filed as an exhibit to the Registrant’s Current Report on Form 6-K, filed on June 14, 2022 and hereby incorporated by reference. |
| (2) | Filed as an exhibit to the Registrant’s Current Report on Form 6-K, filed on July 18, 2023 and hereby incorporated by reference. |
| (3) | Filed as an exhibit to the Registrant’s Annual Report on Form 20-F, fled on April 25, 2023 and hereby incorporated by reference. |
| (4) | Filed as an exhibit to the Registrant’s Annual Report on Form 20-F, fled on April 29, 2022 and hereby incorporated by reference. |
77
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| TDH Holdings, Inc. | |||
| April 29, 2024 | By: | /s/ Dandan Liu | |
| Name: | Dandan Liu | ||
| Title: | Chief Executive Officer (Principal Executive Officer) | ||
| TDH Holdings, Inc. | |||
| April 29, 2024 | By: | /s/ Feng Zhang | |
| Name: | Feng Zhang | ||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||
78
TDH HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of TDH Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TDH Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company records an accumulated deficit as of December 31, 2023, and reports continued net losses and negative cash flows from operations. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/
We have served as the Company’s auditor since 2022.
PCAOB ID
April 29, 2024
F-2
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepayments and other current assets, net | ||||||||
| Current assets held for sale associated with discontinued operation of Tiandihui | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Non-current assets held for sale associated with discontinued operation of Tiandihui | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Advances from customers | ||||||||
| Bank overdrafts | ||||||||
| Short-term loans - related parties | ||||||||
| Taxes payable | ||||||||
| Due to related parties | ||||||||
| Operating lease liabilities, current | ||||||||
| Other current liabilities | ||||||||
| Current liabilities held for sale associated with discontinued operation of Tiandihui | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Non-current liabilities held for sale associated with discontinued operation of Tiandihui | ||||||||
| Total liabilities | ||||||||
| SHAREHOLDERS’ EQUITY : | ||||||||
| Common shares ($ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total TDH Holdings, Inc. shareholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-3
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| For The Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net revenue | $ | $ | $ | |||||||||
| Total revenue | ||||||||||||
| Cost of revenue | ||||||||||||
| Total cost of revenue | ||||||||||||
| Gross profit | ||||||||||||
| Operating expenses: | ||||||||||||
| Selling expense | ||||||||||||
| General and administrative expense | ||||||||||||
| Stock-based compensation expense | ||||||||||||
| Impairment of long-lived assets other than goodwill | ||||||||||||
| Impairment of goodwill | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Interest expense (income) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ( | ) | ||||||||||
| Investment (loss) income, net | ( | ) | ||||||||||
| Total other (expenses) income | ( | ) | ( | ) | ||||||||
| Income (loss) before income tax provision | ( | ) | ( | ) | ||||||||
| Income tax provision | ||||||||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ||||||||
| Net loss from discontinued operations of Tiandihui | ( | ) | ( | ) | ( | ) | ||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||
| Less: Net income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to TDH Holdings, Inc. | $ | ( | ) | $ | $ | ( | ) | |||||
| Comprehensive income (loss) | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | |||||
| Other comprehensive income (loss) | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||
| Total comprehensive income (loss) | ( | ) | ( | ) | ||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||
| Comprehensive income ( loss) attributable to TDH Holdings, Inc. | $ | ( | ) | $ | $ | ( | ) | |||||
| Earnings (loss) per common share attributable to TDH Holdings, Inc. | ||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | |||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | |||||
| Weighted average common shares outstanding | ||||||||||||
| Basic | ||||||||||||
| Diluted | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
F-4
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
| Number of Shares* | Common Shares | Additional Paid-in Capital | Stock Subscription Receivable | Statutory Reserves | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | - | $ | $ | ( | ) | $ | ( | ) | $ | - | $ | ( | ) | ||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of common stock | - | - | - | - | - | |||||||||||||||||||||||||||||||
| Warrants exercised for cashless | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Acquisition of non-controlling interest | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Issuance of common stock and warrants in private placements | - | |||||||||||||||||||||||||||||||||||
| Warrants exercised for cashless | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | - | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||||||||||
| Adjustment to reflect the effect of disposal of Tiandihui and Chongaijiujiu | - | - | - | - | ( | ) | - | - | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||
| Balance, December 31, 2023 | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
F-5
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For The Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | |||||
| Less: net (loss) income from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization expense | ||||||||||||
| Fair value change of short-term investments | ( | ) | ( | ) | ||||||||
| Impairment of goodwill | ||||||||||||
| Impairment of long-lived assets other than goodwill | ||||||||||||
| Inventory write-down | ||||||||||||
| Allowance for doubtful accounts | ||||||||||||
| Deferred income taxes | ||||||||||||
| Loss (gain) on disposal of property, plant and equipment | ( | ) | ||||||||||
| Gain from operating lease contract modification | ( | ) | ||||||||||
| Amortization of operating lease right-of-use assets | ||||||||||||
| Non-cash lease expense | ( | ) | ||||||||||
| Stock-based compensation | ||||||||||||
| Changes in operating assets and liabilities: | ( | ) | ||||||||||
| Accounts receivable, net | ||||||||||||
| Inventories, net | ( | ) | ||||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||||||
| Operating lease liabilities – related parties | - | |||||||||||
| Advances to suppliers, net | ( | ) | ( | ) | ||||||||
| Prepayments and other current assets, net | ( | ) | ( | ) | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||||||
| Accounts payable - related parties | ( | ) | ( | ) | ||||||||
| Interest payable | ( | ) | ( | ) | ||||||||
| Interest payable - related parties | ||||||||||||
| Notes payable | ||||||||||||
| Taxes payable | ( | ) | ( | ) | ||||||||
| Advances from customers | ( | ) | ||||||||||
| Advances from customer - related party | ( | ) | ||||||||||
| Deferred income tax liability | ||||||||||||
| Other current liabilities | ( | ) | ||||||||||
| Net cash used in operating activities from continuing operations | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by (used in) operating activities from discontinued operations | ( | ) | ||||||||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Cash flows from investing activities | ||||||||||||
| Payments to acquire property, plant and equipment | ( | ) | ||||||||||
| Cash obtained from business acquisition | ||||||||||||
| Payment for business acquisition | ( | ) | ||||||||||
| Purchase of short-term investments | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from sale of short-term investments | ||||||||||||
| Leasehold Improvement | ( | ) | ||||||||||
| Net cash used in (provided by) investing activities from continuing operations | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by investing activities from discontinued operations | ||||||||||||
| Net cash provided by (used in) investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issuance of common shares | ||||||||||||
| Purchase of noncontrolling interest | ( | ) | ||||||||||
| Collection of stock subscription receivable | ||||||||||||
| Proceeds from related parties | ||||||||||||
| Repayments to related parties | ( | ) | ||||||||||
| Proceeds from short-term loans | ||||||||||||
| Repayments of short-term loans | ||||||||||||
| Proceeds from short-term loans - related parties | ||||||||||||
| Repayments of short-term loans - related parties | ||||||||||||
| Payment to related party | ( | ) | ||||||||||
| Net cash provided by financing activities from continuing operations | ||||||||||||
| Net cash provided by financing activities from discontinued operations | ( | ) | ||||||||||
| Net cash provided by financing activities | $ | $ | $ | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ) | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of the year | ||||||||||||
| Cash, cash equivalents and restricted cash, end of the year | $ | $ | $ | |||||||||
| Less: cash and restricted cash of discontinued operations at the end of the period | ||||||||||||
| Cash and restricted cash of continued operations at the end of the period | $ | $ | $ | |||||||||
| Supplemental cash flow information | ||||||||||||
| Interest paid | $ | $ | $ | |||||||||
| Income taxes paid | $ | $ | $ | |||||||||
| Non-cash investing and financing activities | ||||||||||||
| Liabilities assumed in connection with purchase of property, plant and equipment | $ | $ | $ | |||||||||
| Notes payable reclassified to short-term loans | $ | $ | $ | |||||||||
| Short-term loans settled by transferring an equity investment to the creditor | $ | $ | $ | |||||||||
| Cashless exercise of warrants | $ | $ | $ | |||||||||
| Right of use assets obtained in exchange for operating lease obligations | $ | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| Restricted cash | $ | $ | $ | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | $ | |||||||||
The accompanying footnotes are an integral part of these financial statements
F-6
TDH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – ORGANIZATION
TDH Holdings, Inc. (“TDH Holdings”)
was incorporated on September 30, 2015 under the laws of the British Virgin Islands. On November 4, 2015, TDH Holdings incorporated a
wholly owned subsidiary, TDH HK Limited (“TDH HK”) in Hong Kong for the purpose of being a holding company for the equity
interest in Qingdao Tiandihui Foodstuffs Co., Ltd. (“Tiandihui”). On September 9, 2016, TDH Holdings incorporated TDH Petfood
LLC, a Nevada limited liability company, in which TDH Holdings holds
Tiandihui was founded in Qingdao City, Shandong Province, People’s Republic of China (“PRC”) on April 22, 2002 as a limited liability company. As of December 31, 2022, Tiandihui had one wholly owned subsidiary: Beijing Chongai Jiujiu Cultural Communication Co., Ltd. (“Chongai Jiujiu”), which was incorporated on March 3, 2011, in Beijing City, PRC. Tiandihui and its wholly owned subsidiary are engaged in the business of development, manufacturing and sales of high quality petfood products under our own formula patents. Our products are produced at Tiandihui facility and sold to the pet owners in PRC and to the retailers and wholesalers throughout worldwide. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui, Ltd., and it entered into bankruptcy proceedings. On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. As a result, Tiandihui has been fully disposed as of December 31, 2023 (see Note 4).
On February 21, 2016, TDH HK entered into an equity
transfer agreement with Rongfeng Cui and his wife Yanjuan Wang, the shareholders of Tiandihui at the time, to acquire
On July 19, 2016, Tiandihui acquired
In November 2018, the Company completed business acquisitions of TDH Group BVBA, a Belgium entity and TDH JAPAN, a Japanese entity. TDH Group BVBA and TDH JAPAN had limited operation activities for the year ended December 31, 2020. TDH JAPAN was dissolved in February 2021.
F-7
On January 22, 2020, Qingdao Tiandihui Pet Foodstuffs Co., Ltd. (“Tiandihui Pet Foodstuffs”) was incorporated in Qingdao City, PRC.
On January 21, 2020, Qingdao Tiandihui Foodstuffs Sales Co., Ltd. (“Tiandihui Foodstuffs Sales”) was incorporated in Qingdao City, PRC. Tiandihui Foodstuffs Sales is a wholly owned subsidiary of Tiandihui Pet Foodstuffs.
On February 27, 2020, TDH Foods Limited was incorporated in Hong Kong, with the purpose of being a holding company for equity interests in Tiandihui Pet Foodstuffs. TDH Foods Limited does not conduct any operations or own any material assets or liabilities.
On August 24, 2020, TDH Holdings, Inc. acquired
On June 4, 2021, TDH Income Corporation (“TDH
Income”) was incorporated in Nevada. TDH Holdings, Inc. owns a
On June 9, 2021, Ruby21Noland LLC (“Ruby21Noland”) was incorporated in Missouri. Ruby21Noland is a wholly owned subsidiary of TDH Income.
On October 31, 2021, TDH Income acquired
On January 22, 2022, Beijing Wenxin Co., Ltd. (“Beijing Wenxin”) was incorporated in Beijing City, PRC.
On March 27, 2023, Qingdao Chihong Information Consulting Co., Ltd. (“Qingdao Chihong”) was incorporated in Qingdao City, PRC.
TDH Holdings and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying audited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC GAAP”), the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company to present them in conformity with U.S. GAAP.
The consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated upon consolidation. The results of subsidiaries acquired or disposed of during the respective periods are included in the consolidated statements of operations and comprehensive loss from the effective date of acquisition or up to the effective date of disposal, as appropriate. The portion of the income or loss applicable to noncontrolling interest in subsidiaries is reflected in the consolidated statements of operations and comprehensive loss.
F-8
Discontinued operations
On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Tiandihui and it entered into bankruptcy proceedings. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings werecompleted. As a result, Tiandihui has been fully disposed as of December 31, 2023.
A component of a reporting entity or a group of components of a reporting entity that are disposed or meet the criteria to be classified as held for sale, such as the management having the authority to approve the action, commits to a plan to sell the disposal group, should be reported in 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. Discontinued operations are reported when a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity is classified as held for disposal or has been disposed of, if the component either (1) represents a strategic shift or (2) have a major impact on an entity’s financial results and operations. In the consolidated statements of operations and comprehensive loss, result from discontinued operations is reported separately from the income and expenses from continuing operations and prior periods are presented on a comparative basis. In order to present the financial effects of the continuing operations and discontinued operations, revenues and expenses arising from intra-group transactions are eliminated except for those revenues and expenses that are considered to continue after the disposal of the discontinued operations (see Note 4)
Reclassifications
In connection with the discontinued operations of a business, certain prior-year amounts have been reclassified for consistency with the current-year presentation. These reclassifications had no effect on the reported results of operations. The assets and liabilities related to the discontinued operations are classified as assets/liabilities held for sale as of December 31, 2022, while results of operations related to the discontinued operations, including comparatives, were reported as losses from discontinued operations for the years ended December 31, 2023, 2022 and 2021. Certain prior-year balance sheet accounts have been reclassified to conform to the current-year presentation.
Going Concern
Our consolidated financial statements have been
prepared assuming we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in
the normal course of business. For the year ended December 31, 2023, our revenue from the restaurant business segment only slightly increased
by approximately $
Management’s plan to alleviate the substantial doubt about the Company’s ability to continue as a going concern include attempting to improve its business profitability, its ability to generate sufficient cash flow from its operations to meet its operating needs on a timely basis, obtain additional working capital funds through debt and equity financings to eliminate inefficiencies in order to meet its anticipated cash requirements. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company’s ongoing capital expenditures, working capital, and other requirements.
F-9
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollar (“$”), which is the reporting currency of the Company. The functional currency of TDH Holdings, TDH HK, TDH Petfood LLC TDH Income Corporation, Ruby21Noland LLC, Far Ling’s Inc, Bo Ling’s Chinese Restaurant, Inc and TDH Foods Limited is United States dollar. The functional currency of Beijing Wenxin, Qingdao Chihong, Tiandihui, Tiandihui Pet Foodstuffs, Tiandihui Foodstuffs Sales and Chongai Jiujiu is Renminbi (“RMB”). The functional currency of TDH Group BVBA is Euro (“€”). For the subsidiaries whose functional currencies are RMB, Euro and Yen, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. The resulting translation adjustments are included in determining other comprehensive income or loss. Transaction gains and losses are reflected in the consolidated statements of operations.
| Period Covered | Balance Sheet Date Rates | Average Rates | ||||||
| Year ended December 31, 2023 | ||||||||
| Year ended December 31, 2022 | ||||||||
The exchange rates used to translate amounts in Euro into U.S. Dollars for the purpose of preparing the consolidated financial statements were as follows (USD$1=€):
| Period Covered | Balance Sheet Date Rate | Average Rate | ||||||
| Year ended December 31, 2023 | ||||||||
| Year ended December 31, 2022 | ||||||||
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Significant estimates and assumptions by management include, among others, useful lives and impairment of long-lived assets, allowance for credit losses, write-down in value of inventories and income taxes including the valuation allowance for deferred tax assets. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.
F-10
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in time deposits and highly liquid investments purchased with original maturities of three months or less.
Restricted Cash
Restricted cash mainly represents bank deposits
judicially frozen by the court as a result of Tiandihui’s bankruptcy proceedings as of December 31, 2022. Restricted cash amounted to
$
Short-term Investments
Starting March 2020 and throughout the years ended
December 31, 2021, 2022 and 2023, TDH Holdings invested in equity securities of certain publicly listed companies through various open
market transactions. The investments in marketable securities are managed and operated by an asset management company. Pursuant to the
asset management agreement, for the period from March 1, 2020 to December 31, 2023, the asset management company is entitled to
TDH Holdings’ investments in marketable
securities are accounted for pursuant to ASC 321 and reported at their readily determinable fair value as quoted by market exchanges in
the consolidated balance sheets with change in fair value recognized in earnings. Changes in fair value, including realized gain of approximately
$
Business Combination
In October 2021, the Company acquired
Non-controlling interest
As of December 31, 2023 and 2022, non-controlling
interest represents
Current Expected Credit Losses
On January 1, 2020, the Company adopted FASB Accounting Standards Update (ASU) 2016-13 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” (ASC Topic 326) and its amendments using the modified retrospective approach. Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326, while prior amounts are not adjusted. The Company’s accounts receivables, advances to suppliers, prepayments and other current assets are within the scope of ASC Topic 326. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments. The amendments require entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.
Our expected loss allowance methodology is developed using an aging method and analyses of historical credit losses experience, current economic conditions, future market forecasts and any recoveries in assessing the lifetime expected credit losses. Additionally, external data and macroeconomic factors are also considered.
F-11
Inventories
Inventories, consisting of raw materials, work in progress, and finished goods, are stated at the lower of cost or net realizable value, with cost computed on a weighted-average basis. The valuation of inventory requires us to estimate excess and slow-moving inventory. We evaluate the recoverability of our inventory based on assumption about expected demand, market conditions, forecasts prepared by its customers, sales contracts and orders in hand.
Property, Plant and Equipment
Property, plant and equipment, are stated at cost less depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.
| Machinery equipment | |||
| Electronic equipment | |||
| Office equipment | |||
| Leasehold improvement | |||
| Buildings |
Land Use Rights
According to the law of PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government for a specified period of time. Land use rights are being amortized using the straight-line method over the periods the rights are granted.
Goodwill
Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least
annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying
amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. The Company recorded impairment loss on long-lived assets other than goodwill of $
The Company’s goodwill is tested for impairment
on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
In testing for goodwill impairment, the Company compares the fair value of its reporting unit to its carrying value including the goodwill
of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Company will recognize an
impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot
exceed the total amount of goodwill allocated to that reporting unit. Given the Company’s net loss position, the Company recorded
impairment of goodwill of $
F-12
In accordance with ASC 323, Investments-Equity
Method and Joint Ventures, the Company applies the equity method of accounting to equity investments, over which it has significant
influence but does not own a majority equity interests or otherwise control. Significant influence is generally considered to exist when
the Company has an ownership interest in the voting stock of the investee between
The Company continually reviews its investment under equity method to determine whether a decline in fair value to below the carrying value is other-than-temporary. The primary factors in its determination are the duration and severity of the decline in fair value, the financial condition, operating performance and the prospects of the equity investee, and other company specific information such as recent financing rounds. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.
For equity securities without readily determinable fair value and do not qualify for the existing practical expedient in ASC 820, Fair Value Measurements and Disclosures to estimate fair value using the net asset value per share (or its equivalent) of the investment, the Company elected to use the measurement alternative to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company makes assessment of whether an investment is impaired at each reporting date and recognizes an impairment loss equal to the difference between the carrying value and fair value in the consolidated statements of operations and comprehensive loss if there is any. The Company makes a qualitative assessment of whether the investments are impaired at each reporting date.
Fair Value of Financial Instruments
Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurement for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The Company measures certain financial assets, including the investment under the measurement alternative method and equity method on other-than-temporary basis, intangible assets and fixed assets at fair value when an impairment charge is recognized.
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 — Unobservable inputs which are supported by little or no market activity.
Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.
F-13
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, inventories, prepayments and other current assets, accounts payable, advances from customers, taxes payable, bank overdrafts, short-term loans and other current liabilities, the carrying amounts approximate their fair values due to the short maturities. The fair value of the Company’s investments in the equity securities of publicly listed companies are measured using quoted market prices.
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observation Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Balance | |||||||||||||
| Publicly listed equity securities | ||||||||||||||||
| As of December 31, 2023 | $ | |||||||||||||||
| As of December 31, 2022 | $ | |||||||||||||||
Lease Commitments
On January 1, 2019, the Company adopted ASU 2016-02, Leases (together with all amendments subsequently issued thereto, “ASC Topic 842”), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance within ASC Topic 842, which among others, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
The initial lease liability is equal to the future fixed minimum lease payments discounted using the Company’s incremental borrowing rate, on a secured basis. The lease term includes option renewal periods and early termination payments when it is reasonably certain that the Company will exercise those rights. The initial measurement of the right-of-use asset is equal to the initial lease liability plus any initial direct costs and prepayments, less any lease incentives.
Payments made under operating leases are charged to the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease period. The Company does not have finance lease arrangements as of December 31, 2023 and 2022. See Note 15 for further discussion.
F-14
Earnings (Loss) per Share
Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the sum of the weighted average number of common shares outstanding and dilutive potential common shares during the period. Potentially dilutive common shares consist of common shares warrants using the treasury stock method. Common equivalent shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive. There were no diluted shares for the years ended December 31, 2023, 2022 and 2021.
Revenue Recognition
Revenue is measured according to ASC Topic 606,
Revenue from Contracts with Customers. The Company currently generated revenue from
Revenue for sale of products is derived from contracts with customers, which primarily include the sale of petfood products. The Company recognizes revenue upon transfer of control of promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer.
In connection with the business acquisition as disclosed in Note 3, the Company started to generate revenue from restaurant business operation since late 2021. Revenue from providing dining services and sales of meals is recognized at point when services are rendered. The Company recognizes revenues in the form of restaurant sales at the time of the sale when payment is made by the customer, as the Company has completed its performance obligation, namely the provision of food and beverage, and the accompanying customer service, during the customer’s visit to the restaurant.
Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities, including value-added tax (“VAT”), business tax, applicable local government levies. At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated sales returns based upon historical experience and related terms of customer arrangements.
The allowance for sales returns recorded by the
Company was $
The Company elected to account for shipping and handling fees that occur after the customer has obtained control of goods, for instance, free onboard shipping point arrangements, as a fulfillment cost and accrues for such costs.
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard is measured on the same basis as under the revenue standard. See Note 14 for information regarding revenue disaggregation by product lines, marketing channels and countries.
Contract liabilities are recorded when consideration
is received from a customer prior to transferring the control of goods to the customer or other conditions under the terms of a sales
contract. As of December 31, 2023 and 2022, the Company recorded contract liabilities of $
Government Grants
Government grants include cash subsidies as well as other subsidies received from the PRC government by the subsidiaries of the Company. Such subsidies are generally provided as incentives from the local government to encourage the expansion of local business. The government grant is recognized in the consolidated statements of operations and comprehensive loss when cash is received and the relevant performance criteria specified in the grant are met.
F-15
Selling Expenses
Selling expenses consist primarily of advertising, salaries and shipping and handling costs incurred during the selling activities. Advertising and transportation expenses are charged to expense as incurred.
Shipping and handling expenses amounted to $
Advertising costs amounted to $
Income Taxes
The Company accounts for income taxes under the provision of FASB ASC 740-10, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Comprehensive Income (Loss)
ASC 220 “Comprehensive Income” established standards for reporting and display of comprehensive income (loss), its components and accumulated balances. Components of comprehensive income (loss) include net income (loss) and foreign currency translation adjustment. As of December 31, 2023, 2022 and 2021, the only component of accumulated other comprehensive income (loss) was foreign currency translation adjustment.
Loss Contingencies
The Company records accruals for certain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. When a loss contingency is not both probable and estimable, the Company does not record an accrued liability but discloses the nature and the amount of possible loss, if material, in the notes to the consolidated financial statements.
The Company reviews the developments in contingencies that could affect the amount of the provisions that has been previously recorded, and the matters and related possible losses disclosed. The Company makes adjustments to provisions and changes to its disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. The assessment of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves complex judgments about future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any.
Related Parties Transactions
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related parties may be individuals or corporate entities.
F-16
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
Segment Reporting
The Company uses the “management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker has been identified as the chief executive officer of the Company
who reviews financial information based on U.S. GAAP. The chief operating decision maker now reviews results analyzed by marketing channel.
This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company has determined
that it has only
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, (Topic 848). The amendments in Topic 848 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Topic 848 can be applied by all entities as of the beginning of the interim period that includes March 12, 2020, or any date thereafter, and entities may elect to apply the amendments prospectively through December 31, 2022. The Company did not utilize the optional expedients and exceptions provided by this standard during the year ended December 31, 2023. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
Note 3 – BUSINESS COMBINATION
On October 31, 2021, the Company completed the
acquisition of
Pursuant to the Stock Purchase Agreements executed
on October 31, 2021, the Company acquired
The transaction was accounted for as a business combination using the purchase method of accounting. The purchase price allocation of the transaction was determined by the Company with the assistance of an independent appraisal firm based on the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date.
In connection with the acquisition, the Company
recognized the intangible assets (mainly include Bo Ling’s Chinese Restaurant, Inc.’s brand name) of $
There was no impairment of Bo Ling’s intangible assets during the years ended December 31, 2023 and 2022.
| For the year ended December 31, 2023 | For the year ended December 31, 2022 | From acquisition date to December 31, 2021 | ||||||||||
| Net revenue | $ | $ | $ | |||||||||
| Net income (loss) | $ | - | $ | $ | - | |||||||
F-17
Note 4 – DISCONTINUED OPERATION
The Company’s subsidiary, Tiandihui, was mainly engaged in the development, manufacture and sale of petfood in China and other regions. On March 16, 2022, the People’s Court of Huangdao District, Qingdao City, Shandong Province made a civil ruling and announced the acceptance of creditors’ application of bankruptcy liquidation of Qingdao Tiandihui Foodstuffs Co., Ltd., and it entered into bankruptcy proceedings. On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. As a result, Tiandihui has been fully disposed as of December 31, 2023 and all the material claims against Tiandihui that arose prior to the date of the completion of Tiandihui’s bankruptcy proceedingwere resolved.
The discontinued operation represents a strategic shift that has a major effect on the Company’s operations and financial results, which trigger discontinued operations accounting in accordance with ASC 205-20-45. The assets and liabilities related to the discontinued operations are classified as assets/liabilities held for sale as of December 31, 2022, while results of operations related to the discontinued operations for the years ended December 31, 2022 and 2021, were reported as income (loss) from discontinued operations.
Prior to the final bankruptcy property distribution
plan approved by the Court on December 27, 2023, Tiandihui had short-term bank loans of $
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Cost of revenues | ( | ) | ( | ) | ||||||||
| Gross profit | ( | ) | ) | |||||||||
| Operating expenses | ( | ) | ( | ) | ( | ) | ||||||
| (Loss) income from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||
| Other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||
| (Loss) income before tax | ( | ) | ( | ) | ( | ) | ||||||
| Net (loss) income from discontinued operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Note 5 – ACCOUNTS RECEIVABLE, NET AND ACCOUNTS RECEIVABLE-RELATED PARTIES, NET
| December 31, 2023 | December 31, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: Allowance for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Balance, beginning of the year | $ | $ | $ | |||||||||
| Provision for credit losses | ( | ) | ||||||||||
| Write-off uncollectable accounts receivable | ||||||||||||
| Translation adjustment | ( | ) | ( | ) | ||||||||
| Balance, end of the year | $ | $ | $ | |||||||||
F-18
Note 6 – INVENTORIES
| December 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total | ||||||||
| Inventory write-down | ( | ) | ( | ) | ||||
| Translation adjustments | ||||||||
| Inventories, net | $ | $ | ||||||
The Company recorded write-down of potentially
obsolete or slow-moving inventories of $
Note 7 – PROPERTY, PLANT AND EQUIPMENT, NET
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Machinery equipment | $ | $ | ||||||
| Electronic equipment | ||||||||
| Office equipment | ||||||||
| Leasehold improvement | ||||||||
| Buildings | ||||||||
| Total property, plant and equipment | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Less: impairment loss | ( | ) | ||||||
| Translation adjustments | ||||||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation expense for the years ended December
31, 2023, 2022 and 2021 was $
F-19
Note 8 – INTANGIBLE ASSETS
| December 31, 2023 | December 31, 2022 | |||||||
| Intangible assets- brand name | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
The intangible assets mainly include Bo Ling’s Chinese Restaurant, Inc.’s brand name to attract customers and bring in increased revenue to benefit the Company.
During the years ended December 31, 2023, 2022
and 2021, amortization expense amounted to $
| Years ended December 31, | Amortization expense | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
Note 9 – OTHER CURRENT LIABILITIES
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Other Payables | $ | $ | ||||||
| Interest Payable | ||||||||
| Wages Payable | ||||||||
| Total | $ | $ | ||||||
F-20
Note 10 – RELATED PARTY TRANSACTIONS
| Name of Related Party | Nature of Relationship at December 31, 2023 | |
| Dandan Liu | ||
| Rongfeng Cui | ||
| Rongbing Cui | ||
| Feng Zhang | ||
| Yanjuan Wang | ||
| Yan Fu | ||
| Yuxiang Qi | ||
| Tide (Shanghai) Industrial Co. Ltd. | ||
| Qingdao Like Pet Supplies Co., Ltd. | ||
| Qingdao Saike Environmental Technology Co., Ltd. (“Saike”) | ||
| Huangdao Ding Ge Zhuang Kangkang Family Farm | ||
| TDH Group BVBA | ||
| TDH JAPAN | ||
| Qingdao Yinhe Jiutian Information Technology Co., Ltd. | ||
| Huangdao Hanyinhe Software Development Center Co., Ltd. | ||
| Beijing Quanmin Chongai Information Technology Co., Ltd. (“Quanmin Chongai”) | ||
| LAI LINGS LENEXA | ||
| Products Inc. | ||
| Bo Lings at Zona Rosa in the Northland | ||
| Richard Ng |
F-21
Due to related parties from continuing operations
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Dandan Liu | ||||||||
| Rongfeng Cui | ||||||||
| Feng Zhang | ||||||||
| Products Inc. | ||||||||
| Total | $ | $ | ||||||
The balance of due to related parties represents expenses paid by related parties on behalf of the Company as well as advances the Company obtained from related parties for working capital purposes. The amounts owed to the related parties are unsecured, non-interest bearing and payable on demand.
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Rongfeng Cui | $ | $ | ||||||
| Total | $ | $ | ||||||
In March 2018, TDH Group BVBA borrowed non-interest
bearing, unsecured long-term loans from Rongfeng Cui in the aggregate amount of €
Modification of Loans from related party
In January 2018, the Company entered into a loan
agreement with Dandan Liu. In May 2018, the agreement was amended to, among others, reclassify unpaid interest payable to the principal
of the loan, resulting in an increase of principal from RMB
In June 2018, the Company entered into a loan
agreement with Yuxiang Qi. Interest rate was
The interest expenses for the loans from related
parties amounted to $
F-22
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Richard Ng | $ | $ | ||||||
| Total | $ | $ | ||||||
Note 11 – INCOME TAXES
British Virgin Islands (“BVI”)
Under the current laws of BVI, TDH Holdings is not subject to tax on income or capital gain. In addition, payments of dividends by the Company to their shareholders are not subject to withholding tax in the BVI.
Hong Kong
The Company’s subsidiary, TDH HK and TDH
Foods were incorporated in Hong Kong and has no operating profit or tax liabilities during the period. TDH HK and TDH Foods were subject
to tax at
United State
The Company’s subsidiary, TDH Income, is
incorporated in the State of Nevada and is subject to the United States Federal income tax at a statutory rate of
Belgium
The Company’s subsidiary, TDH Group BVBA,
is incorporated in Belgium and has no operating profit or tax liabilities during the reporting period. TDH Group BVBA is subject to tax
at
F-23
PRC
The Company’s subsidiaries incorporated
in the PRC are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the relevant PRC income
tax laws. On March 16, 2007, the National People’s Congress enacted a new enterprise income tax law, which took effect as of January
1, 2008. The law applies a uniform
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| United states income tax rate | % | % | % | |||||||||
| HK statutory income tax rate | % | % | % | |||||||||
| PRC statutory income tax rate difference | % | % | % | |||||||||
| Effect of additional deduction on R&D expense and salary for disabled workers | % | % | % | |||||||||
| Effect of expenses not deductible for tax purposes | % | - | % | - | % | |||||||
| Valuation allowance recognized with respect to the loss in subsidiaries | - | % | - | % | - | % | ||||||
| Other | - | % | % | - | % | |||||||
| Total | % | % | % | |||||||||
Accounting for Uncertainty in Income Taxes
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results are subject to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s PRC entities’ tax filings, which may lead to additional tax liabilities.
ASC 740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and concluded that no provision for uncertainty in income taxes was necessary as of December 31, 2023 and 2022.
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Deferred tax assets, non-current | ||||||||
| Net operating loss carrying forward | $ | $ | ||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ||||||
| Total deferred tax assets | $ | $ | ||||||
Note 12 – STOCKHOLDERS’ EQUITY
Common shares
In April 2021, a total of
F-24
On September 30, 2021, the Company and certain
investors entered into a securities purchase agreement in connection with a registered direct offering, pursuant to which the Company
agreed to sell to the investors an aggregate of
On November 3, 2021, the Company and certain investors
entered into a securities purchase agreement in connection with a registered direct offering, pursuant to which the Company agreed to
sell to the investors an aggregate of
On June 14, 2022, our Board approved to effect a reverse stock split of our common shares at the ratio of one-for-twenty with the market effective date of June 14, 2022. The objective of the reverse stock split was to enable our Company to regain compliance with NASDAQ Marketplace Rule 5550(a)(2) and maintain its listing on Nasdaq. As a result of the reverse stock split, each twenty common shares outstanding automatically combined and converted to one issued and outstanding common share without any action on the part of the shareholder. As a result of this stock reverse split, all common stocks issued prior to June 14, 2022 have been retrospectively restated and reflected in the consolidated financial statements.
On July 26, 2022, we completed a private placement
of securities, and entered into a securities purchase agreement with eight accredited investors pursuant to which we sold to the investors
an aggregate
Investor warrants
In connection with the Company’s registered
direct offering as consummated on September 30, 2021, pursuant to the securities purchase agreement, the Company also agreed to sell to
the investors warrants exercisable for an aggregate of
In addition, in connection with the Company’s
registered direct offering as consummated on November 3, 2021, pursuant to the securities purchase agreement, the Company also agreed
to sell to the investors warrants exercisable for an aggregate of
As of December 31, 2021,
F-25
For the above-mentioned investor warrants, the
Company couldcompel the exercise of the warrants if the closing price of the Company’s common shares exceeded$
On July 26, 2022, in connection with our private
placement of securities as mentioned above, in which we sold to the investors an aggregate
| July 11, 2023 | ||||
| Exercise price | $ | |||
| Stock Price | $ | |||
| Term (in years) | ||||
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | ||||
| Number of warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | ||||||||||
| Outstanding, December 31, 2020 | ||||||||||||
| Granted | $ | |||||||||||
| Exercised | ( | ) | ||||||||||
| Exercisable, December 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Outstanding, December 31, 2022 | $ | |||||||||||
| Outstanding, December 31, 2023 | $ | |||||||||||
| Exercisable, December 31, 2023 | $ | |||||||||||
F-26
Statutory reserve
In accordance with the relevant laws and regulations
of the PRC, the Company’s PRC subsidiaries are required to set aside at least
Restricted net assets
As a result of the PRC laws and regulations, the PRC entities are restricted from transferring a portion of their net assets to the Company. Amounts restricted included additional paid-in capital and statutory reserves of the Company’s PRC subsidiaries.
In connection with the bankruptcy determination
and disposition of Tiandihui as disclosed in Note 4, prior year restricted assets associated with Tiandihui were written off. As of December
31, 2023 and 2022, total restricted net assets were $
Note 13 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Customers
For the years ended December 31, 2023, 2022 and 2021，no single customer accounted for more than 10% of the Company’s net revenue, respectively. As of December 31, 2023 and 2022, no single customer accounted for more than 10% of the Company’s total outstanding accounts receivable balance, respectively.
Suppliers
| For the Years Ended December 31, | ||||||||||||
| Supplier | 2023 | 2022 | 2021 | |||||||||
| Supplier D | % | % | % | |||||||||
| Supplier E | % | % | % | |||||||||
| Supplier F | % | % | % | |||||||||
| Supplier G | % | % | % | |||||||||
| Supplier H | % | % | % | |||||||||
| Supplier I | % | % | % | |||||||||
| Supplier J | % | % | % | |||||||||
| Supplier K | % | % | % | |||||||||
| * |
As of December 31, 2023, no single supplier accounted
for more than 10% of the Company’s total accounts payable. As of December 31, 2022, Supplier G’s balance accounted for
F-27
Note 14 – SEGMENT AND REVENUE ANALYSIS
The company is mainly engaged in restaurant operations.
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to and regularly reviewed by the Company’s chief operating decision maker in order to allocate resources and assess performance of the segment.
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. Based on management’s assessment,
the Company has determined that it has
Certain entity-wide disclosures relating to revenues for the years ended December 31, 2023, 2022 and 2021 are as follows:
| For the year ended December 31, 2023 | ||||||||||||
| Petfood sales | Restaurant business | Total | ||||||||||
| Revenue from continuing operations | $ | $ | $ | |||||||||
| Net (loss) income from continuing operations | $ | ( | ) | ( | ) | $ | ( | ) | ||||
| Net loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||||||
| Total Net (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Total assets | $ | $ | $ | |||||||||
| For the year ended December 31, 2022 | ||||||||||||
| Petfood sales | Restaurant business | Total | ||||||||||
| Revenue from continuing operations | $ | $ | $ | |||||||||
| Net (loss) income from continuing operations | $ | $ | ||||||||||
| Net loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||||||
| Total Net income | $ | $ | $ | |||||||||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Total assets | $ | $ | $ | |||||||||
| For the year ended December 31, 2021 | ||||||||||||
| Petfood sales | Restaurant business | Total | ||||||||||
| Revenue from continuing operations | $ | $ | $ | |||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss from discontinued operations | $ | ( | ) | $ | $ | ( | ) | |||||
| Total Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Depreciation and amortization | $ | $ | $ | |||||||||
| Total assets | $ | $ | $ | |||||||||
F-28
The net revenue generated from different marketing channels consists of the following:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Overseas sales | $ | |||||||||||
| Domestic sales | ||||||||||||
| Electronic commerce | ||||||||||||
| Restaurant revenue | ||||||||||||
| Less: Sale tax and addition | ( | ) | ( | ) | ||||||||
| Total net revenue from continuing operations | $ | |||||||||||
The net revenue generated from different product lines and services is set forth as following:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Pet chews | $ | |||||||||||
| Dried pet snacks | ||||||||||||
| Wet canned petfood | ||||||||||||
| Dental health snacks | ||||||||||||
| Baked pet biscuits | ||||||||||||
| Restaurant revenue | ||||||||||||
| Others | ||||||||||||
| Less: Sales tax and addition | ( | ) | ( | ) | ||||||||
| Total net revenue from continuing operations | $ | |||||||||||
The net revenue generated from different countries is set forth as following:
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| South Korea | $ | |||||||||||
| China | ||||||||||||
| United Kingdom | ||||||||||||
| Germany | ||||||||||||
| U.S. | ||||||||||||
| Other countries | ||||||||||||
| Less: Sales tax and addition | ( | ) | ( | ) | ||||||||
| Total net revenue from continuing operations | $ | |||||||||||
“Other countries” are comprised of
all countries whose revenue, individually, was less than
The Company’s long-lived assets associated with restaurant business operations are located in the United States.
F-29
Note 15 – OPERATING LEASES
The company has signed one lease agreement for
office premises and restaurant premises. On October 6, 2010, Far Ling Restaurant entered into a lease agreement with the landlord to lease
the space for the restaurant for
On April 4, 2022, Far Ling signed supplemental
lease agreement with the landlord to modify the lease agreement, with new lease terms expired by December 31, 2026, and monthly lease
payment of $
As a result of this change, the lease agreement has been modified, which may have significant impact on the reported ROU assets and corresponding lease liability.
A lease modification is a change to the terms and conditions of a contract resulting in a change to either the scope or consideration for a lease. This could be a change that either adds or terminates the right to use a portion or all of the underlying asset(s) or changes the lease term. If the lease modification only partially reduces the lessee’s rights to the underlying asset(s), this is accounted for as a partial termination. In this scenario, the lease liability is remeasured based on the new payment terms, and the ROU asset is reduced based on either the proportionate change in the lease liability or the proportionate change in the asset.
As a result of the above mentioned lease modification,
the remaining lease term of the Company’s leases ranges from approximately
Other lease related expenses amounted to $
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Operating lease cost | $ | $ | $ | |||||||||
| Short-term lease costs | ||||||||||||
| Total lease cost | $ | $ | $ | |||||||||
| For the Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flow from operating leases | $ | $ | $ | |||||||||
| Weighted-average remaining lease term | ||||||||||||
| Weighted-average discount rate | % | % | % | |||||||||
F-30
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Total lease right-of-use assets | ||||||||
| Operating lease liabilities, current | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total | ||||
| Less imputed interest | ( | ) | ||
| Total operating lease liabilities | $ |
Note 16 – COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company provides counter guarantee to Gaochuang
including a cash deposit of RMB
During the year ended December 31, 2019, the Company did not make repayment on certain notes payables as scheduled, and Gaochuang, as one of the guarantors, paid on behalf of the Company to the holders of such notes payables. As a result, the unpaid notes payables were reclassified to loan payable to Gaochuang and the amount was included in “current liabilities held for sale associated with discontinued operation of Tiandihui” on the consolidated balance sheets as of December 31, 2022 and 2021. The loan payable to Gaochuang was pledged and guaranteed by the aforementioned assets and guarantors, respectively, under the counter guarantee.
On December 27, 2023, the Court announced that the bankruptcy property distribution plan of Qingdao Tiandihui Foodstuffs Co., Ltd. had been implemented and the bankruptcy proceedings had completed. As a result, Tiandihui has been fully disposed as of December 31, 2023, and substantially all the material claims against Tiandihui that arose prior to the date of the bankruptcy completion were addressed, including the loan payable to Gaochuang.
F-31
CONTINGENCIES
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Since November 2019, the Company has been involved
in a number of claims pending in various courts, in arbitration, or otherwise unresolved as of December 31, 2022. These claims are substantially
related to non-payment of wage payables, non-payment of vendor payables and non-payment of loans and notes payables. These legal proceedings
led to, among others actions, certain of the Tianddihui’s bank accounts and property, plant and equipment judicially frozen by the
court as of December 31, 2022 and 2021. On March 13, 2021, the land and factory buildings above the land owned by Tiandihui. were actioned
by the court for $
In addition, the Company has historically incurred losses and it is uncertain whether the Company may continue to incur losses in the future. As a result of the discontinued operations of the pet food business as disclosed above, if the Company is unable to successfully manage its restaurant business or acquire new business, the Company may be unable to sustain or increase its profitability in the future.
Note 17 – Subsequent Events
The Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the dates of the balance sheets, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company has analyzed its operations subsequent to December 31, 2023 to the date these audited consolidated financial statements were issued, and has determined that it does not have any material events to disclose.
F-32
Exhibit 2.1
DESCRIPTION OF SECURITIES
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of our Common Shares may not be complete and is subject to, and qualified in its entirety by reference to, the terms and provisions of our amended memorandum and articles of association. You should refer to, and read this summary together with, our amended memorandum and articles of association to review all of the terms of our Common Shares that may be important to you.
Overview
We were incorporated as a BVI business company under the BVI Business Companies Act, 2004 as amended, in the BVI on September 30, 2015 under the name “TDH HOLDINGS, INC.” We are authorized to issue a maximum of 50,000,000 Common Shares, of US$0.02 par value each. This takes into account the 1-for-20 reverse stock split of our Common Shares that was effectuated on June 14, 2022 (the “Reverse Stock Split”). As of the date hereof, there are 10,323,268 shares of Common Shares issued and outstanding. This takes into account the Reverse Stock Split.
In connection with the Reverse Stock Split, the Company filed an amendment to its memorandum and articles of association, with the Financial Services Commission of the British Virgin Islands on June 7, 2022 to reduce the authorized number of shares of the Company’s Common Shares from 1,000,000,000 shares to 50,000,000 shares, the reduction at the same ratio as its reduction in the issued and outstanding shares of Common Shares, and to increase the par value per share from $0.001 to $0.02. The Board of Directors of the Company approved the Reverse Stock Split on May 26, 2022. No stockholders’ approval of the reverse stock split is required pursuant to BVI law.
Common Shares
General
All of our issued Common Shares are fully paid and non-assessable. Certificates representing the Common Shares are issued in registered form. Our shareholders who are non-residents of the British Virgin Islands may freely hold and vote their Common Shares.
Listing
Our Common Shares are listed on The NASDAQ Capital Market under the symbol “PETZ.”
Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598.
Distributions
The holders of our Common Shares are entitled to such dividends as may be declared by our board of directors subject to the BVI Act.
General meetings of shareholders
Any director of the Company may convene meetings of the Shareholders at such times and in such manner and places within or outside the British Virgin Islands as the director considers necessary or desirable.
Upon the written request of Shareholders entitled to exercise 30 percent or more of the voting rights in respect of the matter for which the meeting is requested the directors shall convene a meeting of Shareholders.
The director convening a meeting shall give not less than 7 days’ notice of a meeting of Shareholders to: (a) those Shareholders whose names on the date the notice is given appear as Shareholders in the register of members and are entitled to vote at the meeting; and (b) the other directors.
Quorum of a meeting of shareholders
A meeting of Shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than one-third (1/3) of the votes of the Common Shares entitled to vote on Resolutions of Shareholders to be considered at the meeting. A quorum may comprise a single Shareholder or proxy and then such person may pass a Resolution of Shareholders and a certificate signed by such person accompanied where such person be a proxy by a copy of the proxy instrument shall constitute a valid Resolution of Shareholders.
Voting rights
Any action required or permitted to be taken by the shareholders must be effected at a duly called meeting of the shareholders entitled to vote on such action or may be effected by a resolution in writing. At each meeting of shareholders, each shareholder who is present in person or by proxy (or, in the case of a shareholder other than an individual, by its duly authorized representative) will have one vote for each common share that such shareholder holds.
Variation of rights
If at any time the Common Shares are divided into different classes, the rights attached to any class may only be varied, whether or not the Company is in liquidation, with the consent in writing of or by a resolution passed at a meeting by the holders of not less than 50 percent of the issued Common Shares in that class.
Rights not varied by the issue of shares pari passu
The rights conferred upon the holders of the Shares of any class shall not, unless otherwise expressly provided by the terms of issue of the Shares of that class, be deemed to be varied by the creation or issue of further Common Shares ranking pari passu therewith.
Liquidation
If we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay all amounts paid to us on account of the issue of shares immediately prior to the winding up, the excess shall be distributable pari passu among those shareholders in proportion to the amount paid up immediately prior to the winding up on the shares held by them, respectively. If we are wound up and the assets available for distribution among the shareholders as such are insufficient to repay the whole of the amounts paid to us on account of the issue of shares, those assets shall be distributed so that, to the greatest extent possible, the losses shall be borne by the shareholders in proportion to the amounts paid up immediately prior to the winding up on the shares held by them, respectively. If we are wound up, the liquidator appointed by us may, in accordance with the BVI Act, divide among our shareholders in specie or kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders.
Calls on common shares and forfeiture of Common Shares
Our board of directors may, on the terms established at the time of the issuance of such shares or as otherwise agreed, make calls upon shareholders for any amounts unpaid on their Common Shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The Common Shares that have been called upon and remain unpaid are subject to forfeiture.
2
Redemption of Common Shares
Subject to the provisions of the BVI Act, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by our memorandum and articles of association and subject to any applicable requirements imposed from time to time by, the BVI Act, the SEC, the NASDAQ Capital Market, or by any recognized stock exchange on which our securities are listed.
DESCRIPTION OF WARRANTS
Warrants
Overview
As of December 31, 2022, there were 4,000,000 warrants outstanding to purchase our Common Shares (the “Warrants”) that were issued to investors on July 26, 2022, pursuant to private placement offering. The Warrants allow for the investors to purchase up to 4,000,000 shares of our Common Shares.
The following is a summary of certain terms and provisions of the Warrants.
Exercisability
The Warrants became exercisable immediately upon issuance and are exercisable until July 26, 2027. The Warrants are exercisable, at the option of each holder, in whole, or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our Common Shares purchased upon such exercise. Each Warrant is exercisable for one share of our Common Shares (subject to adjustment, as discussed below). The Warrants also have a cashless exercise feature
Exercise Price
The exercise price of the Common Stock purchasable upon exercise of the Warrants is $2.44 per share. The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants is subject to appropriate adjustment in relation to certain events, such as dividends, splits, subdivisions, reclassifications, reorganization, consolidation or similar events affecting our Common Shares.
Rights as Stockholder
The holders of the Warrants do not have the rights or privileges of holders of our Common Shares, including any voting rights, until they exercise their Warrants.
Fractional Shares
No fractional shares of Common Shares will be issued upon the exercise of the Warrants. Rather, the Company shall, round down the number of shares of Common Shares to be issued to the nearest whole number.
Transferability
Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent.
Governing Law
The Warrants are governed by New York law.
3
Exhibit 12.1
Certification
Pursuant to Rule 13a-14(a) of the Exchange Act
I, Dandan Liu, certify that:
| 1. | I have reviewed this annual report on Form 20-F of TDH Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: April 29, 2024 | By: | /s/ Dandan Liu | |
| Name: | Dandan Liu | ||
| Title: | Chief Executive Officer | ||
| (Principal Executive Officer) | |||
Exhibit 12.2
Certification
Pursuant to Rule 13a-14(a) of the Exchange Act
I, Feng Zhang, certify that:
| 1. | I have reviewed this annual report on Form 20-F of TDH Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: April 29, 2024 | By: | /s/ Feng Zhang | |
| Name: | Feng Zhang | ||
| Title: | Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | |||
Exhibit 13.1
Certification
Pursuant to 18 U.S.C. Section 1350
Pursuant to U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of TDH Holdings, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that the Annual Report on Form 20-F for the year ended December 31, 2022 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
| TDH Holdings, Inc. | |||
| Date: April 29, 2024 | By: | /s/ Dandan Liu | |
| Name: | Dandan Liu | ||
| Title: |
Chief Executive Officer (Principal Executive Officer) | ||
| Date: April 29, 2024 | By: | /s/ Feng Zhang | |
| Name: | Feng Zhang | ||
| Title: | Chief Financial Officer | ||
Exhibit 21.1
List of Subsidiaries
| Name | State of Incorporation/Organization |
% of Ownership | ||||
| TDH HK Limited | Hong Kong | 100 | % | |||
| TDH Foods Limited | Hong Kong | 100 | % | |||
| TDH Group BVBA | Belgium | 100 | % | |||
| TDH Income Corporation | Nevada | 100 | % | |||
| Qingdao Tiandihui Pet Foodstuffs Co., Ltd | PRC | 100 | % | |||
| Qingdao Tiandihui Foodstuffs Sales Co., Ltd | PRC | 100 | % | |||
| Ruby21Noland LLC | Missouri | 100 | % | |||
| Far Ling’s Inc. | Missouri | 51 | % | |||
| Bo Ling’s Chinese Restaurnat, Inc. | Kansas | 100 | % | |||
| Beijing Wenxin Company., Ltd. | PRC | 100 | % | |||
| Qingdao Chihong Information Consulting Co., Ltd. | PRC | 100 | % | |||
Exhibit 97.1
TDH HOLDINGS, INC.
Clawback Policy
November 22, 2023
This TDH Holdings, Inc. Clawback Policy (“Policy”) applies to all Executive Officers (as defined below) of TDH Holdings, Inc. (“Company”).
This Policy shall be effective as of October 2, 2023, the Effective Date of Rule 5608 of the Nasdaq Stock Exchange’s listing standards (the “Effective Date”).
Definitions
For purposes of this Policy, the following definitions will apply:
“Board” means the Company’s Board of Directors.
“Committee” means the Compensation Committee of the Company’s Board of Directors.
“Excess Compensation” means any amount of Incentive-Based Compensation Received by an Executive Officer that exceeds the amount of Incentive-Based Compensation that otherwise would have been received had it been determined based on the restated financial information or properly calculated financial measure. Excess Compensation shall be calculated on a pre-tax basis.
“Executive Officer” means the Company’s president; chief executive officer, principal financial officer; principal accounting officer (or controller); vice presidents; or any other officer or person who performs a policy-making function, including executive officers of the issuer’s parent(s) or subsidiaries”) during any portion of the performance period of the Incentive-Based Compensation.
“Incentive-Based Compensation” means any non-equity incentive plan awards, bonuses paid from a bonus pool, cash awards, equity or equity-based awards, or proceeds received upon sale of shares acquired through an incentive plan; provided that, such compensation is granted, earned, and/or vested based wholly or in part on the attainment of a financial performance measure, as determined in accordance with Section 10D of the Exchange Act and the Nasdaq Stock Exchange listing standards (the “Clawback Rules”). Incentive-Based Compensation does not include any salaries, discretionary bonuses, non-equity incentive plan awards earned upon satisfying a strategic measure or operational measure (e.g., completion of a project), or equity equity-based awards that are not contingent on achieving any financial reporting measure (e.g., time vested stock options, restricted stock or restricted stock units).
“Lookback Period” means the three (3) completed fiscal years immediately preceding the earlier of the date on which (a) the Board or appropriate committee concludes or reasonably should have concluded that an accounting restatement is required or (b) a regulator directs a restatement.
“Received” means any Incentive-Based Compensation that is received during the fiscal year in which the applicable financial reporting measure upon which the payment is based is achieved, even if payment or grant of the Incentive-Based Compensation occurs after the end of such period.
Clawback Due to Accounting Restatement
In the event the Company is required to prepare an accounting restatement of its financial statements due to the Company’s material noncompliance with any financial reporting requirement under the securities laws, the Committee or the Board shall require reimbursement or forfeiture (“clawback”) of any Excess Compensation Received by any Executive Officer (current or former) during the applicable Look-Back Period, regardless of whether the Executive Officer engaged in misconduct or was otherwise directly or indirectly responsible, in whole or in part, for the accounting restatement. Covered accounting restatements include those that either (a) correct an error in a previously issued financial statement that is material to such previously issued financial statement or (b) correct an error that is not material to a previously issued financial statement but would result in a material misstatement if left uncorrected in a current report or the error correction was not recognized in the current period.
In the event the Committee or the Board cannot determine the Excess Compensation from the information in the accounting restatement or from the recalculated financial measure, then it will make its determination based on a reasonable estimate of the effect of the accounting restatement or recalculation. Such determination will be final and binding.
Clawback Method
The Committee or the Board may determine, in its sole discretion, the method for the clawback of any amounts due under this Policy, which may include, without limitation direct payment from the Executive Officer, recovery over time, the forfeiture or reduction of future pay or awards, or any other method that will provide for recovery within a reasonable manner and without undue delay. The Company may enter into deferred payment plans with Executive Officers to effectuate clawback to avoid unreasonable economic hardship. Any amounts due under this Policy may be deducted as an offset from amounts due to the Executive Officer from the Company, except to the extent such set-off is prohibited by law or would violate Section 409A of the Internal Revenue Code of 1986, as amended and the regulations thereunder.
The Committee or the Board thereof shall not be required to seek to clawback amounts due under this Policy if such clawback would be impracticable, violate home country laws, and/or involve tax qualified retirement plans, as determined by the Committee or the Board in accordance with the Clawback Rules. Any determination that clawback is not required shall be documented by the Committee or the Board.
2
General
The Company shall not indemnify any Executive Officer against the loss of any covered compensation as a result of the application of this Policy.
This Policy is in addition to (and not in lieu of) any right of repayment, forfeiture or right of offset against any employees that is required pursuant to any statutory repayment requirement (regardless of whether implemented at any time prior to or following the adoption or amendment of this Policy), including Section 304 of the Sarbanes-Oxley Act of 2002. Any amounts paid to the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 shall be considered in determining any amounts recovered under this Policy.
The terms of this Policy shall be binding and enforceable against all Executive Officers subject to this Policy and their beneficiaries, heirs, executors, or other legal representatives. If any provision of this Policy or the application of such provision to any Executive Officer shall be adjudicated to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Policy, and the invalid, illegal or unenforceable provisions shall be deemed amended to the minimum extent necessary to render any such provision (or the application of such provision) valid, legal or enforceable.
To the extent the Clawback Rules require recovery of Incentive-Based Compensation in additional circumstances beyond those specified above, nothing in this Policy shall be deemed to limit or restrict the right or obligation of the Company to recover Incentive-Based Compensation to the fullest extent required
3
Exhibit 99.4
TDH Holdings, Inc. Reports Full Year 2023 Audited Financial Results
QINGDAO, China, April 29, 2024 /PRNewswire/ -- TDH Holdings, Inc. (NASDAQ: PETZ) (“TDH” or the “Company”), a PRC-based company that is an operator of a restaurant in the U.S., announced today its financial results for the fiscal year ended December 31, 2023.
Full Year 2023 Financial Highlights:
| For the Twelve Months Ended December 31, | ||||||||||||
| ($ millions, except per share data) | 2023 | 2022 | % Change | |||||||||
| Revenues from continuing operations | $ | 3.18 | $ | 3.10 | 2.49 | % | ||||||
| Gross profit | $ | 1.03 | $ | 1.05 | -2.18 | % | ||||||
| Gross margin | 32.42 | % | 33.97 | % | -1.55 | pp* | ||||||
| Loss from operations | $ | (6.37 | ) | $ | (3.05 | ) | -108.99 | % | ||||
| Operating loss margin | -200.58 | % | -98.39 | % | -102.19 | pp* | ||||||
| Net loss attributable to common stockholders | $ | (23.63 | ) | $ | 0.80 | -3,039.68 | % | |||||
| Loss per share - basic and diluted | $ | (2.29 | ) | $ | 0.10 | -2,386.63 | % | |||||
* pp: percentage points
| ● | Revenues from continuing operations increased by 2.49% from $3.10 million in fiscal year 2022 to $3.18 million in fiscal year 2023. We discontinued our pet food business during the first quarter of 2023 and we fully disposed of one our China subsidiaries, Qingdao Tiandihui Foodstuffs Co., Ltd (“Tiandihui”) because its bankruptcy proceeding was concluded and all claims against it were processed by December 27, 2023. |
| ● | Gross profit was $1.03 million in fiscal year 2023 as compared to gross profit of $1.05 million in fiscal year 2022. The decrease in gross margin was mainly due to increased costs in our restaurant business. |
| ● | Operating loss was $6.37 million in fiscal year 2023 as compared to an operating loss of $3.05 million in fiscal year 2022. Our operating loss as a percentage of total revenues was negative 200.58%, and negative 98.39% for the years ended December 31, 2023 and 2022, respectively. The continuous loss from operation was mainly due to increased operating expenses in 2023. |
| ● | Net loss attributable to common stockholders was $23.63 million, or a loss per share of $2.29, for the fiscal year 2023 as compared to net income of $0.80 million, or an income per share of $0.10, for fiscal year 2022. The increase in net loss and increase in loss per share was primarily due to recognizing a loss of approximately $15.1 million from the disposal of Tiandihui and recognizing approximately $3.04 million share-based compensation expense as a result of extending the exercise date under certain investor warrants that were issued in a 2022 private placement. |
Full Year 2023 Financial Results
Revenues
Due to the discontinuation of our pet food manufacturing business segment in the first quarter of 2023, the Company’s revenue streams are now primarily from restaurant business operations. Revenues from continuing operations increased by 2.49% from $3.10 million in fiscal year 2022 to $3.18 million in fiscal year 2023. On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed, and as a result our pet food business line has been terminated.
| For the Twelve Months Ended December 31, | ||||||||||||||||||||||||
| 2023 | 2022 | Y/Y Change | ||||||||||||||||||||||
| Revenues ($’000) | % of Total | Revenues ($’000) | % of Total | Amount ($’000) | % | |||||||||||||||||||
| Pet food domestic sales | $ | 1 | 0.03 | % | $ | 26 | 0.84 | % | $ | (25 | ) | -96.15 | % | |||||||||||
| Restaurant revenue | 3,175 | 99.97 | % | 3,074 | 99.19 | % | 101 | 3.29 | % | |||||||||||||||
| less: sales tax and additional surcharge | - | - | (1 | ) | -0.03 | % | 1 | -100.00 | % | |||||||||||||||
| Total | $ | 3,176 | 100.00 | % | $ | 3,099 | 100.00 | % | $ | 77 | 2.48 | % | ||||||||||||
For the year ended December 31, 2023, for revenue generated from pet food sales of our continuing operations, our domestic sales decreased by $0.03 million or 96.15%, and there was no e-commerce sales and overseas sales of pet food products. However, revenue from our restaurant business segment in the United States increased by $0.10 million or 3.29%. As a result, our total revenue increased by $0.08 million or 2.48% when comparing 2023 to 2022. Due to the discontinuation of our pet food manufacturing business segment in the first quarter of 2023, the Company’s revenue streams are now primarily from its restaurant business operations.
| For the Twelve Months Ended December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Y/Y Change | ||||||||||||||||||||||
| Revenues ($’000) | % of Total | Revenues ($’000) | % of Total | Amount ($’000) | % | |||||||||||||||||||
| Pet chews | $ | - | - | $ | 8 | 0.26 | % | $ | (8 | ) | -100.00 | % | ||||||||||||
| Dried pet snacks | - | - | 8 | 0.26 | % | (8 | ) | -100.00 | % | |||||||||||||||
| Wet canned pet food | - | - | 1 | 0.03 | % | (1 | ) | -100.00 | % | |||||||||||||||
| Dental health snacks | - | - | 1 | 0.03 | % | (1 | ) | -100.00 | % | |||||||||||||||
| Restaurant revenue | 3,175 | 99.97 | % | 3,074 | 99.19 | % | 101 | 3.29 | % | |||||||||||||||
| Others | 1 | 0.03 | % | 8 | 0.26 | % | (7 | ) | -87.50 | % | ||||||||||||||
| Less: sales tax and additional surcharge | - | - | (1 | ) | -0.03 | % | (1 | ) | -100.00 | % | ||||||||||||||
| Total | $ | 3,176 | 100.00 | % | $ | 3,099 | 100.00 | % | $ | 77 | 2.48 | % | ||||||||||||
Our total revenue from continuing operations increased by $0.08 million or 2.48% when comparing 2023 to 2022, among which, revenue generated from pet chews decreased by $0.01 million or 100.00%, revenue from dried pet snacks decreased by $0.01 million or 100.00%, revenue generated from wet canned pet foods decreased by $0.01 million or 100.00%, revenue generated from dental health snacks decreased by $0.01 million or 100.00%, respectively, from the year ended December 31, 2022 to the year ended December 31, 2023. The decrease in pet food sales was primarily due to the discontinuation of our pet food manufacturing business segment in the first quarter of 2023.
2
Cost of revenues
Our cost of revenues from our continuing operations is primarily comprised of the cost of our raw materials, labor and overhead costs. Our cost of revenues from continuing operations, increased by $100,015 or 4.89% for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to increased food and beverage costs, labor costs and overhead costs associated with our restaurant business. Cost of revenues associated with our pet food sales was immaterial in 2023. Our cost of revenues as a percentage of revenue was 67.58% and 66.03% for the years ended December 31, 2023, and 2022, respectively.
Gross profit and gross margin
Gross profit was $1.03 million for fiscal year 2023, compared to gross profit of $1.05 million for fiscal year 2022. Gross profit margin was 32.42% for fiscal year 2022, compared to gross margin of 33.97% for fiscal year 2022.
Operating expense
Operating expense consists of selling expenses and general and administrative expenses.
Operating expenses from our continuing operations were $7,399,751, and $4,100,549 for the years ended December 31, 2023 and 2022, respectively, an increase of $3,299,202, or 80.46%. The ratio of operating expenses as a percentage of revenue increased from 132.33% for the year ended December 31, 2022 to 233.00% for the year ended December 31, 2023.
Selling expense from our continuing operations was $90,659 and $91,370 for the years ended December 31, 2023, and 2022, respectively, a decrease of $711 or 0.78%. Our selling expenses decreased in 2023 compared to 2022, mainly due to the company’s management saving expenses.
General and administrative expenses from our continuing operations was $7,309,092, and $4,002,346 for the years ended December 31, 2023 and 2022 respectively, representing an increase of $3,306,746, or 82.62%. The main reasons for the increase was due to increased payroll expenses as a result of the increase in the number of employees, and stock-based compensation expense due to extension of the exercise date under certain investor warrants that were issued in a 2022 private placement.
Impairment of long-lived assets other than goodwill charge was $0 million in fiscal year 2023, as compared to $0.01 million in fiscal year 2022.
Operating loss and operating loss margin
Loss from operations was $6.37 million for fiscal year 2023, compared to operating loss of $3.05 million for fiscal year 2022. The continuous loss from operations was mainly due to increased payroll expenses as a result of the increase in the number of employees, and stock-based compensation expense due to extension of the exercise date under certain investor warrants that were issued in a 2022 private placement.
3
Net income (loss) and earnings (loss) per share
| ● | Net loss was $23.63 million for fiscal year 2023, compared to net income of $0.86 million for fiscal year 2022. Net loss attributable to common shareholders was $23.63 million, or loss per share of $2.29, for the fiscal year 2023. This is compared to net income attributable to common shareholders of $0.80 million, or earnings per share of $0.10 for fiscal year 2022. The increase in net loss and increase in loss per share was primarily due to recognizing a loss of approximately $15.1 million from the disposal of Tiandihui and recognizing approximately $3.04 million share-based compensation expense as a result of extending the exercise date under certain investor warrants that were issued in a 2022 private placement. |
Financial Conditions
As of December 31, 2023, the Company had cash and cash equivalents of $13.66 million, compared to $21.86 million as of December 31, 2022. Accounts receivable and inventories were $0.01 million and $0 million, respectively, as of December 31, 2023, compared to $0.03 million and $0 million, respectively, as of December 31, 2022. As of December 31, 2023, we had working capital of approximately $23.83 million, as compared to working capital of $19.11 million as of December 31, 2022.
Net cash used in operating activities was $2.49 million for the fiscal year 2023, compared to net cash used in operating activities of $2.07 million for fiscal year 2022. Net cash used in investing activities was $6.07 million for fiscal year 2023, compared to $1.33 million used in fiscal 2022. Net cash provided by financing activities was $1.92 million for the fiscal year 2023, compared to $6.06 million net cash provided by financing activities in fiscal year 2022.
Going Concern
Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We discontinued our pet food business during the first quarter of 2023, and we fully disposed of Tiandihui in December 2023 as a result of the completion of its bankruptcy proceeding. Currently our revenue is substantially generated from the restaurant business segment. Our business turnaround depends, in part, on our ability to successfully introduce manage and acquire new restaurants. If we are not able to effectively manage and acquire new restaurants that successfully generate revenue, we may not be able to grow and maintain our business as anticipated, and our sales may decline and our future business, financial condition and results of operations may be materially adversely affected. Furthermore, our business operations may be further affected by the COVID-19 pandemic. There can be no assurances that future revenue or capital infusion will be sufficient to enable us to develop our business to a level where we will be profitable or continuously to generate positive cash flows.
Based on our current financial conditions, our cash balance and revenues generated from our business operations may not be currently sufficient and cannot be projected to cover our future operating expenses and meet our obligations as they become due for the next twelve months after the date that our financial statements are issued.
We still face numerous challenges in our business activities. To effectively sustain our business and maintain growth, we also need to evaluate and identify suitable strategic or acquisition opportunities, complete such transactions on commercially favorable terms, or successfully integrate business operations, infrastructure and management philosophies of acquired businesses and companies. If we are unable to effectively address these challenges, our ability to execute acquisitions as a component of our long-term strategy will be impaired, which could have an adverse effect on our business and growth. We also need to expand our restaurant and customer base, refine our operational, financial and management controls and reporting systems and procedures. If we fail to efficiently manage this expansion of our business, our costs and expenses may increase more than anticipated and we may not successfully attract a sufficient number of customers in a cost-effective manner, respond to competitive challenges, or otherwise execute our business plans. In addition, we may, as part of carrying out our growth strategies, adopt new initiatives to implement new pricing models and strategies. We cannot assure you that these initiatives may achieve the anticipated results.
4
Recent Developments
Discontinued operations
We discontinued our pet food manufacturing segment during the first quarter of 2023. Our decision to discontinue our petfood business was driven largely by the following factors: the increase in cost of raw materials required for production; accepting less orders in an attempt to avoid unprofitable orders and customers; decreased demand for sales of pet food; its historical performance and expected business forecasts in the absence of further capital investments and opportunity costs; lawsuits and the closing of our manufacturing facilities and them being subject to bankruptcy proceedings. We believe the discontinuation of our petfood manufacturing business will provide us with the opportunity to redirect our focus and resources towards expanding and improving our restaurant segment.
On December 27, 2023, the court announced that the bankruptcy property distribution plan of Tiandihui was implemented and the bankruptcy proceedings were completed. Due to the completion of Tinadihui’s bankruptcy proceedings, all the claims against it were concluded. As a result, Tiandihui has been fully disposed as of December 31, 2023, and all the material claims against Tiandihui that arose prior to the date of the bankruptcy completion were addressed.
Notice
Rounding amounts and percentages: Certain amounts and percentages included in this press release have been rounded for ease of presentation. Percentage figures included in this press release have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this press release may vary from those obtained by performing the same calculations using the figures in the financial statements. In addition, certain other amounts that appear in this press release may not sum due to rounding.
About TDH Holdings, Inc.
Founded in April 2002, TDH Holdings, Inc. (the “Company”) (NASDAQ: PETZ), is a PRC-based company that is an operator of a restaurant in the U.S. More information about the Company can be found at www.tiandihui.com.
Forward-Looking Statements
This press release contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. When the Company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. Specifically, the Company’s statements regarding, among others: its growth and business outlook; its ability to execute on its business plan, secure necessary capital to sustain and maintain its operation; its ability to expand its market and customer base; its ability to refine its operational, financial and management controls and reporting systems and procedures, are forward-looking statements. These statements are subject to uncertainties and risks including, but not limited to, the following: the Company’s goals and strategies; the ability to identify, execute and integrate strategic or acquisition opportunities, the Company’s future business development; product and service demand and acceptance; changes in technology; economic conditions; the growth of the restaurant industry in the United States; reputation and brand; the impact of competition and pricing; government regulations; fluctuations in general economic and business conditions in China and internationally and assumptions underlying or related to any of the foregoing and other risks contained in reports filed by the Company with the Securities and Exchange Commission. For these reasons, among others, investors are cautioned not to place undue reliance upon any forward-looking statements in this press release. Additional factors are discussed in the Company’s filings with the U.S. Securities and Exchange Commission, which are available for review at www.sec.gov. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.
For more information, please contact:
Feng Zhang, CFO
Email: tdhpets@163.com
Phone: +86 183-1102-1983
5
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 13,661,382 | $ | 21,857,125 | ||||
| Short-term investments | 13,317,882 | 9,922,366 | ||||||
| Accounts receivable, net | 4,961 | 29,318 | ||||||
| Inventories, net | - | 987 | ||||||
| Prepayments and other current assets, net | 237,052 | 130,623 | ||||||
| Current assets held for sale associated with discontinued operation of Tiandihui | - | 1,841,335 | ||||||
| Total current assets | 27,221,277 | 33,781,754 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | 682,636 | 698,044 | ||||||
| Intangible assets, net | 426,316 | 481,840 | ||||||
| Operating lease right-of-use assets | 571,168 | 783,658 | ||||||
| Non-current assets held for sale associated with discontinued operation of Tiandihui | - | 768,101 | ||||||
| Total non-current assets | 1,680,120 | 2,731,643 | ||||||
| Total assets | $ | 28,901,397 | $ | 36,513,397 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 460,776 | $ | 491,850 | ||||
| Accounts payable - related parties | - | 1,033 | ||||||
| Advances from customers | 4,045 | 11,024 | ||||||
| Bank overdrafts | 77,486 | 74,425 | ||||||
| Short-term loans - related parties | 277,408 | 266,451 | ||||||
| Taxes payable | 54,003 | 11,923 | ||||||
| Due to related parties | 1,983,430 | 55,747 | ||||||
| Operating lease liabilities, current | 219,917 | 212,814 | ||||||
| Other current liabilities | 311,979 | 1,212,420 | ||||||
| Current liabilities held for sale associated with discontinued operation of Tiandihui | - | 12,337,657 | ||||||
| Total current liabilities | 3,389,044 | 14,675,344 | ||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Operating lease liabilities, non-current | 463,196 | 683,113 | ||||||
| Non-current liabilities held for sale associated with discontinued operation of Tiandihui | - | 1,037 | ||||||
| Total liabilities | 3,852,240 | 15,359,494 | ||||||
| SHAREHOLDERS’ EQUITY : | ||||||||
| Common shares ($0.02 par value; 50,000,000 shares authorized; 10,323,268 shares issued and outstanding at December 31, 2023 and 2022) | 206,465 | 206,465 | ||||||
| Additional paid-in capital | 51,129,439 | 48,089,439 | ||||||
| Statutory reserves | - | 160,014 | ||||||
| Accumulated deficit | (26,622,000 | ) | (28,165,927 | ) | ||||
| Accumulated other comprehensive income (loss) | (95,066 | ) | 428,249 | |||||
| Total TDH Holdings, Inc. shareholders’ equity | 24,618,838 | 20,718,240 | ||||||
| Non-controlling interest | 430,319 | 435,663 | ||||||
| Total shareholders’ equity | 25,049,157 | 21,153,903 | ||||||
| Total liabilities and shareholders’ equity | $ | 28,901,397 | $ | 36,513,397 | ||||
The accompanying notes are an integral part of these consolidated financial statements
6
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| For The Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net revenue | $ | 3,175,809 | $ | 3,098,733 | $ | 1,081,095 | ||||||
| Total revenue | 3,175,809 | 3,098,733 | 1,081,095 | |||||||||
| Cost of revenue | 2,146,215 | 2,046,200 | 769,967 | |||||||||
| Total cost of revenue | 2,146,215 | 2,046,200 | 769,967 | |||||||||
| Gross profit | 1,029,594 | 1,052,533 | 311,128 | |||||||||
| Operating expenses: | ||||||||||||
| Selling expense | 90,659 | 91,370 | 74,278 | |||||||||
| General and administrative expense | 4,269,092 | 4,002,346 | 3,541,872 | |||||||||
| Stock-based compensation expense | 3,040,000 | |||||||||||
| Impairment of long-lived assets other than goodwill | - | 6,833 | - | |||||||||
| Impairment of goodwill | - | - | 355,570 | |||||||||
| Total operating expenses | 7,399,751 | 4,100,549 | 3,971,720 | |||||||||
| Loss from operations | (6,370,157 | ) | (3,048,016 | ) | (3,660,592 | ) | ||||||
| Interest expense (income) | (14,276 | ) | 43,081 | (14,518 | ) | |||||||
| Other income (expense) | 493,040 | 37,909 | (670,883 | ) | ||||||||
| Investment (loss) income, net | (2,644,576 | ) | 4,161,093 | 275,866 | ||||||||
| Total other (expenses) income | (2,165,812 | ) | 4,242,083 | (409,535 | ) | |||||||
| Income (loss) before income tax provision | (8,535,969 | ) | 1,194,067 | (4,070,127 | ) | |||||||
| Income tax provision | - | - | ||||||||||
| Net income (loss) from continuing operations | (8,535,969 | ) | 1,194,067 | (4,070,127 | ) | |||||||
| Net loss from discontinued operations of Tiandihui | (15,095,547 | ) | (339,054 | ) | (2,645,831 | ) | ||||||
| Net (loss) income | (23,631,516 | ) | 855,013 | (6,715,958 | ) | |||||||
| Less: Net income (loss) attributable to non-controlling interest | (5,344 | ) | 51,313 | (595,650 | ) | |||||||
| Net income (loss) attributable to TDH Holdings, Inc. | $ | (23,626,172 | ) | $ | 803,700 | $ | (6,120,308 | ) | ||||
| Comprehensive income (loss) | ||||||||||||
| Net (loss) income | $ | (23,626,172 | ) | $ | 803,700 | $ | (6,120,308 | ) | ||||
| Other comprehensive income (loss) | ||||||||||||
| Foreign currency translation adjustment | (523,315 | ) | 888,951 | (247,807 | ) | |||||||
| Total comprehensive income (loss) | (24,149,487 | ) | 1,692,651 | (6,368,115 | ) | |||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | (5,344 | ) | 51,313 | (595,650 | ) | |||||||
| Comprehensive income ( loss) attributable to TDH Holdings, Inc. | $ | (24,144,143 | ) | $ | 1,641,338 | $ | (5,772,465 | ) | ||||
| Earnings (loss) per common share attributable to TDH Holdings, Inc. | ||||||||||||
| Basic | $ | (2.29 | ) | $ | 0.10 | $ | (1.17 | ) | ||||
| Diluted | $ | (2.29 | ) | $ | 0.10 | $ | (1.17 | ) | ||||
| Weighted average common shares outstanding | ||||||||||||
| Basic | 10,323,268 | 8,019,208 | 5,218,681 | |||||||||
| Diluted | 10,323,268 | 8,019,208 | 5,218,681 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
7
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
| Number of Shares* | Common Shares | Additional Paid-in Capital | Stock Subscription Receivable | Statutory Reserves | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 2,292,500 | $ | 45,850 | $ | 21,963,570 | $ | - | $ | 160,014 | $ | (22,849,319 | ) | $ | (212,895 | ) | $ | - | $ | (892,780 | ) | ||||||||||||||||
| Net Loss | - | - | - | - | - | (6,120,308 | ) | - | (595,650 | ) | (6,715,958 | ) | ||||||||||||||||||||||||
| Issuance of common stock | 1,705,000 | 34,100 | 20,188,088 | - | - | - | - | - | 20,222,188 | |||||||||||||||||||||||||||
| Warrants exercised for cashless | 1,221,181 | 24,424 | - | - | - | - | - | - | 24,424 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | (247,807 | ) | - | (247,807 | ) | |||||||||||||||||||||||||
| Acquisition of non-controlling interest | - | - | - | - | - | - | - | 980,000 | 980,000 | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | 5,218,681 | $ | 104,374 | $ | 42,151,658 | $ | $ | 160,014 | $ | (28,969,627 | ) | $ | (460,702 | ) | $ | 384,350 | $ | 13,370,067 | ||||||||||||||||||
| Net income | - | - | - | - | - | 803,700 | - | 51,313 | 855,013 | |||||||||||||||||||||||||||
| Issuance of common stock and warrants in private placements | 4,000,000 | 80,000 | 5,937,781 | - | - | - | - | - | 6,017,781 | |||||||||||||||||||||||||||
| Warrants exercised for cashless | 1,104,587 | 22,091 | - | - | - | - | - | - | 22,091 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | 888,951 | - | 888,951 | |||||||||||||||||||||||||||
| Balance, December 31, 2022 | 10,323,268 | $ | 206,465 | $ | 48,089,439 | $ | - | $ | 160,014 | $ | (28,165,927 | ) | $ | 428,249 | $ | 435,663 | $ | 21,153,903 | ||||||||||||||||||
| Net loss | - | - | - | - | (23,626,172 | ) | - | (5,344 | ) | (23,631,516 | ) | |||||||||||||||||||||||||
| Stock-based compensation expense | 3,040,000 | 3,040,000 | ||||||||||||||||||||||||||||||||||
| Adjustment to reflect the effect of disposal of Tiandihui and Chongaijiujiu | - | - | - | - | (160,014 | ) | 25,170,099 | - | - | 25,010,085 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | (523,315 | ) | - | (523,315 | ) | |||||||||||||||||||||||||
| Balance, December 31, 2023 | 10,323,268 | 206,465 | 51,129,439 | - | - | (26,622,000 | ) | (95,066 | ) | (430,319 | ) | 25,049,157 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
8
TDH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For The Years Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net (loss) income | $ | (23,626,172 | ) | $ | 803,700 | $ | (6,120,308 | ) | ||||
| Less: net (loss) income from discontinued operations | (15,095,547 | ) | (339,054 | ) | (2,645,831 | ) | ||||||
| Net income (loss) from continuing operations | (8,530,625 | ) | 1,142,754 | (3,474,477 | ) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization expense | 80,149 | 17,114 | 466,720 | |||||||||
| Fair value change of short-term investments | 2,644,576 | (4,161,093 | ) | (495,265 | ) | |||||||
| Impairment of goodwill | - | - | 355,570 | |||||||||
| Impairment of long-lived assets other than goodwill | 1,964 | 6,833 | 217,257 | |||||||||
| Inventory write-down | 43,662 | 11,532 | 368,441 | |||||||||
| Allowance for doubtful accounts | 22,674 | 7,210 | 2,168 | |||||||||
| Deferred income taxes | - | - | - | |||||||||
| Loss (gain) on disposal of property, plant and equipment | 13,275 | 153,983 | (5,905,889 | ) | ||||||||
| Gain from operating lease contract modification | - | (408,198 | ) | - | ||||||||
| Amortization of operating lease right-of-use assets | 212,480 | 205,295 | 438,063 | |||||||||
| Non-cash lease expense | - | - | (4,786,099 | ) | ||||||||
| Stock-based compensation | 3,040,000 | - | - | |||||||||
| Changes in operating assets and liabilities: | - | - | (277,310 | ) | ||||||||
| Accounts receivable, net | 47,022 | 2,733 | 127,057 | |||||||||
| Inventories, net | 43,842 | 38,904 | (368,246 | ) | ||||||||
| Operating lease liabilities | (203,739 | ) | (195,626 | ) | 4,830,456 | |||||||
| Operating lease liabilities – related parties | - | - | 278,472 | |||||||||
| Advances to suppliers, net | (34,346 | ) | 8,197 | (3,653 | ) | |||||||
| Prepayments and other current assets, net | (10,418 | ) | 1,017,261 | (1,029,552 | ) | |||||||
| Accounts payable | (1,748 | ) | (305,382 | ) | 64,427 | |||||||
| Accounts payable - related parties | (1,033 | ) | (132,081 | ) | 132,192 | |||||||
| Interest payable | 3,573 | (411,112 | ) | (12,787 | ) | |||||||
| Interest payable - related parties | - | - | 88,778 | |||||||||
| Notes payable | - | - | - | |||||||||
| Taxes payable | (2,445 | ) | (17,103 | ) | 15,331 | |||||||
| Advances from customers | (6,974 | ) | - | - | ||||||||
| Advances from customer - related party | - | (13,799 | ) | 19,125 | ||||||||
| Deferred income tax liability | - | - | 1,132 | |||||||||
| Other current liabilities | (887,302 | ) | 1,054,749 | 793,726 | ||||||||
| Net cash used in operating activities from continuing operations | (3,525,413 | ) | (1,977,789 | ) | (8,154,363 | ) | ||||||
| Net cash provided by (used in) operating activities from discontinued operations | 1,032,689 | (94,926 | ) | 4,854,800 | ||||||||
| Net cash used in operating activities | $ | (2,492,725 | ) | $ | (2,072,715 | ) | $ | (3,299,563 | ) | |||
| Cash flows from investing activities | ||||||||||||
| Payments to acquire property, plant and equipment | (7,655 | ) | - | - | ||||||||
| Cash obtained from business acquisition | - | - | 171,827 | |||||||||
| Payment for business acquisition | - | - | (1,020,000 | ) | ||||||||
| Purchase of short-term investments | (37,066,925 | ) | (42,483,794 | ) | (4,372,809 | ) | ||||||
| Proceeds from sale of short-term investments | 31,024,365 | 41,150,967 | 3,578,206 | |||||||||
| Leasehold Improvement | (16,836 | ) | - | - | ||||||||
| Net cash used in (provided by) investing activities from continuing operations | (6,067,051 | ) | (1,332,827 | ) | (1,642,776 | ) | ||||||
| Net cash provided by investing activities from discontinued operations | - | - | - | |||||||||
| Net cash provided by (used in) investing activities | (6,067,051 | ) | (1,332,827 | ) | (1,642,776 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issuance of common shares | - | - | 20,222,188 | |||||||||
| Purchase of noncontrolling interest | - | - | (100 | ) | ||||||||
| Collection of stock subscription receivable | - | 6,017,781 | - | |||||||||
| Proceeds from related parties | - | 22,410 | 4,085,071 | |||||||||
| Repayments to related parties | (6,774 | ) | - | - | ||||||||
| Proceeds from short-term loans | - | - | - | |||||||||
| Repayments of short-term loans | - | - | 1,458,040 | |||||||||
| Proceeds from short-term loans - related parties | - | - | - | |||||||||
| Repayments of short-term loans - related parties | - | - | 22,302 | |||||||||
| Payment to related party | 1,928,329 | 15,829 | (4,231,327 | ) | ||||||||
| Net cash provided by financing activities from continuing operations | 1,921,554 | 6,055,480 | 21,556,174 | |||||||||
| Net cash provided by financing activities from discontinued operations | - | - | (3,604,117 | ) | ||||||||
| Net cash provided by financing activities | $ | 1,921,554 | $ | 6,055,480 | $ | 17,952,057 | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,557,522 | ) | 985,263 | (247,807 | ) | |||||||
| Net change in cash, cash equivalents and restricted cash | (8,195,743 | ) | 3,635,201 | 12,761,911 | ||||||||
| Cash, cash equivalents and restricted cash, beginning of the year | 21,857,125 | 18,025,966 | 6,749,064 | |||||||||
| Cash, cash equivalents and restricted cash, end of the year | $ | 13,661,382 | $ | 23,146,176 | $ | 19,510,975 | ||||||
| Less: cash and restricted cash of discontinued operations at the end of the period | - | 1,289,051 | 1,485,009 | |||||||||
| Cash and restricted cash of continued operations at the end of the period | $ | 13,661,382 | $ | 21,857,125 | $ | 18,025,966 | ||||||
| Supplemental cash flow information | ||||||||||||
| Interest paid | $ | - | $ | - | $ | - | ||||||
| Income taxes paid | $ | - | $ | - | $ | - | ||||||
| Non-cash investing and financing activities | ||||||||||||
| Liabilities assumed in connection with purchase of property, plant and equipment | $ | - | $ | - | $ | - | ||||||
| Notes payable reclassified to short-term loans | $ | $ | $ | |||||||||
| Short-term loans settled by transferring an equity investment to the creditor | $ | - | $ | - | $ | - | ||||||
| Cashless exercise of warrants | $ | $ | 22,091 | $ | 24,424 | |||||||
| Right of use assets obtained in exchange for operating lease obligations | $ | - | $ | - | $ | 5,158,944 | ||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||||||
| Cash and cash equivalents | $ | 13,661,382 | $ | 21,857,125 | $ | 18,025,966 | ||||||
| Restricted cash | $ | - | $ | 1,289,051 | $ | 1,485,009 | ||||||
| Total cash, cash equivalents, and restricted cash | $ | 13,661,382 | $ | 23,146,176 | $ | 19,510,975 | ||||||
The accompanying footnotes are an integral part of these financial statements
9